Part 3: Supply Sectors

The electricity supply industry inherited from the previous dispensation is in many ways typical of present-day South African economic infrastructure. It has highly sophisticated production and distribution capabilities, developed under circumstances of economic isolation to meet the needs of the industrial sector and a privileged white minority. The energy needs of the majority, the possibilities of regional integration, and the challenges of global competition, have only recently begun to be addressed.

South Africa produced 171 297 GWh of electrical energy in 1995. Ninety-six per cent of this amount is generated by Eskom and transported over its national transmission network to distributors country wide. More than 400 distributors, mainly municipal electricity departments, supply electricity to end customers. Eskom is also the largest single distributor in the country in terms of energy sales for final consumption and number of customers. Eskom is governed by a stakeholder-based Electricity Council, while municipal distributors are under the direct control of their elected local councils. All electricity utilities are subject to regulation by the National Electricity Regulator.

The full extent of the policy problems and challenges facing the electricity sub-sector has only begun to emerge recently. Government has identified the following list of primary challenges that will have to be addressed:

• approximately 50% of all homes in South Africa, and tens of thousands of schools and clinics, are without ready access to an electricity supply;
• the distribution sector of the industry is highly fragmented, with more than 400 distributors, resulting in low efficiencies, high costs, wide disparities in tariffs, and financial viability problems in many distributors;
• the electricity distribution industry continues to experience high levels of non-payment and electricity theft, resulting in increasing arrears and payment defaults;
• apart from a few notable exceptions the electrification programmes of most municipal distributors are limited by difficulties in accessing affordable finance;
• municipal electricity departments are expected to make a contribution towards the funding of other municipal services, particularly in the major urban areas, but are also faced with the burdens of non-payment and the need for significant expenditure on electrification;
• coal-based electricity generation results in significant polluting emissions, with potential long-term effects on the environment;
• in some cases electricity is used inefficiently, perhaps because of a consumer perception that electricity is cheap, thus wasting scarce energy and capital resources;
• although growth in electricity demand is only projected to exceed generation capacity by approximately 2005, long capacity-expansion lead times require strategies to be in place in the mid-term, in order to meet the needs of the growing economy; and
• whilst a number of the challenges presented above could place inflationary pressure on prices, South Africa has to maintain the competitive advantage of low, stable and cost-reflective electricity prices.

The challenges underlying government policy for the electricity sector have been debated in various forums over the past four years. Early initiatives culminated in the establishment of the National Electrification Forum in May 1993. After concluding its discussions the National Electrification Forum presented a set of recommendations to cabinet in the second half of 1994, leading to the establishment of the National Electricity Regulator in early 1995. The National Electrification Forum also developed financial models of various scenarios for the national electrification programme. This information was used by RDP drafters to establish a national electrification target of 2,5 million household connections by the end of 1999. The RDP further suggested that all schools and clinics should be electrified as soon as possible. As a contribution to the RDP Eskom has set itself the target of delivering 1,75 million household connections (300 000 per annum), assuming that municipal distributors would be responsible for the remainder. The National Electrification Forum subsequently dissolved, leaving the task of drafting a new electricity regulatory bill to an advisory committee on electricity legislation reporting to the Department of Minerals and Energy.

The National Electricity Regulator subsequently attempted to rationalise the electricity distribution industry through its first licensing round. This initiative failed to result in any effective rationalisation and, in the absence of a clear policy framework, the National Electricity Regulator turned to government for direction. An Electricity Working Group was subsequently appointed, reporting jointly to the Minister of Provincial Affairs and Constitutional Development and the Minister of Minerals and Energy, to investigate the possible restructuring of the financial relationship between local government and the electricity sector, and to develop proposals for the rationalisation of the electricity distribution industry. The Electricity Working Group developed proposals, after consulting with a wide range of stakeholders, and presented these to the cabinet for approval. Cabinet in turn referred the proposals to an inter-Ministerial committee which, in turn, created an internal government committee known as the Electricity Restructuring Interdepartmental Committee. Cabinet has subsequently adopted this committee’s recommendations as government’s position on the restructuring of the distribution industry for negotiation with stakeholders.

Electricity supply throughout the world is undergoing a revolution. This is being caused mainly, but not solely, by electricity utilities having to meet new pressures resulting from global markets and governments opening up their countries to foreign investors to help fund power sector expansion and development. As a result, utilities are having to see themselves as businesses, and act accordingly. South Africa is not immune from these forces, and will have to move broadly in line with developments taking place in the rest of the world, while also ensuring that the industry evolution meets South Africa’s special requirements.

Therefore government believes that the operation of the industry will have to be constantly optimised to maximise the potential for adequate, reliable, and low cost electricity to serve the people and industries of South Africa. To ensure this result, as an initial goal the distribution sector of the electricity supply industry will have to be rationalised, by reducing the number of distributors to a much smaller number. As investigations have demonstrated, it is the distribution sector that is most urgently in need of reform. But changes will also be needed in the generation and transmission sectors in due course. To ensure the success of these sectors, various developments will have to be considered by government over time, namely:

• giving customers the right to choose their electricity supplier;
• introducing competition into the industry, especially the generation sector;
• permitting open, non-discriminatory access to the transmission system; and
• encouraging private sector participation in the industry.

Addressing the mid to long-term issues will require substantial analysis and additional stakeholder consultation and input. Eventually, however, these measures must translate into an electricity supply industry that is financially viable, technically healthy and well managed. In other words, one that is capable of being the engine for growth, development and prosperity for South Africa.

Owing to the interdependence of the various electricity policies they are not presented in any order of priority, but rather in a sequence designed to assist the reader in understanding the logic of the policy.

There are a number of issues facing South Africa’s electricity distribution industry which limit its ability to achieve its primary objectives of meeting the aggressive electrification targets, of ensuring world class supply quality, and of continuing to provide low cost and equitably priced electricity to all consumers. The challenges include the following:

• The industry is highly fragmented. Currently more than 120 municipalities have less than 1000 customers and more than 90 municipalities have revenue of less than R1 million per annum;
• There are substantial differences in the financial health of municipal distributors. Four municipalities earn 50 per cent of the total surpluses being earned by all municipal distributors and an additional 18 municipalities earn another 25 per cent of the total surpluses. At the other extreme 289 municipalities earn less than 1 per cent of the total surpluses, and the bottom 25 per cent of municipal distributors lose money on their electricity sales.
• There is a wide disparity in the prices paid by the various customer segments that cannot be fully explained by the costs associated with serving these segments. For example, mining customers pay anywhere from 9 to 17 cents per kWh in Gauteng, and anywhere from 23 to 32 cents per kWh in Mpumalanga. Price disparities for other customer segments are as wide.
• Economies of scale, skill and specialisation are not being captured by many of the small distributors. Average distribution costs (including purchased energy) range from 23.9 cents per kWh for distributors of less than 1 GWh in annual sales to only 13.4 cents per kWh for distributors of more than 1000 GWh in annual sales, a 46 per cent difference in costs.
• Electrification needs are not evenly distributed across regions with some of the poorer regions having the greatest need. Without explicit or transparent funding mechanisms there is a great risk that in times of tight resources many distributors will not be able to fund their targets. Moreover, as electrification is a national objective, cross-regional subsidisation should be considered as an equitable way to fund the electrification program.
• While there are many distributors that are not financially viable today, collectively the industry is able to fund both the supply of electricity and electrification over the long-term. However, if the industry is expected to both contribute to funding other municipal services (as it does currently) and to pay for the electrification programme over the long-term, the electricity distribution industry will experience financial bankruptcy without alternative funding and pricing mechanisms, a reduction in the generation and transmission prices (i.e. the wholesale price of electricity), or substantial increases in tariffs. Even if the price municipalities pay for energy is reduced to the price paid for energy by Eskom distribution, the collective position of the industry will not change. The current Eskom distribution surplus will just be transferred to municipalities, without changing the overall cashflow problems for the industry as a whole.

These challenges will have to be addressed in any restructuring of the electricity distribution industry. The current structure and funding mechanisms in the distribution industry put it at significant risk. It is already not meeting the objective of providing low-cost and equitably priced electricity to all customers, the financial health is deteriorating rapidly, and the aggressive goals of the electrification programme may not be met in the areas that need it most. This is evidenced by an increasing number of municipalities who are unable to pay their bulk accounts to Eskom, high prices, poor quality of supply in many areas and problems with the delivery of electrification.

Government has found it necessary to make a number of assumptions about the restructuring process and the implications of restructuring. These assumptions may be regarded as constraints to restructuring, rather than formal policies, and include the following.

• No forced retrenchments will occur in the distribution industry as a result of restructuring.
• The electricity distribution industry will remain under public ownership, through municipalities and Eskom, for the short to medium-term, and any changes to ownership status will take place within the framework of government’s policy on the restructuring of state assets.
• Municipalities will continue to play an important role in setting policy and in supervising the distribution of electricity in their areas. This does not mean, however, that they must undertake the distribution of electricity directly.
• Municipalities will continue to fund other municipality services from funds generated from electricity, but these funds will be generated through new, transparent mechanisms.
• The industry will remain self-funding, since the government will not be in a position to provide significant subsidies. (Should Eskom and the newly established regional distributors become corporate income tax payers, then the electrification programme should be funded on-budget.)
• Distributors will have to meet their agreed-to electrification targets, although funding will be done nationally and in a transparent manner.
• Regardless of whatever distribution structure is put in place, national tariff systems and national service and technical standards will be enforced by the NER.
• Regardless of the distribution structure, there are certain issues which have to be addressed at a national level. For instance planning, standards and collective bargaining are best addressed at the national level, whilst local planning and customer service complaints are better addressed at a local level.

Government believes that distribution industry restructuring should be undertaken in order to:

• ensure agreed-to electrification targets are met;
• provide low-cost electricity;
• facilitate better price equality;
• improve the financial health of the industry;
• improve quality of service and supply;
• foster proper co-ordination of operations and investment capital; and
• attract and retain competent employees.

To achieve these objectives government proposes the following policies.

A full-time Transformation Team will be formed to determine detailed policy recommendations, address implementation issues and prepare draft legislation.

The electricity distribution industry will be consolidated into the maximum number of financially viable independent regional distributors.

Based on initial financial modelling and operational considerations the maximum number of financially viable independent regional distributors is five. It is not possible to create nine regional distributors aligned by provincial boundaries because a number of these regional distributors would not be financially viable.

The distributors will be owned by municipalities and Eskom. Control of all distribution network assets must pass to the companies and the Transformation Team will determine appropriate mechanisms for achieving this.

Government believes that transfer of assets by legislation is the preferred option but other options could be used depending on individual circumstances.

While these distributors will be independent, they should co-ordinate on issues such as electrification planning, tariff issues and centralised bargaining.

Government has decided that only two business forms are appropriate for the regional electricity distributors, namely companies established in terms of the Companies Act, 1973, or special statutory corporations established in terms of Special Acts of Parliament. Because of South Africa’s well established company law system, its appropriateness to governing modern business entities, and the ability to accommodate municipal ownership, government is of the opinion that the regional electricity distributors should be established as public companies in terms of the Companies Act, 1973, as are most parastatals. The articles of association of the companies should limit the trading of the companies shares by providing that the shares may not be sold without the permission of government.

It is critical to note that with regard to ownership, government believes that shares in the respective companies should be owned by municipalities and Eskom. In terms of this position they will exchange the net assets (assets minus liabilities) on their balance sheets for shares in the company. This will allow municipalities to continue to raise funds against their existing asset base. If the transfer of assets compromises existing debt covenants with lenders, then consideration should be given to the leasing of the assets by the regional distributors.

The regional electricity distributors should be controlled by boards of directors with the majority of directors being appointed by stakeholders. Customers, trade unions, national government and provincial governments, municipalities and Eskom would have the right to appoint directors to the boards of the regional electricity distributors. The memorandum and articles of association of the companies and the appropriate management structure, which still needs to be developed, will determine the representation of stakeholders and the process of their appointment. For example, a two-tier supervisory and management structure could be implemented, similar to Eskom’s Electricity Council and Management Board.

The relationship between the regional electricity distributors and municipalities will be formalised through legislation, contractual arrangements or other appropriate mechanisms.

Government expects the entire electricity supply industry to change the manner in which it funds its obligations. Restructuring alone will have limited impact on improving the overall financial health of the industry, particularly given the constraints placed on the restructuring process. In effect, unless alternative funding and pricing mechanisms are developed, the industry will be unable to both fund electrification and contribute to other municipal services without substantial increases in tariffs, major reductions in distribution costs, or the curtailing of the electrification programme.

The entire industry (generation, transmission and distribution) must move to cost-reflective tariffs with separate, transparent funding for electrification and other municipal services.

While additional work in this area needs to be completed the objective would be to design a tariff and tax system that minimises the impact on end-user tariffs while addressing the funding needs in the industry.

The new constitution empowers municipalities with executive authority in respect of, and the right to administer, gas and electricity reticulation. The purpose of this provision is to enable municipalities to fulfil these functions if they are required to do so. It is government’s opinion that this provision does not give municipalities an exclusive or first right to provide electricity in their areas.

Section 17 of the Electricity Act of 1987 provides that the supply of electricity in its area is subject to the consent of a local authority, but that where such consent is unreasonably withheld the National Electricity Regulator is allowed to rule on the matter.

The Transformation Team will investigate this matter and propose parameters for the local government–utility relationship. If necessary these parameters will be enacted through new legislation.

Since this is essentially a fiscal matter, rather than electricity policy, this issue is dealt with in detail in the section on Fiscal and Pricing Issues.

Electricity plays an important role in the competitiveness of many of South Africa’s large and especially energy intensive industrial electricity consumers, and they should be allowed the choice in line with the long-term vision for the industry. The implications for funding, access charges, existing contractual agreements and distributor viability will have to be finalised.

Large industrial customers should have the right to purchase their electrical energy from the regional electricity distributors or from Eskom directly.

Preliminary analysis suggests that these larger industrial customers be defined as those typically having annual electricity consumption greater than 100 GWh and demand greater than 10 MVA, and would be equal to approximately 160 customers.

Electrification is a central component of the RDP’s infrastructure delivery programme. In line with the target proposed in the RDP document it has been government’s intention to ensure the electrification of 2,5 million houses by the end of the decade. The programme will require capital investments of up to R2 billion per annum and it is expected that the programme will incur operating losses of up to R300 million per annum during the early years. Grid and off-grid connections will continue to be made at more modest levels after 1999, until all South Africans have access to electricity.

From the government’s perspective the most critical policy challenges surrounding the national electrification programme are obtaining financial resources, allocating these resources to appropriate projects, and ensuring that capable utilities are in place to implement the programme. This last point has already been dealt with above under the heading of ‘Restructuring the distribution sector’. Financing the programme and allocating these resources to selected projects are directly related and are discussed below.

The challenges which have resulted from the current funding and allocation mechanisms include the following.

• The annual allocation of more than R1 billion of public funds by Eskom to individual electrification projects takes place through internal utility processes, in a non-transparent manner, without any direct accountability to parliament or any tier of government.
• As a combined result of the internal financing arrangements and the present structure of supply rights, large-scale over-investment in rural electrification occurs while many urban areas remain unelectrified.
• The majority of municipalities are unable to finance or subsidise electrification projects.
• Because the subsidy funds Eskom raises are only available for its own grid-based programme, other electrification initiatives using off-grid technologies such as photovoltaic supplies are disadvantaged. This results in inefficient and expensive investment in grid electrification where other technologies would have provided cost-effective solutions.

Government intends to address these problems by developing a detailed electrification policy and national electrification planning system. Government expects that utilities will fund electrification projects from a combination of commercial finance, concessionary loans and grant funding. Utilities will be encouraged to make the true costs of the electrification programme transparent and open to public debate.

Government also wishes to see electrification subsidies allocated in a more transparent and accountable manner than in the past, with elected political representatives playing a larger role in establishing the policy framework.

Government recognises that household access to adequate energy services for cooking, heating, lighting and communication is a basic need. Whilst these needs can be met by various fuel-appliance combinations, government recognises that without access to electricity, a clean, convenient and desirable fuel, human development potential is ultimately constrained.

Government commits itself to implementing reasonable legislative and other measures, within its available resources, to progressively realise universal household access to electricity.

Access to electricity is taken to include grid supplies, Solar Home Systems, generators, hybrid systems, battery systems or any other supply solution which provides an appropriate and affordable electricity supply.

The Minister of Minerals and Energy, together with the Minister of Finance, will establish rolling five-year national electrification targets on an annual basis.

Annual connection targets will be allocated to electricity distributors who, as part of their licence conditions, will be expected to comply with these targets. Initial targets will be in accordance with those proposed by the medium scenario of the National Electrification Economic Study, as adopted in the Reconstruction and Development Plan.

In many cases grid electrification is simply uneconomical. In such cases an off-grid supply can often provide an adequate electricity service. Government therefore recognises the need to stimulate and sustain off-grid electricity supply industries.

A portion of the annual connection targets, and related subsidies, will be allocated for off-grid supplies.

Government recognises the dangers of off-grid industries becoming dependent on subsidies and, as far as possible, commits itself to maintaining stable targets and subsidy levels.

Government will subsidise a portion of the capital costs of connections made towards meeting electrification targets.

The subsidy will make a substantial contribution to the capital costs of connection, but should not remove supplier incentives to innovate for lower costs.

New household electrification connections made under the national electrification programme will receive a standard subsidy and there will be no discrimination in subsidy level on the basis of geographic region, supply technology or any other factor.

The Minister of Minerals and Energy will, together with the Minister of Finance, determine the appropriate subsidy level on an annual basis.

In so doing they will take into account:

• the rate of progress towards the goal of universal access;
• the resources available for electrification subsidies;
• industry cost trends; and
• any other relevant factors.

Allocation of electrification funds will be undertaken in terms of government’s criteria for the allocation of electrification subsidies.

These criteria will be developed through ongoing research and consultation. The allocation criteria will aim to:

• maximise the economic benefits of electrification subsidies;
• achieve an equitable regional distribution of subsidies;
• provide appropriate division between grid and off-grid supplies; and
• stimulate innovation within suppliers.

The Minister of Minerals and Energy may delegate responsibility to an appropriate organisation or organisations to allocate electrification subsidies in accordance with government’s allocation criteria.

Such allocating organisations will meet the following criteria. They will have:

• adequate accounting and managerial capacity to ensure responsible treatment of public funds;
• established capacity for project evaluation, project financing and project administration;
• a good understanding of the role of energy supply and electrification in social and economic development;
• the capacity to integrate electrification with other social and economic development processes; and
• a suitable level of independence from commercial activities relating to electrification so as to ensure that conflicts of interest do not arise.

A National Electrification Fund will be established to provide electrification subsidies.

The National Electrification Fund will derive income from a combination of electricity industry levies; fiscal allocations; grants; and any other appropriate sources. Government will determine an appropriate balance between these sources from time to time.

Government may allocate responsibility for the management of the National Electrification Fund to an appropriate organisation. Such an organisation will meet the following criteria. It will have:

• adequate accounting and managerial capacity to ensure responsible treatment of public funds; and
• an excellent history of fund management.

An allocating organisation may manage the National Electrification Fund.

Further policy on the electrification levy can be found in the section on Fiscal and Pricing Issues.

The progress of the national electrification programme will be monitored by a number of agencies, including at least:

• The National Electricity Regulator (NER), which will monitor progress with grid electrification;
• Other agencies concerned with development within South Africa generally.

The Department of Minerals and Energy (DME) will ensure that a national electrification database is established and maintained to assist with the monitoring of progress and the establishment of targets. The DME may request a suitable agency or agencies to undertake this task.

The impact of the national electrification programme will be evaluated and the electrification policy amended from time to time.

An Electrification Advisory Board will be appointed by the Minister of Minerals and Energy to:

• Advise the Minister on appropriate electrification targets;
• Advise the Minister on electrification policy
• Advising the Minister on the selection of allocating organisations, the manager of the National Electrification Fund, and other institutional responsibilities;
• Advise the Minister on allocation criteria; and
• Review allocation decisions by allocating organisations.

The Electrification Advisory Board will have an independent chair and will consist of six to ten individuals, selected on the basis of their ability to contribute to the Board’s functions.

In its approach to electricity pricing policy government has to achieve an appropriate balance between meeting equity, economic growth and environmental goals. Pricing policy has to steer a course between affordable electricity prices for households, low-cost electricity for industrial consumers, prices which provide efficient market signals by accurately reflecting the cost of supply, and a general price level that ensures the financial sustainability of electricity utilities.

In addition to these general criteria for pricing policies, electricity distribution industry pricing presents the following additional challenges.

• As a result of the fragmentation of the electricity distribution industry there are currently more than 1100 domestic tariffs in place. Residential areas directly adjacent to each other often experience wide variations in tariff structures and levels. This situation creates unnecessary confusion for domestic consumers, is impossible to justify or regulate and may well contribute to an ongoing culture of non-payment.
• Non-payment and electricity theft continue to be widespread in South Africa and contribute to the financial losses of the electrification programme.
• The widespread practice of monopoly pricing within the commercial and industrial tariffs of many municipal distributors creates serious pricing distortions and imposes an uneven burden on these consumers, which, in turn, could inhibit industrial development.
• The structure and level of many electricity tariffs does not provide adequate incentives to consumers to use electricity more efficiently.

To address these challenges, electricity pricing policy, to be implemented by the National Electricity Regulator, will be informed by the following approach.

• Price signals should result in economically optimal investments in electricity infrastructure and consumption of electrical energy. Government is of the view that this will generally be achieved through the use of cost-based electricity tariffs which include capital replacement costs (long-run marginal costs).
• The level of electricity prices should essentially be determined by the utility’s revenue requirements, while the tariff structure should be determined by the structure of costs.
• Recognising that many households are presently unable to afford cost based tariffs, government acknowledges that moderately subsidised tariffs for poor domestic consumers are necessary for equity reasons.
• To limit possible negative impacts and ensure effective political accountability subsidies should, as far as possible, be transparent to the public.
• Cross-subsidies should have a minimal impact on the price of electricity to consumers in the productive sector of the economy.

Government policy on electricity pricing is as follows:

Cost-reflective tariffs will be applied at electricity distributor supply points in due course.

The cost of electricity inputs to regional distributors depends on the supply voltage level and the distance of the supplying sub-station from the Gauteng/Mpumalanga highveld where most generators are located. Basing transmission tariffs on the true cost of supply will have significant impacts on the financial viability of some distributors, as well as the prices paid by electricity consumers within their areas. Eskom presently normalises its prices nationally and levies a ‘transmission surcharge’ of a maximum of 3%, depending on the distance from Johannesburg, while in fact the geographic variation in transmission costs can be much higher.

Regional distributors will establish cost-reflective tariffs for each major customer segment.

The new tariff system will be designed and implemented over an appropriate period of time. Tariffs must take into account adjustments to the electricity sales price to the distributors and cost savings achieved through industry consolidation. The level of end-user tariffs may be reduced if the generation and transmission tariffs are reduced and/or if significant cost savings occur as a result of restructuring. If it is determined that some subsidisation (such as transmission subsidies to certain regions) should continue, they should be made explicit and transparent.

The National Electricity Regulator will regulate domestic electricity tariffs in order to rationalise the large variety of tariffs available in South Africa and ensure that a suite of supply options with progressive capacity-differentiated tariffs and connection fees are available to domestic customers.

Domestic customers differ in terms of their levels of consumption, supply capacity requirements, ability to pay the capital costs of connection, and the ease with which they can alter their consumption patterns. Generally poor households demonstrate low levels of electricity consumption, therefore only requiring low capacity supplies, and can only afford low connection fees and subsidised tariffs. On the other hand wealthy households tend to be high consumption customers, require expensive high capacity connections, and can afford to pay full connection costs in addition to contributing towards the subsidisation of low consumption (poor) households.

A suite of capacity-differentiated tariffs with a range of connection fees and tariff structures will therefore be offered to domestic customers. Lower-end tariffs will be structured to subsidise low levels of consumption but, as consumption increases, will automatically cover full supply costs and even contribute towards cross-subsidies. As consumption increases, households will have an incentive to shift to more sophisticated cost-reflective higher-end tariffs.

These choices will provide a strong signal to domestic customers to choose affordable and appropriately rated supply options. The average level of domestic tariffs should, as far as possible, be set to recover operating losses incurred in supplying poorer domestic consumers from within the domestic sector. In remote rural areas, where the lowest capacity grid system cannot be supplied within the capital expenditure limit, this system will provide a natural opportunity for Remote Area Power Supply (RAPS) systems to be supplied. The implementation of this policy may require amendments to the Electricity Act to enable the National Electricity Regulator to regulate connection fees.

Government will support electricity distributors in the establishment and implementation of sensitive but firm strategies to deal with non-payment and energy theft.

For the sake of the financial viability of the electricity supply industry, and the sustainability of the national electrification programme, it is essential that a culture of payment for services be revived within South Africa. Government, at all tiers, will take responsibility for this process and assist the electricity supply industry in dealing with this problem.

Eskom’s latest Integrated Electricity Plan forecasts for an assumed demand growth of 4,2% that Eskom’s present generation capacity surplus will be fully utilised by about 2005. Timely steps will have to be taken to ensure that demand does not exceed available supply capacity and that appropriate strategies, including those with long lead times, are implemented in time. The next decision on supply-side investments will probably have to be taken by the end of 1997 to ensure that the electricity needs of the next decade are met.

For many decades Eskom has carried the responsibility of supplier of last resort, effectively enjoying a de facto monopoly on the construction of new generation capacity. Power station construction was based on projections of historic demand growth and by 1980 it became apparent that Eskom had committed itself to expensive over-capacity, a situation that has prevailed for the last ten years. Since customers ultimately have to bear the costs of poor investment decisions it is government’s intention to ensure greater public participation in future decisions on public expenditures of this magnitude. Government also intends to steadily increase competitive pressures in the generation sector in order to improve efficiencies and reduce electricity prices.

Government will require the use of integrated resource planning methodologies in evaluating further electricity supply investments and the decommissioning of older power stations.

IRP is a decision-making process concerned with the acquisition of least-cost energy resources, which takes into account the need to maintain adequate, reliable, safe, and environmentally sound energy services for all customers. The IRP approach includes:

• the evaluation of all candidate energy supply and demand resources in an unbiased manner;
• the systematic consideration of a full range of economic, environmental, social, and technological factors;
• the consideration of risks and uncertainties posed by different resource portfolios and external factors, such as fluctuations in fuel prices and economic conditions; and
• the facilitation of public involvement in the utility planning process.

The compulsory use of IRP methodologies will ensure that utilities avoid or delay electricity supply investments, or delay decommissioning decisions, when it is economical to do so, by optimising the utilisation of existing capacity and increasing the efficiency of energy supply and consumption. The use of IRP will also contribute to meeting the electricity supply industry’s environmental performance.

Government will establish the guidelines for the IRP approach through new energy legislation and regulations and will require the National Electricity Regulator to oversee its implementation. If a competitive electricity supply market is established in future IRP policies will be adjusted to be consistent with the new market system.

In light of the questions that have been raised about the true cost of operating Koeberg nuclear power station, and the concerns voiced amongst communities and environmental groups, government wishes to provide clarity about its expected future life-span.

As part of the IRP process government will require the National Electricity Regulator to investigate Koeberg’s economic and technical performance, including long-term costs and the implications of decommissioning and waste disposal, to determine the optimal period for operating the plant. The parameters for the enquiry will be set by the National Electricity Regulator, possibly with the assistance of international experts, while Eskom will be expected to conduct the investigation and present the results to the National Electricity Regulator for public evaluation.

The investigation into Koeberg will be conducted in the context of the long-term planning horizon for the South African power sector, and with consideration of the full life-cycle costs of running Koeberg as well as that of realistic alternatives. The results of the investigations will be made available for public scrutiny and comment before a final decision is made on the future of Koeberg.

The entry of multiple players into the generation market will be encouraged.

Initially this policy will be implemented by obliging the national transmission system to publish National Electricity Regulator approved tariffs for the purchase of co-generated and independently generated electricity on the basis of full avoided costs.

The purpose of this policy is to:

• improve energy and capital efficiencies in the national interest;
• encourage the development of renewable and environmentally sound electricity generation technologies; and
• encourage more players to enter the generation industry in order to develop a competitive power market.

This policy will enable the economic exploitation of the significant available potential for non-utility generation in South Africa. Research has indicated that a technical potential of as much as 6 000 MW of non-utility generation could be exploited. By including environmental costs into the pricing structure the further development of renewable and environmentally benign generation technologies such as hydro, wind, solar thermal, and waste incineration will also be encouraged.

This policy forms part of the integrated resource planning approach to electricity supply and its implementation should thus be overseen by the National Electricity Regulator who will be responsible for finalising the details of the methodology for calculating the full avoided costs of non-utility generation.

It is expected that this policy, in addition to encouraging the exploitation of further energy-efficient generation options and increasing competitive pressures on Eskom, will provide the National Electricity Regulator and government with experience that would be invaluable in the event that a more fundamental change towards a market-based electricity supply industry is introduced at a later stage.

The rapid changes in the political and economic context of the electricity supply industry world-wide in recent years raise questions about the continued ability of South Africa’s monopolistic electricity industry to meet customers’ electricity service needs in future. Various initiatives to establish competitive electricity markets have been undertaken internationally in recent years but much remains to be learnt about the net benefits of this course of action, the circumstances under which competition will be beneficial and the problems that are being encountered. Some of the benefits that have been observed with the introduction of competition include:

• increased opportunities to exploit cheaper and environmentally benign generation options;
• the potential to increase the level of supply security, at a lower cost, through a regionally integrated and diversified supply base;
• the potential for efficiency improvements; and
• the potential for downward pressure on electricity prices.

Concerns are, however, being raised in some countries about the impact of competition on equity and environmental goals and the ability of a competitive market to ensure sustained investment and security of supply at low prices in the long term.

Tentative steps towards enabling competitive pressures in South Africa have already been taken with the establishment of the Southern African Power Pool (SAPP), Eskom’s own initiative to establish an internal national power pool, and the open access conditions included in the transmission licence recently issued to Eskom by the National Electricity Regulator.

Government realises that competitive models and private sector participation hold the promise of benefits for electricity consumers and will therefore be closely following developments in countries experimenting with these new arrangements.

It is government policy to support gradual steps towards a competitive electricity market while investigations on the desired course of action are completed.

Any fundamental market restructuring is likely to be delayed for a number of years while the distribution sector is restructured and the bulk of the electrification programme is undertaken. Mechanisms will be put in place to ensure that equity and environmental goals are achieved, and possibly even accelerated, throughout the market restructuring process and thereafter. In the meantime the initial exploratory steps will include the unbundling of Eskom’s generation and transmission groups, the further development of the SAPP, increased non-utility generation, policy research into the desirability of competition for the South African situation, and the strengthening of the National Electricity Regulator’s ability to regulate private players and a competitive market.

Eskom will be restructured into separate generation and transmission companies, initially held by a single holding company.

Present restructuring initiatives in the distribution sector, and future plans for restructuring generation, indicate that it has become necessary for Eskom to be restructured as a preparatory step for further changes in the electricity supply industry. In restructuring Eskom government intends to:

• achieve a separation of the transmission group which operates the national grid from the distribution and generation groups so as to ensure the independence of the transmission group in procuring from the lowest-cost generation capacity;
• provide greater transparency of the performance of the various Eskom groups and of the economic flows between them;
• enable Eskom’s distribution interests to be incorporated into a restructured distribution sector;
• enable the possible future separation of power stations into a number of companies to facilitate competition; and
• formalise government’s role as owner and enable the payment of dividends and company tax.

Government will facilitate the development of the Southern African Power Pool (SAPP) to the mutual benefit of all its members.

Government has already signed an Inter-Governmental Memorandum of Understanding to this end. It is envisaged that co-operation through the Southern African Power Pool will eventually bring great benefits to the region. At present the SAPP allows for the joint operation and trading of power between power utilities in member countries (most SADC countries and Zaire) and for the wheeling of power through the transmission networks of third parties.

The developments around the SAPP are well advanced, with regional utilities taking the lead in negotiating rules for its operation and the establishment of the necessary infrastructure. South Africa will be an equal partner in negotiations to establish agreements that are mutually beneficial and equitable.

It is government policy that the Transmission group of Eskom should represent South Africa in the SAPP to ensure that generation options outside South Africa are afforded a reasonable opportunity as South Africa plans for its future capacity needs.

The shifts in government’s energy policy objectives pose new challenges for the governance of the electricity industry. These include the need to:

• ensure the effective accountability of public utilities to implement national policy decisions, without affecting their ability to manage their commercial affairs independently;
• broaden the involvement of stakeholders in utility governance processes;
• expedite the introduction of IRP; and
• strengthen South Africa’s electricity regulatory capabilities;

and possibly the need to:

• introduce and maintain effective competition within the electricity supply industry.

Government recognises that sound governance will be critical to the successful development and operation of the electricity supply industry.

Government will consolidate the electricity regulatory regime by establishing the powers and functions of the National Electricity Regulator through clear legislative mandate and by strengthening its capacity to achieve its mandate.

Although the National Electricity Regulator has been established through two amendments to the Electricity Act of 1987, the complete details of the regulatory regime have yet to be finalised. A new Electricity Supply Industry Regulation Bill will be submitted to parliament in 1997 to consolidate the legislative basis for the establishment and operation of the National Electricity Regulator.

From the policies presented above it is clear that large demands will be placed on the National Electricity Regulator’s resources in future years. It will have to deal with the many regulatory challenges that will emerge during the restructuring of the distribution sector; it will have to introduce IRP rapidly in order to guide investment planning in the years before effective competition is established; and it will have to prepare itself to oversee the introduction of competition into the sector.

To deal with these challenges the National Electricity Regulator will have to expand its capacity. Government will provide support for this process where it can and will facilitate international exchanges to assist the National Electricity Regulator with skills development.

Government will strengthen the Department of Minerals and Energy’s capacity to deal with the many electricity policy challenges faced by the country.

The Department of Minerals and Energy carries primary responsibility for the development of government’s policy for the electricity industry. The imminent changes to the structure and governance of the electricity sector will place large demands on government for policy leadership. Some of the tasks discussed above include the responsibility to head the restructuring of the electricity distribution industry, develop government electrification funding policy, establish the national electrification planning system, develop government’s approach to the SAPP, investigate the possibility of electricity supply industry competition, and provide a clearer legislative mandate and policy framework for the National Electricity Regulator.

These challenges point to the need to strengthen the department’s capacity significantly by appointing appropriate qualified personnel and undertaking further training of existing staff. This issue is discussed further in the section on Governance and Institutional Capacities.

Nuclear energy is a minor component of the South African energy sector, contributing about 2,7% of national primary energy consumption, and about 5% of the country’s electricity, but despite its small contribution the nuclear industry has been the recipient of a major portion of the Department of Minerals and Energy’s budget. The main actors in the nuclear sector are the Atomic Energy Corporation (AEC), Eskom, the Council for Nuclear Safety (CNS) and the private sector Nuclear Fuel Corporation (Nufcor). About 3000 people are employed, 1970 by the AEC, 944 by Eskom (mostly at Koeberg), and the balance by the CNS, Nufcor and several smaller companies.

Based on projections of power demand, and taking Eskom’s current surplus capacity into account, it is not expected that more generation capacity will be required in South Africa before 2005 at the earliest. Whether new nuclear capacity will be an option at that point or beyond will depend largely on the environmental and economic merits of other energy sources relative to nuclear and its political acceptability, construction lead-times and load characteristics.

On the international front it appears that the majority of countries with nuclear generation capacity have either ceased building these plants or have slowed down plans to install additional nuclear power generation capacity, leaving France and Japan as the only Organisation for Economic Co-operation and Development (OECD) countries with a public commitment to expanded nuclear programmes. Non-OECD countries, such as a number of Pacific Rim countries (including China, Taiwan and Korea), are now seen as the main growth areas for nuclear power expansion. Scenarios developed by the International Atomic Energy Agency suggest that the share of nuclear power in electricity generation world-wide will either decrease from the present 17% to 12% or be maintained at its present level in the coming two decades. Expansion will depend on factors such as economic growth, public attitudes and approaches by decision makers in assessing the macro-economic, health and environmental aspects of the different options available for electricity generation.

Certain nuclear materials and technologies used in the nuclear power industry can also be used for the construction of nuclear weapons, and their use is therefore subject to conditions set out under a number of international treaties and conventions. South Africa is a signatory to most of these, and will have to continue fulfilling its obligations in this respect.

The generation of electrical power from uranium requires:

• the mining, milling and processing of uranium ore in order to produce uranium oxide powder;
• conversion of the oxide to gaseous uranium hexaflouride (hex);
• enrichment of hex in order to increase the proportion of usable uranium;
• fuel fabrication, during which enriched hex is reconverted to the oxide which is then packed into metal-clad fuel elements;
• utilisation of the fuel elements in a nuclear power station where they remain for about 36 months until spent;
• subsequent on-site temporary storage of the spent fuel for the medium term; and finally
• long-term disposal.

The sum of these activities is often referred to as the nuclear fuel cycle.

In South Africa, uranium is produced as a by-product of gold mining, the production of the oxide and its marketing being undertaken by Nufcor, which is part of the Chamber of Mines. Production during 1995 stood at just under 1700 tons, generating an income of about R150 million. Most of the product is exported directly, with small amounts being beneficiated at the AEC’s Pelindaba facility near the Hartebeespoort Dam, either for export or for subsequent purchase by Eskom. Until recently the AEC operated a conversion plant as well as a fuel fabrication plant. During 1995/96 both plants were the subject of an investigation by a task team convened by the Department of Minerals and Energy whose recommendation was that the fuel fabrication plant be closed, but that the conversion plant be retained subject to achieving certain production targets. Since April 1996 production at the fuel fabrication plant was temporarily halted pending ratification of a cabinet decision that this plant be closed permanently. Until April 1995, the AEC also operated an enrichment plant, but this was shut due to its low cost-efficiency, and is currently being dismantled.

Eskom owns and operates the 1840 MW Koeberg nuclear power station outside Cape Town. Its fuel is largely sourced on the international nuclear fuel market, in a combination of long-term contracts and spot market deals. At present spent fuel is stored on site at Koeberg, but these storage facilities are likely to be filled by mid-1998, by which time new temporary storage facilities with a higher racking density will be in place. Other radioactive wastes produced during operations at Koeberg are currently being disposed of at the Vaalputs national radioactive waste repository, near Springbok in the Northern Cape. Vaalputs is maintained and operated by the AEC, which recovers operating costs from Eskom.

At present no national radioactive waste management policy exists, nor has the suitability of Vaalputs for long-term disposal of spent fuel from Koeberg been investigated. In view of the absence of any policy on radioactive waste, and its mission to safeguard the public against harm from radioactivity, the CNS has initiated a process of national discussions on this matter, as a first step toward dealing with the problem.

Several linkages exist between the local nuclear industry and the international nuclear fuel market: Nufcor supplies product mainly in the form of unprocessed uranium oxide to the international market, although small amounts of converted hex are also exported (for which conversion services are purchased from the AEC); Eskom sources most of its nuclear fuel requirements internationally; the AEC also exports small amounts of converted uranium. However, since the closure of the enrichment plant, it has not been possible to beneficiate locally produced uranium oxide beyond the conversion stage.

The Nuclear Energy Act of 1993 governs the country’s nuclear sector and is administered by the Department of Minerals and Energy. It also establishes the functions of the Atomic Energy Corporation and the Council for Nuclear Safety. The AEC is responsible for developing technological expertise in the field of nuclear fuels, promoting the development and application of nuclear technology for peaceful purposes, exercising control over the management of radioactive waste and administering the Nuclear Non-Proliferation Treaty and the International Safeguards Agreement on behalf of the State. (The latter are international treaties that are administered globally by the International Atomic Energy Agency.) The CNS regulates and controls the nuclear industry through the issuing of licenses, except for the medical uses of radioactive materials, which are controlled by the Department of Health. In addition, the Department of Foreign Affairs represents government in the negotiation of international nuclear agreements.

With the blessing of the Department of Minerals and Energy, the CNS has recently embarked on a process of drafting a report that will be used to develop a separate Nuclear Safety Act, in order to ensure a clear public differentiation between the CNS (as the regulator of the industry) and the AEC (as a participant in the industry). At present both bodies are governed by the same act, which leads to perceptions that they are not separate from each other.

Government proceeds from the understanding that the current situation in the nuclear sector is a product of an historical context which differs substantially from that facing the country today. For this reason two types of problems require resolution: firstly, what long-term contribution can nuclear power make to the country’s energy economy and, secondly, how can the existing nuclear industrial infrastructure be optimised? Intrinsic to the latter challenge is the recognition that the nuclear industry, and especially the AEC, is a repository of scientific and technical expertise that could be of great benefit to the country. Government is therefore faced with both long-term policy questions and shorter-term managerial issues. In the long term, government needs to provide direction on the role of nuclear power within the country's overall energy mix, while in the short to medium term it needs to:

• be satisfied that the Koeberg power station is operated in a safe and optimal fashion;
• assess the activities, financing and possible restructuring of the Atomic Energy Corporation;
• ensure harmony between the AEC’s scientific and technical research and development programmes, and national policy for these areas;
• develop a radioactive waste management policy and programme;
• ensure that environmental impacts arising from the use of nuclear materials are receiving proper evaluation;
• improve the governance of the nuclear sector and ensure its integration into broader energy planning; and
• separate nuclear energy matters from other matters relating to the nuclear sector.

In meeting these challenges, it must be recognised that the nuclear sector is not static but is already undergoing change as a result of the implementation of the 1990 ‘AEC 2000 Plus’ strategic and business plan, and because of general restructuring of state-owned assets.

Government therefore intends to undertake any restructuring of the nuclear industry that may be necessary to ensure the environmental sustainability and cost-efficiency of South Africa’s energy economy, while seeking maximum benefit from historical investment, and will endeavour to do so in a participatory fashion.

Whilst it is unlikely that additional nuclear capacity will be required for a number of years, it would not be prudent to exclude nuclear power as a supply option. Decisions on the role of nuclear power, as with any other supply option, need to be taken within the context of an integrated resource planning process. Government policy on this approach is presented in the sections on Electricity, and Environment, Health and Safety.

Government will ensure that decisions to construct new nuclear power stations are taken within the context of an integrated energy policy planning process, and are subject to a full public debate.

The continued operation of the Koeberg power station cannot be assessed on its own merits, but has to be considered in the context of alternative energy supply options, and as part of an integrated resource planning process. Government policy on this approach and on the Koeberg power station specifically is presented in the section on Electricity.

Because the AEC resulted, in large part, from a policy context that no longer applies, its role in South Africa’s further development needs to be carefully assessed. Toward this end, government has already decided to evaluate the role of the AEC in regard to technology development and industrialisation activities, as per the white paper on Science and Technology, adopted by the cabinet on 4 September 1996. The terms of reference of this evaluation are to be drawn up by the Ministers of Minerals and Energy; Arts, Culture, Science and Technology; and Trade and Industry.

Government will review and assess the AEC’s activities and future plans, in order to reach a basis for decisions on the desirability of its restructuring and further fiscal support for its activities.

In order to develop rational policies for any restructuring of the AEC, government will analyse the corporation’s present range of activities and programmes, in order to identify:

• those that are likely to result in low or no returns (and which should therefore no longer be supported);
• those which are not income generating but which cannot be split from the rest of the AEC for operational or other reasons (and which may warrant support);
• those that could be self-sustaining (and which should no longer receive support from the fiscus);
• those worth further investment; and
• those that could or should properly be transferred to other statal bodies (such as the CNS, the CSIR, or the Council for Non-Proliferation of Weapons of Mass Destruction).

One of the most pressing policy issues around nuclear energy concerns the management of the radioactive waste produced by the various stages of the nuclear fuel cycle. This includes problems around the proper treatment of radioactively-contaminated steels emerging from the mining industry, as well as radioactivity released from mine dumps and slimes dams. Although the levels of radioactivity are not very high, the total amount of radioactivity involved can be. This is an often understated problem, since it affects mining activities so directly, and addressing it could impact on the profitability of marginal mines. The AEC stores its radioactive wastes on site at Pelindaba, but recent events have highlighted a number of problems in this area. Although some wastes from Koeberg are disposed of at the Vaalputs repository, there are no guidelines as to how to deal with its spent fuel. In fact, previous governments neither formulated a national policy on radioactive waste, nor did they institute a programme of management for such waste. Against this background, the CNS recently embarked on a series of discussions with stakeholders and affected parties, with a view to mapping out a process for addressing this issue and making submissions to the Department for consideration.

The Department of Minerals and Energy will address all aspects of the management of radioactive waste in South Africa and will make recommendations in regard to the safe management and disposal of such waste in such a way as to ensure maximum public confidence in its proposals.

The report will inform the development of government policy on the management of radioactive waste and must address issues around all radioactive waste, the role and most appropriate form of ownership and management of Vaalputs, and the role and management of other nuclear material repositories. The commission will consult all relevant stakeholders during its deliberations.

In light of perceptions around health and safety issues associated with the Koeberg nuclear power station, and other plants where radioactive materials are processed, government believes that an impartial evaluation of these issues is required.

The Council for Nuclear Safety will produce an annual public report on the health and safety circumstances associated with all major nuclear-related installations. The process of compiling the report will proceed in such a way as to ensure maximum public confidence in its analysis.

Governance systems within the nuclear sector evolved under strategic conditions which required great secrecy, as a result of which integration with other energy sectors was minimal. Given the nature, and outcomes, of past nuclear policy formulation processes, transparency and participation in nuclear sector governance will be crucial to the restoration of public confidence in government’s nuclear energy policies.

Governance policy for this sector needs to ensure the adequate definition and separation of roles, distinguishing in particular between the functions of policy makers, regulators, administrators and nuclear energy operators. For instance, the commercial activities of nuclear industries, such as the AEC and Eskom, need to be clearly separated from regulatory functions conducted on behalf of government. Such regulatory functions should be conducted by the independent CNS, and be kept quite separate from nuclear operators.

The Department of Minerals and Energy will investigate and clarify the functions of bodies associated with the nuclear industry, including the Atomic Energy Corporation, the Council for the Non-Proliferation of Weapons of Mass Destruction, and the Council for Nuclear Safety, as well as any other institution with governance functions over this industry.

The task team undertaking this investigation will be appropriately composed in order to build public confidence in nuclear governance structures. Where necessary, legislation will be passed to institutionalise the clear role separation of the various nuclear industry participants.

Governance of nuclear issues not associated with the energy sector, such as the administration of the Non-Proliferation Treaty and Safeguards Agreement, needs to be separated from nuclear energy governance in order to ensure effective policy making and the efficient utilisation of national resources.

The Department of Minerals and Energy will investigate the implications of separating the governance of nuclear energy issues from that of other issues associated with the use of nuclear materials.

The task team undertaking this investigation will be appropriately composed in order to build public confidence in nuclear governance structures. In addition to considering the administration of international treaties, this investigation will consider the practicalities and costs of separating the commercial and non-commercial aspects of the AEC’s operations. Account will have to be taken of existing initiatives around the restructuring of state-owned assets.

Despite its generous minerals endowment, South Africa has no significant proven crude oil reserves and has to rely on imports, which impact significantly on our balance of payments. It is, however, believed that potential exists for offshore discoveries of both natural oil and gas and onshore coal-bed methane in South Africa. The successful exploitation of these domestic resources would therefore contribute to the growth of the economy and relieve pressure on the balance of payments.

The majority of the offshore areas are presently controlled by Soekor under prospecting lease OP26 issued under the Mining Rights Act of 1967. In terms of this prospecting lease Soekor’s Petroleum Licensing Unit presently sub-leases offshore acreage to investors. Prior to 1991 the right to explore for oil and gas onshore was determined by statute and held by the state. With the promulgation of the Minerals Act of 1991 these rights reverted to the mineral rights owner.

Up to now the government, through Soekor, undertook its own oil and gas exploration programme. This resulted in the discovery of the F-A/E-M gas fields which were developed by Mossgas and the E-BT cluster of oil fields which are presently being developed by Soekor through a wholly-owned subsidiary.

Policy on oil and gas exploration must ensure the optimal exploration and development of the country’s natural oil and gas resources to the maximum benefit of its peoples. Policy challenges are therefore:

• to promote the development of South Africa’s oil and gas resources through the establishment of a stable fiscal regime, taking cognisance of the high risk involved, with due regard to reasonable returns for potential investors;
• to secure private sector investment and expertise in the exploration and development of the country’s oil and gas resources;
• to ensure the support and co-ordination of surveys, investigations and research by the state in order to stimulate the optimal exploration and development of the country’s natural oil and gas resources;
• to ensure a safe and healthy working environment in accordance with relevant local and international oil and gas field practice;
• to ensure the protection of the natural environment in accordance with relevant local and international oil and gas field practice; and
• to promote international co-operation with an emphasis on Southern Africa.

The rights to licence on- and offshore exploration and exploitation of oil and gas will remain with the state.

It is foreseen that exploration and exploitation will largely be undertaken by the private sector.

Government will establish an appropriate capability to perform regulatory and promotional functions in respect of oil and gas exploration on behalf of the state.

To give effect to policy for the upstream oil and gas sector appropriate institutional arrangements and dedicated legislation need to be finalised. This will include, inter alia an analysis as to:

• the relevance of the present legislatory dispensation (the Mining Rights Act of 1967 and the Minerals Act of 1991);
• whether a dedicated Oil and Gas Act consistent with international practice but addressing local circumstances is required; and
• whether oil and gas exploration should be treated as a minerals or energy responsibility.

The primary requirement is that a cohesive, effective and clear policy and legislative framework be developed.

A stable and positive fiscal regime must also be established, in conjunction with the Department of Finance and the South African Revenue Service, to promote and support cost-effective oil and gas exploration.

Prior to 1954, all fuel consumed in South Africa was imported in refined form and distributed by the four oil companies then operating as wholesale marketers in South Africa, namely BP, Shell, Mobil and Caltex.

During the first decade after World War II, the demand for fuel products in South Africa increased to such an extent that the establishment of a viable refining industry became possible. Genref was the first refinery, established by Mobil (now Engen) in 1954, followed by Sapref (Shell and BP) in 1964, both in Durban; Calref (Caltex) in 1966, in Cape Town; and Natref (Sasol and Total) in 1971/72 in Sasolburg.

For political and strategic reasons, the government of the day decided to embark on a synthetic fuel programme and Sasol I was established in 1954 to convert coal into synthetic fuel. The uncertainties of the international crude oil supply situation, and the oil embargo applied against South Africa, led to the establishment in 1964 of the Strategic Fuel Fund Association (SFF) for the acquisition of crude on behalf of the country and administration of the strategic crude oil stockpile. The synthetic fuel industry was expanded with the commissioning of Sasol II in 1982, and Sasol III in 1983; finally Mossgas, which converts natural gas to synthetic fuels, was established in 1987. Tariff protection is paid to the producers of synthetic fuels. In December 1995 cabinet decided to phase down this protection by 1999.

Present crude oil refinery capacity is 445 000 barrels per day with the capacity of the Sasol synthetic fuels plant being 150 000 barrels per day and Mossgas 45 000 barrels per day of crude oil equivalent. About one-third of fuel demand is met by the synthetic fuels industry.

During 1996 South Africa imported approximately 16.8 million tons of crude oil and 20 800 Ml of refined product was consumed. Approximately 15% of South Africa’s primary energy consumption is currently met by imported crude oil. Taking synthetic fuel production into consideration, liquid fuels meet approximately 28% of South Africa’s final energy needs.

The industry’s wholesale turnover was some R24 billion in 1994 and it provides employment to more than 100 000 persons. There are approximately 4900 service stations in the retail sector of the industry, providing employment to an estimated 45 000 pump attendants.

As a result of the historical development of the liquid fuels industry and economic and political influences, the industry in South Africa is characterised by a unique regulatory framework and a significant degree of government involvement.

Policy challenges for the South African liquid fuels industry include the need to achieve:

• an efficient and internationally competitive industry;
• the stable and continued availability of quality product throughout the country at competitive and fair prices;
• an equitable balance between the interests of industry participants and consumers;
• an environment conducive to investment in the liquid fuels industry and the related petro-chemicals industry; and
• an industry supportive of government’s social and economic goals.

Government believes that the desired attributes for the liquid fuels industry can ultimately best be met in an environment of minimum governmental intervention and regulation. Government will therefore provide an environment within which the liquid fuels industry can conduct its business effectively and on a competitive basis.

The key policy challenge for government is thus to determine the appropriate level of involvement during the transition to a competitive environment.

The government has since 1993 been engaged in a consultation process with a wide range of participants and stakeholders regarding the restructuring of the industry. Government has concluded that there is general consensus that current circumstances necessitate the amendment or withdrawal of regulatory mechanisms within an appropriate time-frame to better reflect current realities. Government would, however, want to see the following conditions being met for the process to be initiated:

• a competitive industry but with an equitable structure, especially between the wholesale and retail sectors;
• an industry which increasingly allows for participation by previously disadvantaged groups;
• acceptable arrangements for the upliftment of synthetic fuels; and
• adequate arrangements to address any labour-related consequences of restructuring.

To achieve this outcome government will pursue the following policies.

The end of the oil sanctions era has allowed crude oil refineries to accept responsibility for their own oil acquisition. It is accepted that the oil refiners are in the best position to judge their oil requirements.

Crude oil refiners will continue to purchase their own crude oil requirements.

For as long as SFF, as state agency, is empowered to buy and sell crude oil, all transactions between the oil industry and SFF will be on a willing seller - willing buyer basis.

The refining industry has effectively been deregulated in 1991 and although the income of refineries is determined by the deemed import parity cost of fuels there is no control in respect of refining margins. There is also no regulatory barrier in respect of entry to the refining industry. However refiners need to find outlets for their products, either through placement in the local market or through exports.

Government will not extend regulatory control over the crude oil refining industry

Price control is based on import parity pricing (in-bond landed cost) at the refinery gate, with control over the profitability of the wholesale and retail sectors of the industry through the respective wholesale and retail margins. Price control, especially retail price maintenance in respect of petrol, and import control together form the cornerstone of the regulatory dispensation of the liquid fuels industry.

The government believes that within three to five years competitive market forces should determine prices. However, as long as price control is applied the import parity pricing approach will be retained, with suitable improvements if necessary.

Government intends to move away from price control with the adoption of suitable transitionary arrangements. Depending on the transitionary arrangements, control of industry margins, at wholesale and retail level will be phased out and will ultimately be determined on a competitive and commercial basis.

The Service Station Rationalisation Plan, a voluntary agreement between government and the wholesale and retail industries, guides the development of the retail sector. This agreement limits the number of service stations to promote throughput at service stations and thereby, through economies of scale, contains costs in a price-controlled environment. It also prohibits self-service at retail fuel outlets to protect the jobs of pump attendants, as well as vertical integration in the industry, in that wholesale marketers are not allowed to operate service stations, in order to promote small business in the retail industry.

With the phasing out of price control the role and implementation of the Rationalisation Plan will be amended and phased out. The restructuring of the Rationalisation Plan will be accompanied by a temporary moratorium on self-service and vertical integration in the industry to minimise job losses and to promote the maintenance and establishment of small businesses. The labour implications of marketing-related restructuring will be addressed jointly with the Department of Labour.

There is no regulatory prohibition on participation in the wholesale industry. It is however incumbent on wholesalers to secure product and to find outlets for such product. This implies that prospective new entrants to the wholesale sector must be accommodated, through negotiation, as participants in the Service Station Rationalisation Plan. The phasing out of the Service Station Rationalisation Plan will eliminate this requirement.

At the end of the transition period the liquid fuels industry should be characterised by unrestricted market entry, allowed to engage in normal business practices and subject to generally applicable legislation.

The control of the import and export of petroleum products is effected in terms of the Import and Export Act which is administered by the Department of Trade and Industry. The Department of Minerals and Energy acts in an advisory capacity to the Department of Trade and Industry. Current policy allows free importation of crude oil to meet the need of crude oil refiners, whereas importation of refined products is limited and is only recommended when demand cannot be satisfied through local production. Export and re-export of crude oil and refined product is allowed on condition that local demand is satisfied.

With free participation in the liquid fuels industry, import and export control will be phased out.

This policy will ensure that South Africa’s commitments towards the World Trade Organisation would be met.

To ensure that South African consumers are provided with quality product, from an environmental and technical point of view, it is necessary that appropriate fuel standards be upheld.

In an environment of free trade in liquid fuel products, fuel standards and specifications will remain mandatory.

Transport tariffs incorporated in the price structure of liquid fuels are currently determined by the Transnet subsidiaries Petronet, Spoornet and Autonet.

With the phasing-out of price control the liquid fuels industry will be allowed to negotiate commercial transport rates with carriers of their preference.

Government recognises the economic contribution of the synthetic fuels industry in South Africa by providing protective subsidies to indigenous synthetic fuel manufacturers.

Subsidies to the synthetic fuels industry will be progressively lowered to promote a level playing field between the crude oil refining industry and the synthetic fuels industry. It is expected that these subsidies will be phased out by 1999.

For as long as the manufacturers of synthetic fuel do not have viable access to the retail sector, a dispensation will be promoted which ensures the upliftment of such fuels for placement in the market.

The interaction between the crude oil industry and the synthetic fuels industry should be on a negotiated basis.

The restructuring of the CEF-group of companies will take place in terms of the National Framework Agreement on the Rationalisation of State Assets and other national policy frameworks.

Soekor was established in 1965 as a wholly-owned subsidiary of CEF (Proprietary) Limited. Restructuring of Soekor has already led to the establishment of two entities; a wholly-owned subsidiary Soekor (Exploration and Production) Proprietary Limited, responsible for exploring for and producing oil and gas and a business unit within the company which promotes, locally and internationally, the development of South Africa’s offshore national oil and gas resources.

The Petroleum Licensing Unit of Soekor undertakes a regulatory and licensing function on behalf of the State which may be influenced by the further restructuring of Soekor.

Government will ensure the maintenance of appropriate capacity to perform regulatory functions in respect of gas and oil exploration.

Government has a direct interest in the production of synthetic fuels form natural gas through Mossgas. Private sector-interest in Mossgas has been assessed but none of the proposals submitted met the specified criteria and it was decided that Mossgas will continue in its present role as synthetic fuels producer and that satellite gas fields will be developed to enhance the life-expectancy of Mossgas.

Government will not increase its involvement in the manufacture or marketing of synthetic fuels.

The maintenance of adequate petroleum reserves and stocks remains a strategic imperative for any crude oil importing country. The International Energy Agency consider a strategic crude oil stockpile level equivalent to ninety days import requirements as appropriate for its member countries.

Government will determine the country’s strategic crude oil requirements and will ensure that such stocks are maintained.

Taking cognisance of the capacity of its synthetic fuels industry South Africa will maintain a strategic crude oil stock level equivalent to at least three months total consumption.

The Petroleum Products Act of 1977 and the Central Energy Fund Act of 1977 will remain as enabling legislation, but may have to be amended to accommodate policy reforms.

Governance of the liquid fuels sector will be commensurate with government’s policy goals for, and level of involvement in, the industry.

The interwoven nature of the current regulatory dispensation requires a phased approach to the restructuring of the liquid fuels industry to ensure minimum disruption. A phased approach will allow for proper management and monitoring of the process. It will also allow time for preparation and adjustment by the respective industry participants and role-players.

The first phase of the process will allow for interim adjustments to fuel price mechanisms and settling of over/under-recovery accounts with the oil industry. It will also create opportunities for the negotiation of intra-industry agreements, such as upliftment agreements for synthetic fuels. During this phase mechanisms will be put into place to ameliorate any negative impact on employment opportunities as a result of the restructuring process. This phase will also allow the state to pursue the restructuring of its assets within the liquid fuels sector. It is foreseen that the duration of the first phase will be approximately three years and will end with the termination of subsidy payments to the indigenous synthetic fuels industry.

The second phase will be characterised by allowing market forces to set prices. This process could be initiated by allowing discounting from maximum prices to increase price competition. The Service Station Rationalisation Plan will also be phased out during this period, after agreement has been reached about self-service fuel and retailing operations and vertical integration within the liquid fuels industry.

The Department of Minerals and Energy will act as a facilitator in the transformation process and a task team will be appointed to manage the process.

Deregulation of the petroleum industry

Despite the problems associated with deregulation, there is no fundamental reason why the industry should not be deregulated. The two cornerstones of the present regulatory regime are the control of the petrol retail price and import control on products. While deregulation will have negative effects on labour and small business in the short and medium terms, government is however satisfied that it is inevitable that it will become a reality at some stage in the future. A special effort should therefore be made so that the present emerging companies and new entrants in the oil industry should not lose the momentum that they are now beginning to acquire.

Government will introduce a deregulated oil industry within the next few years in order to promote competition. A formula would however have to be found in order to protect and nurture new emerging participants in the oil industry, in particular those who have been deprived the opportunity as a result of the unfair policies of the past.

Special measures should be taken by the state to ensure that during the transitional period to a deregulated oil industry, newly established previously disadvantaged participants become fully competitive in a deregulated environment.

Government is committed to promoting a climate that would be conducive to reasonable profits and sustained investment in the liquid fuels industry. During the period of regulation, government is committed to a fair and transparent method used to set the margins in order to encourage investments.

At present there is apparently no need for the construction of a new oil refinery, since the present total refining capacity of approximately 600 000bbls/day exceeds daily demand. In future, however, this situation may change. Government is in principle supportive of a new refinery venture in future, provided that there would be a visible need driven by the economics of the day, as well as an opportunity to bring in new participants who were previously excluded from participation.

Government would consider an option to restructure existing state assets in the oil industry into a company in which the government would be a major shareholder. The company would possibly be in the private sector in terms of the Companies Act governance, and would compete with other private companies on a level playing field. Such an entity should possibly not require any state subsidy (cf Eskom).

The current situation of the high local costs of jet fuel should be addressed as a matter of urgency. Government would be prepared to consider an interim option whereby a benefit would be passed on to the national airline by mutual consent with role-players. In the long term however, following the possible privatization of the national airline, a long term solution would have to be found in order to benefit all airlines operating in the country in an equitable manner.

Government’s vision for the future is to create a stable and competitive oil industry in our country. With the opening of world markets since 1994, it has become imperative that our economy begins to be competitive in international terms. While regulations that ensure environmental safety and quality of product should naturally be maintained, a new dispensation which minimises government intervention would deliver maximum benefits to the economy and to consumers. This implies that the transition would have to be carefully and efficiently managed. Opportunities for sustainable employment should be created and maintained. At the same time, new entrants into the industry should be empowered and enabled to compete effectively in the long term.

Natural gas, produced from the F-A field in the Mossel Bay area, currently supplies just 1,7% (or 70 PJ) of total South African primary energy supply, as a feedstock to the Mossgas synthetic liquid fuels plant. Piped coal gas, manufactured in Sasol’s chemicals and liquid fuels plants and marketed by Sasol Gas, a division of the Sasol subsidiary Sasol Oil, supplies 1,1% (or 27 PJ) of net energy consumption, largely to industrial consumers in the Gauteng and Mpumalanga provinces. The pipelines are owned by Gaskor. Sasol Gas markets both high energy content methane-rich gas (to Witbank, Middelburg and the Richard’s Bay/Durban areas) and low energy hydrogen-rich gas in Gauteng. Both Mossgas and Sasol were state initiated and financed. Sasol has subsequently been privatised while Mossgas remains state owned. The Mossgas project was developed for purely strategic reasons and has been unable to re-coup its R11 billion capital cost. The Sasol gas business developed largely as a by-product of Sasol’s synfuels business and remains inextricably linked to it. Sasol’s gas production capacity is unknown.

South Africa has relatively small known gas resources of 30 billion cubic metres (bcm) off the south coast and some very small recent discoveries (3 bcm) off the west coast. However, the potential natural gas resources have not yet been fully investigated. To date South Africa has undertaken limited exploration for oil and natural gas leading to twenty gas and nine oil discoveries. Limited exploration for coal-bed methane is underway. This section on the downstream gas industry does not distinguish between natural gas and coal-bed methane.

Despite the relatively low level of known domestic gas resources it is probable that the South African gas industry is on the brink of significant expansion, due to natural gas field discoveries and development in neighbouring Mozambique and Namibia, as well as the potential development of South African natural gas and coal-bed methane resources.

Based on the results from three wells drilled, the current recoverable reserve in the Kudu field in Namibia is 56 bcm. An upside potential of 230 bcm is likely. This amount of gas could is sufficient to satisfy current levels of demand for gas in both the Western Cape and Gauteng markets.

The Pande field in Mozambique is the most mature of the gas fields, with current proven reserves of 65 bcm, and is likely to be developed first. The utilisation of this gas in South Africa will require the construction of an international gas transmission pipeline, up to 900 km in length, from Pande in Mozambique to Mpumalanga and Gauteng. The project has attracted significant international interest in recent years.

Potential gas development projects entail huge capital investments, locked into immovable assets with long term returns, and investors therefore require stable policy conditions. In the absence of stability, increased investment risks lead to lenders requiring higher returns, which pushes up the price of capital and hence the gas price. This has the dual effect of making some projects non-viable, and allocating an unnecessary portion of the rent to risk capital for those projects that are viable.

Given that both the Pande and Kudu fields are located in neighbouring countries the development of these projects has important implications for regional economic development. The harmonisation of gas policies within the region, particularly regarding bi-national gas trade, is required to facilitate this process. Considerable progress has already been made in this regard with Mozambique.

Strong potential thus exists for significant growth in South Africa’s gas industry, based largely on regional gas trade. Recent developments in the local gas industry have seen Petronet, the state-owned fuel pipeline company, converting a liquid fuels pipeline to transport gas more than 500 km from Sasol’s Secunda plants to the Richard’s Bay and other Natal markets. Sasol has also recently built a 119 km pipeline from its Secunda plants to the Witbank area, thereby significantly expanding its market access.

Environmental benefits arising from the use of natural gas as a source of energy include:

• reduced carbon dioxide emissions relative to equivalent energy other fossil fuels;
• low particulate emissions;
• high energy efficiency in combined-cycle applications;
• negligible sulphur content in regional deposits; and
• gas-fired generation plants require less space than conventional coal-fired plants of the same capacity.

Gas has a number of attractive characteristics from an energy policy perspective. The development of the gas industry will stimulate inter-fuel competition, provide environmental benefits through lower emissions in contrast to oil and coal, provide greater options for industrial thermal applications, and increase the diversity of fuel supplies and hence improve South Africa’s energy security. Other important uses of gas are as a reductant in the metallurgical industry or as a feedstock in the chemical industry. Government is therefore committed to the establishment of an appropriate climate to facilitate the development of the gas industry.

Key policy challenges facing government are the following:

• to ensure conditions conducive to a stable investment climate, so as to encourage economically viable development and thereby limit the risks to capital lenders and improve project viabilities;
• to ensure that gas transmission, storage and distribution operators do not adopt monopolistic behaviour and to limit the opportunities for dominant operators to abuse their market power;
• to deal effectively with the international aspects of gas transmission pipelines and international gas trade; and
• to develop appropriate gas governance systems and the necessary capacity for these to operate.

The Department of Minerals and Energy is currently in the process of developing a gas regulatory structure and addressing the harmonisation of regional gas polices through bi-national agreements. Studies by the World Bank, the International Energy Agency, and South African bodies are assisting this process.

The Government shall in collaboration with relevant stakeholders endeavour to harmonise gas issues with neighbouring states.

This will facilitate cross- border gas trade and enhance regional socio-economic development.

South Africa’s small gas industry is expected to expand and provide a significant component of national primary energy. Indications are that the existing participants in the industry, potential participants and potential investors would all welcome a regulatory environment in which government policies for the gas industry are stated explicitly. This will increase investor confidence and promote the rapid development of the industry.

The Government will legislate for the transmission, storage, distribution and trading of piped gas. The legislation will provide for the establishment of a Gas Licensing Authority to implement a minimal regulatory regime consistent with orderly development of a competitive gas industry.

The functions of gas transmission, storage, distribution and merchandising will be implemented as separate undertakings and will require separate licences. The regulatory system will facilitate pipeline routing, pipeline sizes and capacities, and the interconnection of pipelines.

Integration of companies operating in more than one of the gas chain elements, namely production, transmission, storage and distribution, can result in anti-competitive behaviour. On the other hand, the security of gas supply/demand to encourage development of the industry may require some form of vertical participation by the principle players.

Non-controlling interests in more than one element will be permitted in order to facilitate project development from producer, through transmission to distribution. In the event of common interests in the control of vertically-related companies, the licensing of such companies will be subject to proof of functional separation and arms-length relationships between the companies.

The government will facilitate efficiencies which accompany economies of scale.

Large gas consumers will be permitted to purchase gas directly from the transmission system. Small gas consumers will purchase gas through a distribution system.

The natural monopoly characteristics of gas transmission pipelines presents the potential for the exercise of market power, including restricted access of gas industry competitors and maintenance of high prices.

The gas regulatory regime will inhibit monopolistic abuse of pipelines by requiring pipelines to provide non-discriminatory open access to uncommitted capacity, transparency of tariffs, and disclosure of cost and pricing information to the gas regulatory body.

Where a third party requests access to a transmission pipeline, decisions will be made on a reasonable basis, and at the expense of the applicant who requests the upgrading.

A distributor’s function is to supply lower volume consumers whose consumption is too small or too irregular to warrant purchasing from a producer/merchant. Distributors are vulnerable to predatory actions by producers, who can attract the steady-demand medium-sized consumers, thus destroying the distributor’s ability to aggregate sales and enter into a take-or-pay contract with the producer. This chain of events would limit the expansion of the gas industry into the household market. The distribution system world-wide is reliant on a distributor’s ability to aggregate customers and exclusive rights to an area to prevent duplication of the distribution grid.

Distributors will be awarded licenses for franchised areas in order to market gas to small gas consumers.

Licensed distributors will be required to satisfy specific customer service standards and to disclose operating information to the regulatory body responsible for the gas industry.

Depreciation on pipelines is currently not allowable for tax purposes. This is a fiscal policy which discourages investment. The Department of Minerals and Energy will make representation to the Department of Finance to allow tax deductibility on gas pipelines.

The Department of Minerals and Energy will assist the Department of Labour with the development of national health and safety standards for the construction and operation of transmission and distribution pipelines, storage and metering

Where existing standards are deemed acceptable, even if they do not conform to the new national standards, these will be permitted for indefinite use, but new or replacement work will have to conform to the national standards. Where existing standards are deemed unsatisfactory, a transition period will be allowed for institutions to bring equipment up to standard without undue financial hardship.

Some countries have chosen to restrict the usage of gas to certain applications, based on the understanding that gas reserves were limited and that this commodity should be conserved while alternative commodities were available. Such constraints on usage have tended to limit the growth of gas markets and hence the rate of exploration. International experience now shows that, in general, gas reserves are far larger than had been expected and that no limitations should be placed on gas utilisation.

No restrictions will be placed on the use of gas, or on the amount of national primary energy sourced from gas, or on the amount of gas that may be imported from SADC countries.

Efficient-energy practices will, however, be encouraged.

South Africa has a coal resource of approximately 121 billion tonnes, of which about 55 billion tonnes are classified as economically recoverable reserves. Although coal’s contribution to South Africa's total primary energy supply has declined slowly, at the current level of approximately 70 per cent it still dominates the energy sector. Approximately half the coal consumed in South Africa is used for the generation of electricity, and a quarter for the production of synthetic liquid fuels. A large number of urban households in the central industrialised area still continue to burn coal, even after electrification.

During 1996, total national coal consumption was approximately 154 million tonnes, and coal exports totalled 60 million tonnes. The production of discard coal during 1996 has reached about 53 million tonnes, mainly, as a waste product of coal beneficiation. It is estimated that 550 million tonnes of discard are stockpiled above ground, which can be regarded as a future reserve of low grade coal. Stockpiling must, however, be done in an environmentally acceptable manner.

The coal production and beneficiation industry is wholly in the hands of the private sector. Previous regulations, for example controlling prices and export quantities, have been repealed, and the industry was completely deregulated during 1992. The government currently maintains a monitoring watch on the industry to ensure that coal resources are optimally utilised to the national benefit and that a competitive market is maintained.

Government energy policy for the coal industry is to maintain a successful and competitive coal market, ensure the efficient utilisation of coal resources and the reduce the environmental impacts associated with coal usage. This last policy has already been partially addressed by the Mining Health and Safety Act of 1996, and is covered further in the Environment, Health and Safety section of this paper.

Since the removal of all governmental controls in 1992, the coal industry has operated as a competitive market. Under these conditions the industry has prospered, exports have increased, thereby earning foreign exchange, and relatively low prices have been maintained.

The coal energy industry will remain deregulated and its level of performance will be monitored.

Government will continue to monitor the coal industry’s performance, including wholesale and retail operations, to ensure that competitive conditions in the coal market are maintained, and coal resources are utilised efficiently.

Long-term national planning of coal utilisation and policy development requires information as to the quantity, quality and locations of resources and reserves, as well as the rates of consumption of different coal products. Government also requires data to monitor the level of sustainability of the South African coal export programme.

The national coal resource/reserve database will be developed, updated and maintained, subject to evaluation of the need from time to time.

Coal-bed methane provides a hitherto wasted untapped source of gas. During coal mining operations, the coal-bed-methane was allowed to escape into the atmosphere, thereby contributing to the green-house gas burden. The harnessing and exploitation of coal-bed-methane will minimise these green-house gas releases. Details of exploitable reserves are unknown, and further policy development requires knowledge of quality and quantity of this commodity.

The resource potential of coal bed methane will be investigated and established.

It is likely that coal will remain the major source of energy for the foreseeable future. Since the use of this fuel carries with it the potential for significant negative environmental impacts it is necessary to develop policies to ameliorate these impacts.

Significant scope exists to reduce the environmental impacts of coal use in urban households, utility boilers and approximately 4500 coal-fired industrial boilers through the utilisation of modern clean coal technologies at a low marginal cost.

Clean coal technologies will be monitored, and promising technologies evaluated and demonstrated, and their introduction will be facilitated where applicable.

Clean coal technologies represent a major area for co-operation with more developed countries. In some applications, especially where thermal energy is required, it may be cheaper, more efficient and more environmentally benign to make use of clean direct coal combustion, rather than secondary carriers such as electricity.

Government will therefore be involved in standard setting, monitoring, evaluation, and technology demonstration where necessary. Further information on these issues is available in the section on Research and Development.

Although South Africa is fortunate to have low sulphur content coals available for utility power generation, future coal-fired stations will be evaluated on best available clean coal technologies and economics for both retrofit and new plant applications.

Implementation of this policy will also facilitate the use of low-smoke coals, more detail on which is provided in the section on the Environment, Health and Safety.

More efficient use of coal by industry, commerce and households, through improved processes and appliances, can reduce the environmental impact of coal combustion, including carbon dioxide emissions, and extend the life of this depleting resource.

Government will facilitate efficiency improvements in coal use.

Facilitating the international transfer of information and technology is one mechanism which could assist in improving efficiencies for the optimal utilisation of coal resources and the reduction in total global carbon dioxide emissions. Further information on this issue is provided in the sections on Energy Efficiency and International Energy Trade and Co-operation.

Cross reference to Green-house Gas Inputs in Environment Section.

Coal discards form a valuable reserve, even though they are of low quality. Since they are located above ground they can be reclaimed by benefication at a competitive cost as they do not incur a further mining cost.

There are at least two potential means of making use of discard coal, firstly the beneficiation of discards to yield conventional coal products and, secondly, the combustion of raw discards, for example in a fluidised bed combustor. Research has indicated that approximately 60% of discards can be used for energy application purposes. Government is in support of current techno-economic investigations for power production from discard coal.

Government will continue to investigate options for the utilisation of coal discard streams and stockpiles and will promote these as appropriate.

Renewable energy is obtained, in one form or another, from the sun and its daily interaction with the environment. Altogether renewable energy resources provide approximately 10% of South Africa’s primary energy. Biomass, in the form of firewood, wood waste, dung, charcoal and bagasse, accounts for close to 10% of net energy use at the national level (60% of household energy consumption), hydropower contributes less than 1% of electricity generation and most of that is pump-storage, and other renewable energy sources make up a small but rapidly increasing amount of energy supply.

Although more than 200 000 m² of solar water heater panels have been installed, this constitutes less than 1% of the potential market. The installed capacity of photovoltaic systems is approximately 5 MW peak, of which 50% is used for telecommunications. 280 000 water pumping windmills are in operation and the installed capacity of small-scale hydropower exceeds 60 MW.

Rapid development of renewable energy technologies is taking place in many parts of the world. As costs decrease, more and more applications are becoming cost effective and competitive. In contrast to world trends, however, South Africa has neglected the development of renewable energy applications, despite the fact that our renewables resource base is extensive and many appropriate applications exist.

Renewable energy applications have specific characteristics which should be taken into account. Advantages include: minimal environmental impacts in operation in comparison with traditional supply technologies; generally lower running costs; and high labour intensities. Disadvantages include: higher capital costs in some cases; lower energy densities; and lower levels of availability, depending on specific conditions, especially with sun and wind based systems. Nonetheless, renewable resources generally operate from an unlimited resource base and, as such, can increasingly contribute towards a long term sustainable energy future. The development of government’s renewable energy policy is guided by a rationale that renewable applications are in fact the least cost energy service in some cases, particularly when social and environmental costs are taken into account.

Government policy on renewable energy is thus concerned with meeting the following challenges:

• ensuring that economically feasible technologies and applications are implemented;
• ensuring that an equitable level of national resources is invested in renewable technologies, given their potential and compared to investments in other energy supply options; and
• addressing constraints on the development of the renewable industry.

Government policy is based on an understanding that renewables are an energy source in their own right, are not limited to small-scale and remote applications, and have significant medium and long-term commercial potential.

Renewable energy developments in other countries need to be monitored, adapted, developed for local use and demonstrated to build awareness. This is particularly the case for near-cost-effective applications with extensive potential for replication. Perceptions exist in South Africa that renewable energy is only suitable for small-scale applications, where it would be too expensive to supply conventional forms of energy. In fact, renewable energy can be suitable for both small/local and large/centralised applications. Closed mind-sets are therefore a barrier to the adoption of renewable energy technologies.

Government will provide focused support for the development, demonstration and applications of renewable energy sources for both small and large scale applications.

Immediate priorities for this programme will be biomass applications (for the use of biomass, not for its production), passive building design, photovoltaic electricity systems and solar water heating. Activities will include information dissemination, education, extension and referral services, and the active promotion of implementation where applicable

It is anticipated that suitable demonstration projects, and the effective communication of their results, will contribute to the establishment of a greater acceptance of the role of renewable energy sources in South Africa. This will entail the promotion of a long-term perspective on the total energy system, taking into consideration externalities, the depletion of fossil energy sources and the reduction of supply risks through the diversification of the primary energy supply base.

In many cases renewable energy technologies can be used in combination with conventional energy sources. The role that renewable energy already plays in household electrification is an example of this integrated approach to the supply of energy services. In order for government to prioritise which specific renewable technologies and applications to support, research into local and international developments must be undertaken.

Government will support renewable energy technologies for application in specific markets on the basis of researched priorities.

Appropriate research into optimal system integration, control systems and pricing signals will be undertaken to identify opportunities for renewable applications. This research will inform government strategies for the support of prioritised technologies.

Fuelwood is the main source of energy for most rural households. Demand exceeds sustainable supply in many areas of the country and this, coupled with agricultural and settlement pressures, is resulting in the denudation of natural woodland.

Government will facilitate the production and management of woodlands through a national social forestry programme for the benefit of rural households, where appropriate.

The implementation of this programme is currently the responsibility of the Department of Water Affairs and Forestry, in co-operation with the Department of Agriculture, the Department of Minerals and Energy, provinces, local communities and the private sector.

Government will facilitate the investigation of transitional fuels, such as low smoke fuels, as an interim solution to energy supply problems in rural areas. This will limit exposure of these communities to pollutants and emissions associated with the burning of wood or coal.

As with all ‘new’ technologies, renewable energy applications have yet to establish standards and practices on a par with conventional supplies. The lack of standards contributes to user uncertainty about the cost effectiveness and reliability of these systems.

Government will promote the development of appropriate standards and guidelines and codes of practice for the correct use of renewable energy technologies.

Implementation of this policy will entail the development of (1) standards and codes of practice, based on international practice and adapted for South African conditions, and cost efficiency requirements. (2) Standards Laboratory testing centre according to standards developers Government private sector initiative. Such development can be facilitated by the Department of Minerals and Energy but must include standards authorities and the renewable energy industry.

Certification of system designers and installers, information dissemination and voluntary compliance with specifications and codes of practice will build confidence in the renewable industry. Government tender procedures are a further option to increase pressures for standardisation. It is preferable that activities of this nature be industry-led. Government will monitor progress in this regard.

To date insufficient attention has been paid to the establishment of national criteria for solar rights in South Africa, such as the rights of consumers to receive direct solar radiation during the day, on specific parts of their property, without interference by other buildings, structures or vegetation. Such rights, or access requirements, are usually covered by town planning ordinances. National government will facilitate the establishment of criteria for these rights.

Informed decision making, at all levels, is only possible when suitable and credible statistics and information are available. There is currently a national lack of renewables energy data, and information on renewable energy system applications, system specifications, systems standards, installation and performance guides, technical and economic characteristics and many other related issues.

Government will establish suitable information systems of renewable energy statistics, where justifiable.

The Department of Minerals and Energy will facilitate the implementation of this policy, possibly with the assistance of an appropriate external body. The Department of Minerals and Energy will also establish programmes to disseminate information and educate energy users about the potential, characteristics, costs and implications of the various forms of renewable energy.

Government presently lacks institutional capacity to implement most, if not all, of the above policies. Furthermore, implementation of these policies will require substantial funding. Opportunities to leverage investments in renewable energy systems, by means of innovative approaches to reducing the risks to financial institutions and hence the cost of finance to consumers, also need to be exploited.

The capacity of the Department of Minerals and Energy is being presently improved in order to cater for the need to implement our renewable energy projects and programmes. The year 1998 has been declared by the Minister to be the ‘Year of Delivery’ for the Department. To this end, a number of rural villages have been targeted for installation of solar home systems (SHS), solar cookers, solar water pumps and solar water heaters. The natural beneficiaries of these systems are households, schools and clinics in these rural areas. With the assistance of international funders and contractors, the programme are developing at an ever increasing rate. All of the Department’s human resources that were previously engaged in the development of fuelwood usage will now be deployed into this and other endeavours of the Department.

Hydro schemes such as the Cahora Bassa potential will be investigated by the Department. Already we are engaged in negotiations of tapping some 1 400MW from the scheme, subject to agreements on tariffs being reached between our government and the governments of Mozambique and Portugal. These discussions are now at an advanced stage.

Various international agencies have expressed an interest in assisting with the development of potential sources of renewable energy. Such support is dependent on the existence and proven activities of suitable local institutions, and a serious commitment from government to fully support cost-effective renewable energy applications.

Contents   Part One  Part Two   Part Three  Part Four