7. Koeberg nuclear power station
   

Eskom owns and operates the 1840 MW Koeberg nuclear power station outside Cape Town for the generation of electricity. For further details on Koeberg see section on Nuclear Energy.

8. Non-utility generation

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.

6. Electricity market structure

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 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 implementing these new arrangements.

Government will initiate a comprehensive study on future market structures for the South African electricity supply industry.

In the light of the above, it is clear that the introduction of Independent Power Producers (IPP) will be allowed in the South African electricity market. Any fundamental market restructuring is likely to be delayed for a number of years while the distribution sector restructuring 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.

1. Restructuring of Eskom
   

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 competition in the electricity supply industry.

In the long term Eskom will have to be restructured into separate generation and transmission companies.

For future restructuring, government intends to separate the power stations into a number of companies. Such a step will assist the introduction of competition into electricity generation. This will also create the opportunity for private sector and Black Economic Empowerment investment opportunities in the generation sector.

Eskom has over the years developed technological support and research capacity through its Technology Research and Investigations Division (TRI) and this capacity should continue to support the Electricity Supply Industry (ESI) in the future.

Government will consider organisationally separating TRI and other relevant technologies support capacities from Eskom and to position them as a national resource for the benefit of the entire ESI.

The restructuring of Eskom will be done in terms of Government policy on the rationalisation of State-owned assets.

2. Transmission
   

The open access conditions included in the transmission licence issued to Eskom by the National Electricity Regulator, as well as the establishment of the Southern African Power Pool (SAPP) brought a new dimension to the South African Electricity Supply Industry. In order to move to a competitive market, open access to the transmission lines will be a prerequisite.

Government will legislate for transmission lines to provide for non-discriminatory open access to uncommitted capacity, transparency of tariffs, and disclosure of cost and pricing information to the National Electricity Regulator.

3. Development of the Southern African Power Pool

Government has already signed an Inter-Governmental Memorandum of Understanding, while an inter-utility agreement was also signed by the respective utilities, with respect to SAPP.

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 Democratic Republic of Congo) 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. Irrespective of South Africa’s commitment to develop SAPP, it is of importance for South Africa to determine during the ESI restructuring debate, the percentage generation capacity that will be allowed as a minimum national target to ensure a security of supply for the country.

Government will appoint representatives to participate in the activities and meetings of the Electricity Sub-sector of SADC, of which SAPP is an important component. Since SAPP is an utility driven initiative, 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.

7. Electricity sector governance

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.

1. The National Electricity Regulator
   

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 1999 to consolidate the legislative basis for the establishment and operation of the National Electricity Regulator.

One of the shortcomings in the current electricity regulatory system is the lack of a regulatory methodology.

Government will provide guidelines on the regulatory philosophy and approach which should be adopted by 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.

Funding of the National Electricity Regulator appears under subsection Fiscal Revenue of Cross-cutting Issues (Part 4).

2. Department of Minerals and Energy capacity

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.

2. Nuclear energy
   

Nuclear energy is a minor component of the South African energy sector, contributing about 3% during 1997 of the national primary energy supply, 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 2600 people are employed, 1500 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 the year 2007 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 and public 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 applicable international treaties and conventions to which South Africa is a signatory. South Africa will have to continue fulfilling its obligations in this respect.

1. The nuclear industry in South Africa

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 hexafluoride (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 plant where they remain 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. Production during 1998 stood at just less than 1200 tons, generating an income of about R165 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. The AEC’s uranium enrichment and fuel fabrication plants have been closed. The conversion plant is scheduled to close in the near future. Since 1996, AEC has identified core competencies in radiation technology, fluorination and molecular laser isotope separation (MLIS). However, the MILS programme has since been shut down.

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 the third quarter of 1999, 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 a national radioactive waste management policy has not yet been established, nor has the suitability of Vaalputs for long-term disposal of spent fuel from Koeberg been investigated. These policy matters will have to be addressed in the near future.

2. Governance of the nuclear industry
   

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 and industrial radioactive sources, which are controlled by the Department of Health. In addition, the Department of Foreign Affairs represents government in the negotiation of international nuclear agreements.

The Department of Minerals and Energy has drafted two bills, namely, the Nuclear Safety Bill and the Nuclear Energy Bill and Cabinet has approved them. The two bills seek, amongst others, to ensure a clear public differentiation between the nuclear regulatory functions (CNS) and nuclear industry activities (AEC). At present both bodies are governed by the same act, which leads to perceptions that they are not separate from each other.

In defining its policy on regulation, Government recognises the difference between nuclear installations, on the one hand, where the potential exists for acute exposures and catastrophic accidents, and therefore requiring a special liability regime with compulsory financial security, sophisticated safety assessment to ensure that the risk is engineered to acceptably low levels, and where the high level spent fuel waste requires specially engineered storage and disposal facilities. On the other hand there are other industries where relatively low levels of naturally occurring radioactivity are by-products of the process, where the hazard can be controlled within the overall occupational/industial hygiene programme and the risk is covered by a regular civil liability regime, and where the mostly huge volumes of waste containing low levels of radioactivity is not amenable to engineered disposal facilities.

3. Challenges for the nuclear industry

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 and the AEC nuclear facilities are 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.

Relevant to the above, it must be recognised that the nuclear sector is not static but is already undergoing change, for an example, 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 do so in a participatory fashion.

4. The future role of nuclear power in South Africa
   

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. Eskom is currently conducting feasibility studies on the possibility of constructing a pebble bed modular reactor (PBMR) nuclear power station.

Government will ensure that decisions to construct new nuclear power stations are taken within the context of an integrated energy policy planning process with due consideration given to all relevant legislation, and the process subject to structured participation and consultation with all stakeholders.

5. Koeberg nuclear power station
   

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 investigate Koeberg’s economic and technical performance, including long-term costs and the implications of radiological safety, emergency planning, decommissioning and waste disposal, to determine the optimal period for operating the plant. The parameters for the enquiry will be set by government.

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 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.

6. Atomic Energy Corporation

AEC’s strategic role as a nuclear fuel supplier to Eskom has stopped. Because the AEC resulted in large part, from a policy content that no longer applies, its role in South Africa’s further development needs to be carefully assessed. Toward this end and during 1997, an Inter-Ministerial Cabinet Committee for Science and Technology mandated the Department of Arts, Culture, Science and Technology (DACST) to initiate and manage an evaluation of 11 South African technology institutions, including the AEC. At the same time, an initiative by the AEC’s Board to determine the future role and structure of the AEC was also started. Both these reviews have made recommendations which, amongst others, suggest that the commercial activities of the AEC be separated organisationally from its institutional responsibilities.

From the above two studies, Government has identified the following three broad organisational activities for the AEC that need addressing:-

First, an organisation that carries out institutional responsibilities on behalf of the State. These responsibilities may include:

• decommissioning and decontamination of past strategic nuclear fuel facilities;
• the management of nuclear waste disposal on a national basis;
• the application of radiation technology;
• operating the Pelindaba site and services;
• execution of the safeguards function with the International Atomic Energy Agency (IAEA), the Nuclear Non-Proliferation Treaty (NPT), the African Co-operative Agreement (AFRA) and the Treaty of Pelindaba; and
• technical co-operation activities with IAEA/AFRA.

Second, a separate organisation that houses all of the AEC’S commercial activities (even those that are still under development). An evaluation of all of the AEC’s commercial activities must be undertaken to ascertain their future viability.

Third, the role of SAFARI, the AEC’s isotope-producing reactor, must be thoroughly evaluated to determine the viability or necessity of the following three areas:

• its commercial viability in producing large-scale isotopes for the export market;
• its possible expanded use for academic research and training; and
• its strong geo-political role in terms of its usefulness to the IAEA/AFRA technical co-operation activities within Africa.

Restructuring will take place in terms of the Government policy on rationalisation of State-owned assets.

The above policy proposals will further inform the decisions on the desirability of further fiscal support of AEC activities.

7. Radioactive waste management
   

In the absence of a national policy, one of the most pressing issues around nuclear energy concerns the management of the radioactive waste produced by the various stages of the nuclear fuel cycle. 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 final decisions on how to deal with its spent fuel in the long term. In fact, previous governments neither formulated a national policy on radioactive waste, nor did they institute a programme of management for such waste.

The Department of Minerals and Energy will investigate 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, following a process, which is subject to structured participation and consultation of all stakeholders. An IEP approach will be considered by the Department of Minerals and Energy in consultation with the Department of Environmental Affairs and Tourism.

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.

8. Safety, Health and Environmental Impact
   

It is essential that nuclear installations in South Africa are operated in a safe manner and that assurance is provided in this regard. A serious nuclear accident can have devastating consequences, not only for the workers and surrounding population, but also for the economy of the country. Assurance (through competent licensing and operation) must therefore be maintained at all times such that the probability of a serious accident at nuclear installations remains acceptably low.

Government will monitor on an ongoing basis relevant aspects of the nuclear industry to obtain assurance of safety in general.

The CNS is accountable to the Minister of Minerals and Energy and is responsible for regulatory oversight of the nuclear industry to ensure the safety of workers and the public, through a licensing process, especially related to those nuclear facilities where a potential exists for accidents which may result in catastrophic radiological consequences.

The Department of Minerals and Energy will monitor on an ongoing basis the effectiveness of policy and adequacy of regulatory oversight.

The operators of nuclear facilities (Eskom, AEC) are responsible for the safety of their facilities, especially related to operations, maintenance, radiation protection, effluent and waste management, environmental monitoring, emergency planning and decommissioning. It is essential that such operators have sufficient independent structures within their organisations to provide internal assurance of compliance with safety requirements. The Department of Minerals and Energy will address this aspect as part of the undertakings in this policy document to investigate aspects of the nuclear industry.

In the light of perceptions around health and safety issues associated with the nuclear industry, government believes that an impartial evaluation of these issues is required.

The Council for Nuclear Safety will produce, and submit to the minister, an annual public report on the health and safety circumstances associated with all major nuclear installations.

9. Nuclear Emergency Planning
   

Although the probability of a serious nuclear accident is very low the potential serious consequences requires the establishment of a nuclear emergency plan and that restrictions be placed on population development around nuclear facilities. A serious accident will require national co-ordination and it is essential that governmental mechanisms are in place to deal with such a contingency. Restrictions on population development around nuclear facilities also have socio-economic implications.

Government will monitor the arrangements for national disaster planning and the restrictions on population development around nuclear facilities.

10. Clarifying nuclear industry governance
    

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 ensured to restore 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.

The Department of Minerals and Energy will investigate and clarify functions of bodies associated with the nuclear industry, including the Atomic Energy Corporation and the Council for Nuclear Safety, as well as any other institution with governance functions over this industry, for example Department of Water Affairs and Forestry, and Department of Environmental Affairs and Tourism, who will be consulted.

1. Separation of nuclear energy and other nuclear issues

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.

3. Oil and gas: exploration and production
   

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 natural resources would therefore contribute to the growth of the economy and relieve pressure on the balance of payments.

Soekor, a wholly-owned state corporation was established in 1965 to explore and exploit natural oil and gas for itself, on behalf of the State or on behalf of any other person. A Prospecting Lease No OP26 was granted to Soekor whereby the government, through Soekor, undertook to prospect for natural oil and gas which resulted in the discovery of the F-A/E-M gas fields developed by Mossgas. The E-BT cluster of oil fields is presently being developed by a wholly-owned subsidiary of Soekor. Soekor currently holds prospecting rights on most of South Africa’s offshore area.

1. Policy Framework

Government will ensure the optimal and environmentally sustainable exploration and development of the country’s natural oil and gas resources to the benefit of all. Therefore Government undertakes to:

• maintain an appropriate cabability to perform regulatory and promotional functions in respect of oil and gas exploration on behalf of the state.

• promote the development of South Africa’s oil and gas resources by ensuring that the tax regime and contractual arrangements as well as the regulatory and operating environment will be consistent, stable and internationally competitive;

• ensure private sector investment and expertise in the exploitation and development of the country’s oil and gas resources;

• promote research, technology development and technology transfer to stimulate the optimal development of the country’s oil and gas resources;

• promote oil and gas development by applying the "use it and keep it" principle in contracts according to standard international practice.

• retain the rights to natural oil and gas offshore

• work towards government’s long term objective of all on shore mineral rights vesting in the state.

• ensure a safe and healthy working environment in accordance with the Mine Health and Safety Act, 1996, and good international oil and gas field practice;

• ensure that an integrated and holistic environmental management on all onshore and offshore oil and gas exploration and production operations is achieved in accordance with international oil and gas field practice.

• ensure that the "polluter pays" principle is applied in the regulation and enforcement of environmental impact management measures and standards;

• promote international co-operation with an emphasis on Southern Africa.

Government will determine the necessity or otherwise of introducing a dedicated oil and gas act to govern the exploration and exploitation of these mineral rights. Until then it will regulate the upstream oil and gas industry in terms of the Minerals Act of 1991 and in line with policy guided by the White Paper on a Minerals and Mining Policy for South Africa. Where appropriate, provision will be made to address specific requirements of this industry.

A stable fiscal regime will be maintained in conjunction with the Department of Finance and the South African Revenue Service, to promote and support oil and gas exploration and production.

4. Liquid fuels
   
1. Background
   

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 afforded to the producers of synthetic fuels.

Present crude oil refinery capacity is 455 000 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 1997 South Africa imported approximately 23,6 million tons of crude oil and 21 300 Ml of refined product was consumed. Crude oil is South Africa’s single largest import item. 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 R40,7 billion in 1997 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.

2. The policy challenges

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 internationally competitive and fair prices within appropriate health, safety and environmental standards;
• an equitable balance between the interests of industry participants and consumers;
• an environment conducive to synergistic investment in the liquid fuels industry and the related petro-chemicals industry;
• an industry supportive of government’s broader social and economic goals;
• a restructuring of the state’s involvement in the industry to one more appropriate to South Africa’s changed political and economic circumstances;
• The meaningful inclusion of those interests which have been historically disadvantaged; and
• The optimum and efficient utilisation of liquid fuels;
• An efficient network of pipeline and storage infrastructure whilst protecting against the abuse of market power and restrictive practices in these natural monopolies.

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 rapidly globalising and internationally competitive environment.

3. A vision for the future
   

Government’s vision for the future is to create a stable and internationally competitive liquid fuels industry in our country. As South Africa is increasingly integrated into the global economy our industry will be well prepared to adapt to these changing circumstances. This implies an industry with limited government intervention and continued investment in new refining, wholesaling and retailing facilities. As a significant input cost to the economy, the cost of liquid fuels will be kept as low as possible and be made available as widely as possible. To this end natural monopolies in pipelines and storage facilities will be regulated with a view to optimising investment and lowering cost. Environmental, safety and product quality standards will gradually be improved as international standards advance. Opportunities for sustainable employment will be maintained and created. South African black interests will assume their rightful place in the affairs of the industry.

Achieving this vision will require a carefully and efficiently managed transition.

4. The Cornerstones of future Government policy

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. From these processes Government has concluded that there is some consensus that current circumstances necessitate changes to the existing regulatory model within an appropriate timeframe to better reflect current realities.

The cornerstones of the future policy framework will thus be:-

• Deregulation;
• The stable and continued availability of quality product throughout the country at internationally competitive and fair prices;
• The preservation and promotion of formal sector employment;
• The desire for commercially based retail pricing in which the industry does not engage in inter-fuel or rural-urban cross subsidies;
• The preservation of retailing activities for small and medium businesses;
• Black economic empowerment reflected in the composition of the industry at all levels and significant domestic black ownership or control in all facets of the industry;
• The maintenance and enforcement of adequate health, safety and environmental standards;
• The promotion of a coastal refining and petrochemicals hub for future investments;
• Adequate provision for national strategic considerations relating to security of supply; and
• Tariff protection for vulnerable sectors where justified by cost-benefit analysis;
• A low cost pipeline and storage infrastructure suitably regulated to encourage optimum investment, to prevent the abuse of these natural monopolies and to prevent the exclusion of new entrants.

To achieve this outcome government will pursue the following policies.

5. A climate of certainty and fair returns for investors
   

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 the use of a fair and transparent method to set the margins in order to encourage investment in the industry.

6. Procurement of crude oil
   

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.

7. Crude oil refining
   

The refining industry was 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.

8. A Southern African Refining and Petrochemicals Hub
   

At present there is apparently no need for the construction of a new oil refinery, since the present total refining capacity of approximately 650 000 bbls/day has been sufficient to meet current 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 South African participants who were previously excluded from participation. Government believes that prospective refinery investors are increasingly viewing such investments in a SADC context. Government will encourage this approach.

There are important synergies possible between refining and petrochemical activities. South Africa’s export orientated trade policy makes coastal locations more attractive for such investments. In addition the small size of liquid fuel markets in some SADC countries means that co-operative approaches to meeting these market needs can yield benefits to all concerned.

Government will promote a refining and petrochemicals hub at a coastal location.

9. Price control
   

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 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 achievement of suitable transitional milestones and arrangements. Control of industry margins, at wholesale and retail level will be removed and thereafter will be determined on a competitive and commercial basis.

10. Marketing
    

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.

The role and implementation of the Service Station Rationalisation Plan will be amended and phased out.

The restructuring and phasing out of the Rationalisation Plan will be accompanied by legislation prohibiting self-service and vertical integration in the industry to minimise job losses and to promote the maintenance and establishment of small businesses. These prohibitions will be reviewed from time to time with a view to their ultimate withdrawal. Such legislation will be discussed at NEDLAC in accordance with the NEDLAC Act. The labour implications of marketing-related restructuring will be addressed jointly with the Department of Labour. Due cognisance will be given to any relevant NEDLAC agreements.

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 historically disadvantaged South African interests that wish to enter the wholesale sector must be accommodated, on a sustainable basis, through negotiation, as participants in the Service Station Rationalisation Plan. Once this is achieved the Service Station Rationalisation Plan can be phased out.

At the end of the transition phases the liquid fuels industry should be characterised by unrestricted market entry, allowed to develop in response to competitive forces, and subject to generally applicable legislation.

11. Control of import and export of crude oil and refined products
    

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 Trade & Industry administers these provisions in conjunction with and according to energy policy determined by the Department of Minerals and Energy. Current policy allows free importation of crude oil to meet the needs 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.

As free participation in the liquid fuels industry is realised, quantitative import and export control will be phased out. Duties on refined products may be introduced where justified by economic and socio-economic considerations.

12. Quality standards
    

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 be compulsory.

13. Transportation and storage of oil and liquid fuel products
    

Currently transport tariffs incorporated in the price structure of liquid fuels are those charged by the Transnet subsidiaries Petronet, Spoornet and Autonet.

When price control in the liquid fuels industry is removed it will no longer be necessary to continue with the current practice of making reference to a transport cost in the price build-up for certain products. Government will promote competition in the transport of liquid fuels.

The pipelines and storage facilities currently in use consist of a combination of state owned (Petronet and SFF) and private sector facilities which have in effect not been regulated. In the case of pipelines Petronet (a division of Transnet) has built, operated and regulated pipelines. Petronet’s future is tied up with the restructuring of state assets and is not yet clear. However the department would like to see a separation of functions between, on the one hand, investment and operation and on the other hand the licensing and regulation of pipelines on the other.

The petroleum regulatory regime will inhibit monopolistic abuse of pipelines and storage facilities. Pipelines will be required to provide non-discriminatory open access to uncommitted capacity, transparency of tariffs, and disclosure of cost and pricing information to a suitable authority.

It is recognised that more detailed policy work is required in this area and this will be embarked upon as soon as possible. Included in this work will be an investigation to determine the adequacy of competition legislation, and its implementation, in respect of storage facilities and whether or not dedicated legislation is necessary. Stakeholders will be offered the opportunity to contribute their views during the investigation.

14. The synthetic fuels industry
    

Government recognises the important economic contribution made by the synthetic fuels industry in South Africa by providing a form of tariff protection to synthetic fuel manufacturers.

Tariff protection afforded to the synthetic fuels industry is being progressively lowered. The need for such protection will be reviewed before mid 2000.

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. Government will urge these parties to consult all stakeholders on proposed new arrangements during the first phase (see below).

15. Governance and legislative action
    

The Petroleum Products Act of 1977 and the Central Energy Fund Act of 1977 will remain as enabling legislation, and are likely to 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 industry will also be governed by generally applicable legislation such as competition legislation.

16. Phases and milestones in deregulating the petroleum industry

Despite the problems associated with deregulation, government is however satisfied that it is inevitable that it will become a reality at some stage in the future. It nevertheless recognises that the transition process may be difficult and that there will be some negative effects on employment and small business in the short and medium term. Government will embark upon a phased and managed transition and will seek the co-operation of key stakeholders in this process. Deregulation will proceed as far as practicable towards clearly identifiable milestones and on the basis of cost-benefit analyses. A special effort will be made to accommodate those who have been historically disadvantaged.

The two cornerstones of the present regulatory regime are the control of petrol retail prices and import control on certain products. Buttressed between these two is the voluntary Service Station Rationalisation Plan.

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. Government will introduce deregulation in three sequential phases. It would like to proceed as swiftly as possible but will be reliant to some extent on the continued co-operation of other stakeholders.

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 and market access 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.

The second phase will be characterised by allowing market forces to set prices.

The third phase will be the post deregulation transition phase. This will be characterised by government vigilance and monitoring for possible problems arising from the introduction of deregulation and corrective action to address these. In the event uneven competition results in price distortions, for example rural- urban cross subsidies, then fiscal measures or price capping may be employed to counter balance such distortions.

The Department of Minerals and Energy will guide the transformation process.

17. State participation in the liquid fuels industry: CEF-group of companies
    

The CEF group of companies will be restructured to effect a separation of the three kinds of activities it is engaged in, namely; strategic, regulatory and commercial. Government will consider restructuring existing commercial state assets in the oil industry into a domestic commercial company in which the government would be a significant shareholder. This consideration will include retaining a wholly owned oil company for, at least, the purposes of taking up the state’s participation rights in oil and gas field development. Restructuring (of the CEF group of companies) will take place in terms of the Government policy on rationalisation of State-owned assets and may be used to promote the participation of historically disadvantaged interests in the liquid fuels industry.

1. Soekor
   

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

The promotional, data management, regulatory and other functions performed by the Petroleum Licensing Unit in oil and gas exploration will be separated from those of Soekor (Exploration and Production) (Pty) Ltd which will be commercialised in preparation for the restructuring of CEF’s commercial assets.

2. Mossgas
   

Government has a direct interest in the production of synthetic fuels from natural gas through its ownership of 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 seek to optimise its investment in Mossgas. Government does not intend to embark upon any new synfuels projects.

3. Strategic Fuel Fund Association (SFF)

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

5. Gas
   
1. The existing gas industry
   

Natural gas, produced from the F-A field in the Mossel Bay area, supplied 1,6% (or 72 PJ) of total South African primary energy supply during 1997, 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 about 30 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.

2. Gas resources and industry development
   

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 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.

3. Environment

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.

4. Key policy challenges

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.

5. Regional issues
   

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 consultation with relevant stakeholders endeavour to harmonise gas issues with neighbouring states.

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

6. Regulatory regime
   

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.

A Gas Regulatory Authority will be established to implement a minimal regulatory regime consistent with orderly development of a competitive gas industry through granting licenses for the transmission, storage, distribution and trading of piped gas.

Government recognises that the existing gas industry is relatively small, but growing rapidly. The regulatory environment will be conducive to the development of the industry and will provide investors with confidence to invest in the required infrastructure by establishing clear, stable legislation to facilitate investment. Legal requirements will be phased in where appropriate.

Due regard will be given to the needs of all stakeholders.

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. A facility will be made for phasing in of regulations, and where a monopoly exists a price control mechanism will be instituted.

7. Industry structure
   

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.

Interests in more than one element may 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 arm's-length relationship 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 in licensed distribution areas will purchase gas through a distribution system.]

8. Transmission
   

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 Authority.

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.

9. Distribution
   

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 exclusive geographic areas in order to market a class of gas to small gas consumers. This will be subject to price approval by the Gas Regulatory Authority.

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,

10. Fiscal matters
    

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

11. Technical standards
    

The Department of Minerals and Energy will assist the Department of Labour with the development of 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.

12. Gas utilisation

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.

Efficient-energy practices will, however, be encouraged.

6. Coal
   

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 75% during 1997 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 1997, total national coal consumption was approximately 157 million tonnes, and coal exports totalled 64 million tonnes. The production of discard coal during 1997 has reached about 62 million tonnes, mainly, as a waste product of coal beneficiation. It is estimated that 800 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.

1. Coal market
   

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.

2. Coal resources
   

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.

3. Coal-bed methane
   

Coal-bed methane provides a hitherto wasted untapped source of gas. During coal mining operations, the coal-bed-methane is 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.

The investigation of the exploitation and utilisation of coal bed methane will be market driven. The exploitation and utilisation of coal bed methane will have the benefits of making underground coal mining safer as well as to prevent the release of a potent green house gas into the atmosphere.

4. Coal and the environment
   

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.

1. Clean coal technologies
   

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 adoption, introduction and implementation will be facilitated where applicable.

Government will investigate the application of tax concessions and/or penalties for the promotion of the implementation of market-driven clean coal technologies.

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 Technologies Not Entailing Excessive Costs (BATNEEC) for both retrofit and new plant applications.

2. Low-smoke fuels
   

The Department of Minerals and Energy has initiated the Low-smoke Fuels Programme because of the high levels of air pollution caused by the combustion of coal in households. Improved efficiency in the combustion of low-smoke fuels will contribute , along with other measures, the health problems associated with environmental pollution. The aim of the Low-smoke Fuels Programme is to specifically replace the use of coal in households

Government will promote the use of low-smoke fuels and efficient combustion appliances for the improvement of air pollution from coal and wood use.

3. Efficiency of coal use
   

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 non-renewable resource.

Government will promote 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.

4. Coal discards

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 the accumulated 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 and encourage options for the utilisation of coal discard streams and stockpiles and will promote appropriate options for the resultant energy and environmental benefits.

 

7. Renewable energy sources

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). Hydro-electric power contributes less than 1% of electricity generation and most of that is pumped-storage. Other renewable energy sources make up a small but rapidly increasing amount of energy supply. These include the biogas and landfill gas which need to be promoted in order to address thermal energy needs.

Although more than 484 000 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 and implementation of renewable energy applications, despite the fact that our renewable energy 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 South Africa disposes of very attractive renewable resources, particularly solar and wind and that renewable applications are in fact the least cost energy service in many cases; more so 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 energy sources in their own right, are not limited to small-scale and remote applications, and have significant medium and long-term commercial potential.

1. Monitoring of international renewable energy developments
   

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 implementation 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, micro-hydro and wind-based 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.

2. Support to priority technologies
   

In many cases renewable energy technologies can be used in combination with and complementary to 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 and barriers to their wider use must be addressed.

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 and applications.

3. Rural fuelwood
   

Fuelwood is the main source of energy for most rural households and access to sustainable and secure fuelwood supplies is important for the survival of many 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.

4. Standards and guidelines

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.

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. a Standards Laboratory and testing centre according to standards developers as a 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. Town planning ordinances, usually covers such rights, or access requirements. National government will facilitate the establishment of criteria for these rights.

5. Statistics, information dissemination and education
   

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, and will assist with the dissemination thereof.

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.

6. Renewable energy systems

Implementation of the renewable energy 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, need to be exploited. The non-grid industry should make optimal use of private sector financing opportunities, in conjunction with the funding mechanisms being put in place for electrification.

The capacity of the Department of Minerals and Energy is presently being improved in order to cater for the need to implement the proposed renewable energy policies and programmes. To this end, some 1 400 rural schools and 300 rural health clinics have already been electrified with photovoltaic systems. 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 programmes are developing at an ever-increasing rate.

Hydro schemes, such as Cahora Bassa, will be investigated by the Department. Already the Department is engaged in negotiations between the South African government and the governments of Mozambique and Portugal regarding agreements on tariffs. The establishment of the Southern African Power Pool will widen access to other hydro-electric resources in the Southern African region.

The attractive wind energy potential of South Africa will, likewise, receive attention.

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.