– South Africa has a new energy plan but will it break the bank?

THE release of South Africa’s long-awaited update to the Integrated Resource Plan is certain to inspire renewed debate about the country’s energy future.

Once public consultation has taken place, the plan will drive policy decisions on the mix of renewables, nuclear, coal and gas-fired power generation to be added to the grid until 2050.

Energy Minister Tina Joemat-Pettersson yesterday pointed to a number of factors incorporated in the updated plan. Importantly, it addresses the fundamental shift in South Africa’s electricity demand: the implications of technological innovation in decreasing the costs of renewables, and the addition of new generating capacity that has quickly turned the country’s electricity deficit to surplus.

But one important matter is surprisingly absent in the discussion. Can the country afford the energy plan?

In normal times an energy plan might not need to focus on issues of finance and funding.

But with South Africa’s credit rating under review, the National Treasury’s ability to provide support to the sector reaching its limits and Eskom’s finances under threat, normal does not apply.

In looking at funding issues, the first point to clarify is that it is largely irrelevant whether these facilities are developed by the private sector or through public-private partnerships.

In either case, government will need to provide financial guarantees to make them bankable. This has been the case for government’s partnership with the private sector in bringing more than 1 800 MW of renewable power generation online, and for Eskom’s capital expansion programme which will add well over 10 000MW of new power generation capacity to the grid by 2022.

The problem is that government guarantee exposure to the power sector is already very high. Eskom is essentially the “man in the middle”.

The government is relying on the utility’s ability to repay borrowings used to fund its capital expansion programme, and pay for power supplied from the private sector. The government stands as guarantor for both.

How is Eskom proposing to meet its obligations? First up, it sees tariffs needing to increase by 13.6 percent year-on-year through to 2021 to cover the costs of power purchases.

Add to this the cost of borrowings needed to complete Eskom’s build programme. This could add another R50 billion or more to the tariff base by 2022.

The probability of Eskom receiving double-digit tariff increases to the end of the decade has to be low. Consumer sentiment is negative, and there is a growing backlog of tariff determinations awaiting resolution in the courts.

With power cuts still in the minds of many, it is perhaps difficult to appreciate the significant shift from deficit to surplus power supply achieved this past year.

With two of the world’s largest power-generating stations under construction and electricity usage trending downwards, South Africa may have an excess of generating capacity for some time to come.

In addressing these issues, the revised plan has set back new build nuclear power plants to 2037, and re-phased other new build dates as well.

Still, significant levels of additional generation capacity are called for as early as 2021.

And perhaps of greater significance is how electricity demand is assumed to respond to price increases.

This is wrong, as backed-up by numerous studies and just plain common sense. Electricity usage at residential, commercial and industrial levels does respond to large price increases. The tariff increases needed to recover the costs of additional generating capacity are substantial, and would no doubt add downward pressure on electricity demand. This matters a great deal because the assumption about how much more demand there will be drives the plan’s capital expansion requirement.

But let’s hope his assumption is wrong, and that tariffs can remain stable in the face of increasing costs, that Eskom’s finances are strong, and that the National Treasury can sustain further increases to its exposure to the power sector.

Labson is managing director at Sleconomics, and a Senior Research Fellow at University of Johannesburg.

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