Challenges with Energy Sector Transformation in South Africa: Making Small-Scale Embedded Generation work
Tshegofatso Putu
South Africa’s transition from non-renewable energy sources is imperative and inevitable in the context of global warming. Contrary to supporters of privatization, I argue that the South African central state should be leading this transitionary process in order to ensure its sustainably and success in the long term. The article discusses this in the context of Small-Scale Embedded Generation (SSEG) and its disruption of the South African Electricity value chain currently dominated by the state-led, power manufacturer, Eskom.
Global Climate Change Policy and South Africa
The conversation surrounding the adoption of renewable technologies has gained significant traction since the beginning of the 21st century but more so after the 2015 Paris agreement. There has been global consensus about the imperativeness to curb human-induced global warming and to keep the global temperature under 2 degrees Celsius. Various countries have adopted policies that specifically support green growth in their respective long-term development plans. These policy changes have increased investments in green technologies globally and have led to the prices of these technologies becoming cheaper and more accessible than ever before. For example, the cost of photovoltaic (PV) technologies had, by 2018, reached record lows. Researchers at the University of Cape Town, Filipova and Morris (2018) found that in 2017 renewable energy auctions, energy was priced at USD 0.032/kWh in Mexico and USD 0.024/kWh in Abu Dhabi (IRENA 2018) (Fillipova & Morris, 2018). Further, the global weighted average levelized cost of electricity for utility-scale solar photovoltaic decreased by 73% since 2010, reaching a record low of USD 0.10/kWh in 2017 (IRENA 2018) (Fillipova & Morris, 2018). Thus the societal benefits to the adoption of renewable energies is inclusive of long-term energy cost reduction for governments, businesses and households.
South Africa is the 14th largest contributor of CO2 gas in the world; and following the 2015 Paris agreement, it has committed to diversifying its energy mix by adding 20 GW of renewable energy to its generation capacity. Currently, this amounts to 40% of the country’s generation capacity. Furthermore, the country’s experience of severe crisis in its energy supply sector has stimulated increased discussion surrounding decentralising energy production, and rethinking the implementation of new, renewable technologies.
The Problem of Eskom
Because of its fundamental role in facilitating industrialisation and economic development, electricity is a valuable political tool. Its operations and governance are thus highly politicised in South Africa. Eskom is the dominant power provider in South Africa and it is primarily owned by the South African government. It provides 58% of the country’s electricity while local South African municipalities provide the remaining 42%. Lack of capacity, aging infrastructure, poor maintenance, a raising debt burden and corruption in input sourcing has led to the downward supply spiral of the state-owned utility. Eskom can no longer cover its cost of capital and is heavily reliant on state subsidies. BusinessTech (2019) has estimated that the utility will need R23 billion a year for the next ten years. Further, since 2007, the utility has not been able to guarantee consistent electricity supply to its consumers. This has resulted in various occurrences of power cuts known as ‘load-shedding’ which have cost the South African economy close toR2 billion for everyday of their implementation (BusinessTech, 2019). Further, Filipova and Morris (2018) found that between 2003 and 2015–16, Eskom’s residential tariff increased by 47% in real terms, while the tariffs to commercial consumers and local government (electricity distributors) increased by 141% in real terms. Thus, the problem of Eskom is that it has consistently increased prices despite not being able to provide consistent, reliable electricity supply to households and enterprises. This has created entry opportunity for private projects and entities in the electric-supply value chain.
Small-Scale Embedded Generation and South African Municipalities
Despite the sluggish adoption of green policy globally, this has not been the case in South Africa. Eskom’s supply crisis led to the formation of the Renewable Energy Independent Power Producer Procurement Programme (REI4P) in 2011, a renewable energy programme that auctioned off energy supply rights to private energy projects and enterprises. Specifically, REI4P has created entry points for small-scale projects such as small-scale embedded generation (SSEG) to enter the generation space and has been dubbed one of the most successful and best-governed renewable energy procurement programmes. REI4P has, between 2011 and 2015, added 2.15 GW of renewable energy to the energy mix (Eberhard and Naude , 2017). Subsequently, wind and solar have become the cheapest new-build generation option in South Africa, at a levelized cost of electricity of ZAR 0.62/kWh, compared to ZAR 1.03/kWh for electricity produced by baseload coal and a projected cost of new nuclear of ZAR 1.09 /kWh.
Small-Scale Embedded Generation thus, according to Fillipova and Morris (2018) is part of the global movement towards decentralising and privatising electricity supply and is specifically beneficial in the Sub-Saharan African context. In Small-Scale Embedded Generation, the electricity generator is situated at the point of consumption of the electricity, rather than centralised. And since 30–40% of the population in the SSA region is dispersed and rural, it would increase reliable electricity access. For South Africa, Small-Scale Embedded Generation lowers the demand for electricity; and it allows new players to enter the electricity generation space by utilising decentralized small-scale renewable energy technologies.
For South African municipalities, who collectively distribute 42% of electricity nation-wide, SSEG offers opportunity to tap into the function of electricity generation and sell their own electricity to consumers instead of purchasing it from Eskom at continuously increasing prices. Municipalities have individual development plans and polices which are more extensively incorporating climate change issues. Municipalities are also dealing with localised climate related adaptation and mitigation issues. Alongside their extensive duties, they have been mandated with the right and authorities to distribute electricity within their jurisdiction, subject to provincial and national regulation. Small-Scale Embedded Generation presents itself as an opportunity for municipalities to fulfil these mandates. Thus Small-Scale Embedded Generation is a potential disruptor to the South African energy value chain; and because of this there has been reluctance by the national government to adequately regulate it.
The lack of clarity in terms of national level regulation of SSEG have seen municipalities organising themselves in non-governmental organisations and devising their own framework of rules and processes. At present, working groups like South African Local Government Association (SALGA) — and the municipalities that they represent — have resolved to allowing systems up to 1 MWp to operate. They have also created other frameworks which they intend the government should adopt and formalise in future. In the interim, the grey areas that exist because of a lack of regulation allow SSEG to thrive, and in some instances illegally. Since the adoption of these technologies is mainly driven by economic and technical viability, its expansion and implementation are likely to continue even if official national frameworks are lacking. Because of SSEGs fundamental ability to disrupt the value chain, by decentralising and privatising electricity production, its un-regulated expansion may be adversarial for households and enterprises in the long-term.
Mitigating against privatization and exploitation of the poor
Despite state-owned Eskom’s many challenges with supplying reliable and affordable electricity to users in South Africa, the paper argues that it is imperative that dominant control of the electrical supply value chain remain under control of the democratically elected South African government. Further, the paper suggests that it should be the democratically elected national government that does the work of carefully framing and directing the expansion of SSEG and the implementation of new renewable energy technologies.
Although privatisation is lauded for introducing efficiency, increasing competition, and in the case of this paper, increasing investment in renewable technologies; the unregulated expansion of private electricity generators could eventually lead to a grouping that wields significant power and market share. This group could — in the long term — set exclusionary and inaccessible prices for their product. And because of the severity of inequality in South Africa, privatization of electricity is likely to mean improved efficiency and reliable electricity supply for some, while translating to decreased or no access to this utility for others. This situation desperately needs to be avoided. Challenges of unregulated privatisation include government losing out on potential dividends which are critical to nation-building.
As a significant producer of CO2 gas globally, the South African government has taken seriously the call to curb climate change. Thus adopting renewable energy technologies has become imperative and is essentially inevitable in South Africa. The economic and technical viability of these technologies have prompted local level municipalities to allow their installation despite an absence of national-level adaptation frameworks and approval. Specifically privately-facilitated, small-scale embedded generation has thrived through the grey areas in governance policy. Although the expansion of SSEG provides critical opportunities and benefits for municipalities, households and enterprises; it also poses a significant long-term threat to the electricity production value chain. In a country as economically unequal as South Africa, the expansion of privately — owned renewable energy suppliers may be detrimental to the public if not closely regulated by the government.
References
BusinessTech. 2019. Why Eskom Was Always doomed to fail. BusinessTech (online) available: https://businesstech.co.za/news/energy/305168/why-eskom-was-always-doomed-to-fail/
BusinessTech. 2019. We now have a better idea of how much load shedding cost the economy. BusinessTech (online) available: https://businesstech.co.za/news/energy/317324/we-now-have-a-better-idea-of-how-much-load-shedding-cost-the-economy/
Eberhard, A. Naude, R. 2017. Recommendations for the design of successful renewable energy auctions or competitive tenders in Africa. Lessons from South Africa. Cape Town: University of Cape Town Graduate School of Business
Filipova, A. Morris, M. 2018. Small Scale embedded generation in South Africa: Implications for energy sector transformation from a local government perspective. SA-TIED Working Paper 13
IRENA. 2018. Renewable Power Generation Costs in 2017. Abu Dhabi: International Renewable Energy Agency
The Guardian. 2015. Uruguay makes dramatic shift to nearly 95% electricity from clean energy.The Guardian (online) available: https://www.theguardian.com/environment/2015/dec/03/uruguay-makes-dramatic-shift-to-nearly-95-clean-energy
BusinessTech. 2019. Why Eskom Was Always doomed to fail. BusinessTech (online) available: https://businesstech.co.za/news/energy/305168/why-eskom-was-always-doomed-to-fail/
BusinessTech. 2019. We now have a better idea of how much load shedding cost the economy. BusinessTech (online) available: https://businesstech.co.za/news/energy/317324/we-now-have-a-better-idea-of-how-much-load-shedding-cost-the-economy/
