Promote private generation to address electricity crisis
In this blog, I address the current electricity crisis that affects us all in our day-to-day lives and risks having a very negative impact on the SA economy. In my view, the best way to address the crisis in the short-term and ensure energy security over the longer term is to allow private firms and individuals to contribute more to the grid by liberalising the environment (addressing the Eskom monopoly) and aggressively reducing the red tape. We need private sector players similar to Elon Musk’s Solar City to help drive this process!
SA’s power grid has become increasingly constrained over the past decade with strong economic growth and a successful electrification effort significantly increasing demand, while an extended period of under-investment (up until the late-2000s) meant limited supply growth. Additional factors such as disruptions in coal supply, quality of coal, weather and production outages due to maintenance and equipment failure has exacerbated the situation.
Over the period from 2002 to 2014, electricity consumption in SA increased by 34% to an estimated 244gWh (gigaWatt hours – amount of electricity produced in a year). SA electricity production only increased by 12.5% over the same period to 244gWh. As a result electricity consumption as a percentage of production increased aggressively from 84% to close to 100%. The last time it was close to 100% was in 2008/2009 when the country suffered from meaningful load-shedding.
Eskom is in the process of building further generation capacity, but there have been construction delays and cost escalations at Medupi and Kusile. From 2008 to 2014, only 13% of Eskom’s 12900MW target was delivered. However, Medupi’s first unit is set to be synchronised with the national grid on 24 December 2014 and could add more than 600MW.
Even with Medupi, Kusile and other projects coming on line over the next 6 years, the SA power grid is likely to remain constrained, especially if the economy in SA grows.
I believe that the best way to bridge the gap over the next five years and ensure energy security over the longer term is if independent producers can supplement the grid to a meaningful extent. Government started this process in 2003 and Eskom has an Independent Power Producer (IPP) process in place. However, I see two problems with this process.
The first problem is that the process is simply too slow, delayed by red tape and regulation. Today, more than 10 years after the process started, independent electricity production sits at only 5% of the total electricity production in SA, with only 1000MW from renewable energy producers, which is less than 30% of the target set for 2013.
The second problem is that all IPPs must sell the electricity that they produce directly to Eskom and are not allowed to sell to municipalities or consumers directly. This means that IPPs are constrained by Eskom’s regulatory process and finances. Approval for new projects that are not related to existing power plants has to be made at cabinet level and this has led to severe bottlenecks. Also, government must provide guarantees to Eskom as the single buyer of power generated by IPPs, which is causing further delays.
Even if Eskom and government can speed up the approval of IPP projects over coming years, there is a large potential growth area that may not be developed effectively within the current framework and that is urban solar power production. SA’s urban centres are well positioned to benefit from solar production due to the high levels of sunshine we receive and the proximity to electricity consumers. Although there have been moves by some companies towards solar power, it proceeds at a snail’s pace and the surface has not been scratched yet.
There are a number of reasons why growth in this area has been stymied. Costs are high, especially for companies that want a solution that allows them to operate off-grid during load-shedding – this requires expensive batteries. Municipalities have been slow in allowing companies to sell electricity into the grid. No municipality allows companies to be net contributors to the grid, with only some providing credits against existing electricity bill. Individual environmental impact studies need to be undertaken for each company implementing the solution.
This growth area can take off if regulations change to allow solar companies to rent roof space from consumers, offer them an energy solution and sell excess production back to municipalities. In the US, Solar City uses this model very effectively. Solar City is partly-owned and chaired by Elon Musk, the SA-born entrepreneur behind PayPal, Tesla and SpaceX.
Solar City operates in 15 US states and aims to generate 2000MW of electricity by 2015 and 6000MW by 2018, which would only account for 2.5% of single family homes. Solar City installs the solar panels for free and then the consumer pays a monthly electricity bill to Solar City (which is typically 20% lower than normal electricity bill).
Solar City is also expanding into the business market, installing solar generation at more than 100 Walmart locations and other companies including manufacturers, farms and office blocks. Again, the businesses do not have to pay for the installation, but receive a monthly bill for the power generated by the Solar City installation.
Imagine the potential in SA if a company similar to Solar City were to be allowed to operate here (which is not possible under the current regulatory framework). Without any upfront investment, consumers could see lower electricity bills, an end to load shedding and a move away from coal to renewable energy.
As I discussed in my previous blog, the renewable energy industry in SA fits very neatly into my vision for an industry that should be protected and nurtured. Over time, we could become world leaders in this field.http://blogs.fin24.com/straighttalkingstrydom/2014/11/24/import-fewer-goods-more-people-and-make-south-africa-great/
I really hope that government, Nersa (National Energy Regulator of SA) and Eskom take the current energy crisis to reassess the environment and take positive steps:
- Make sure than infrastructure is maintained and unexpected outages are minimised;
- Ensure that coal supplies are maintained and that the quality of coal is high enough;
- Avoid further delays in the building of new generation capacity like Medupi and Kusile;
- Fast track the granting of IPP contracts and ensure that the necessary government guarantees to Eskom are forthcoming;
- Change the regulatory framework in especially urban areas to allow independent producers to sell directly to municipalities, to encourage companies similar to Solar City to enter the market;
- Aggressively encourage, protect and nurture the renewable energy industry in SA through tax breaks, subsidies, tenders, tariff protection and immigration; and
- Continue to encourage more energy efficiency from consumers, including replacing energy inefficient appliances, discouraging energy wastage during peak demand times, etc.
What do you think? I would love some feedback.
In the mean time, keep your talk straight!