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Power in SA

January 22, 2007

Power crisis: The deeper problem
By: Andrew Kenny

WE know exactly why South Africa was plunged into electricity blackouts last week. South Africa does not have enough generation capacity to meet her increasing demand for electricity.

This is because no new power stations have been built in the last twenty years even though it was blindingly obvious from 1994 that we needed them. Why did we not build them? This is because there is a deeper problem in our whole electricity supply system. Has the deeper problem been addressed? No, it has not.

In round figures, South Africa's total operating generation capacity is about 37 000 MW (megawatts). Maximum demand is about 36 000 MW and climbing.

A healthy electricity supply system has at least 15% reserve margin. We are about 4 000 MW short of that. This is why last week, when some generating units were down for planned maintenance and there were problems on others, there were blackouts.

With modest growth rates, we shall need an extra 1 500 MW every year on top of that. It takes at least six years to build the baseload coal or nuclear stations we need. This means it will take us ten years or more before we can acquire a safe reserve margin. In the meantime we face the continual threat of power failures.

Policy chaos

If electricity growth had been 6% since 1994, we should have run out of capacity in 2001. In fact it grew more slowly than that, more slowly indeed than was expected, and we have run out now. (It is absolute nonsense to say we were taken by surprise by unexpectedly high growth.)

So to the deeper problem. Why did we not build stations? The answer is that there was a complete void in responsibility and national policy, and that void exists today. Nobody knows who is responsible for making sure we have sufficient generation capacity. Nobody is accountable for the planning of our future requirements. There are no national criteria for a sound electricity supply. There is policy chaos.

In the old days Eskom was a stand-alone state monopoly with the de facto responsibility to ensure South Africa always had enough electricity. It had the "obligation to supply". Eskom did its own planning and followed its own plans through. This was successful even if there was an excess of capacity in the 1980s because of economic slow down.

Passing the buck

After democracy in 1994, things changed. The new government spoke of deregulating Eskom and splitting up its generation. It even instructed Eskom not to build any more power stations. But it did nothing to encourage others to build.

Moreover, the government seems to have misunderstood Eskom completely. It thought Eskom was eager to build stations and needed restraining but on the contrary there were many in Eskom only too pleased not to build and delighted to be relieved of the obligation to supply. (Building a power station is a massive undertaking. A standard Eskom coal station costs about R30bn to build today.)

The government also seemed to believe that Eskom would scream at them when we were running out of capacity but instead Eskom seems to have done little more than whisper. Everybody thought that somebody else was dealing with the problem.

Nobody knows

Since 2004, the government has somewhat reversed its thinking and to some extent restored Eskom to its old status. But only to some extent. In 2002 Eskom had become a public company with the government as the sole share-holder.

In the meantime, a National Electricity Regulator (NER) had been formed, which is now part of the National Energy Regulator of South Africa (Nersa).

Who is now responsible for ensuring we have reliable electricity supply in future? Is it Eskom, Nersa or the department of minerals and energy? Nobody knows.

The Electricity Regulation Act of 2006 says the minister of DME "may" determine that new generation capacity is needed but does not oblige her to do so. And what is national policy? What, for example, is the required national minimum reserve generation capacity? Nobody knows.

Eskom, Nersa and DME all have their electricity planners, none of whom has any clear authority. Everybody is planning - which means that nobody is planning.

Eskom does have an excellent planning group, by far the best in the country, with a great mass of information and experience. But this group does not have autonomous authority. Rather than planning objectively for the good of the country, it is told by various interest groups in Eskom what it must put in the plans, and even then the plans are often ignored by those with the power to implement them.

Furthermore it has no clear criteria to plan against.

Eskom monopoly

An allied question is: who is going to build the new stations? I am a free marketeer but have to accept the brutal logic that nobody can build stations more cheaply than Eskom. Eskom now sells the world's cheapest electricity (ironic since it has also run out of supply).

Nobody, including Eskom, can generate electricity from a new station at anything like these low prices. But even with new stations, Eskom can beat anyone in the market. This is because Eskom can raise money on debt at far lower rates than a private company could on debt or equity.

And this is because Eskom is seen as very safe, so that the big pension funds would trip over themselves to buy its bonds even at low coupon rates, and because Eskom, unlike a private generator, is happy to accept low returns and a very long payback period. Independent Power Producers (IPPs), except in niche cases, could probably only come into the market with big subsidies, which is crazy.

What is to be done? Here is my suggestion. First, the government must draw up a national policy on electricity supply. The reserve national generation capacity will be 15%. The mix of energy sources for generating future electricity will conform to the following criteria. Then it must pass a law stating that Eskom has a legal obligation to supply if nobody else will. Eskom must be the supplier of last resort.

Eskom's planners must be given full independent authority to draw up plans for future national supply. These plans must be scrutinised and approved by Nersa and the DME and perhaps representatives of customers. The plans must include Eskom's expected future costs for each energy source.

If any private company thinks it can supply electricity more cheaply than Eskom, it must be allowed to build power stations and be held strictly to a power purchase agreement (PPA) based on these lower costs. (Under no circumstances a cost plus contract!) If nobody can come in cheaper than Eskom, Eskom must build.

There must be a complete free market for everybody in the world to supply equipment to and help construct, or even completely construct, new Eskom power stations at lowest cost. The pricing of electricity should become more related to the market, for example, reflecting the fact that the cost of electricity at peak times is far higher than at off-peak times.

South Africa must get moving with some policy like this. Meanwhile, stand by with candles, a gas stove and a generator.

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