Electricity action plan must be rational, measured and defensible - and deter opportunistic projects

16 Aug 2022

There is a dangerous narrative circulating that due to the current energy crisis, South Africa must take any and all electrons that are available. But some electrons come at too high a price, and South Africans would be left paying for these panic purchases for a long time.

The greatest risk to President Cyril Ramaphosa’s new electricity action plan is that it could be leveraged by vested interests. We have already seen how the Risk Mitigation Independent Power Producer Procurement Programme (RMI4P) led to false solutions and short-sighted initiatives such as expensive, 20-year power purchase agreements with gas-to-power giant Karpowership.

Achieving energy security is absolutely imperative, but to avoid the mistakes of the past, the presidency must act decisively and with a cool head. What the country needs is a plan that ends rolling blackouts as fast as possible, without locking in deals that could have negative long-term impacts, such as undermining the ongoing transition from fossil fuels to clean energy.

A good start

There is little serious disagreement that the electricity system of the future will be dominated by distributed renewable energy and storage, at a variety of scales and owned by a diversity of stakeholders. Many of the announced actions align with this trajectory, but the devil will be in the details, which are not yet available.

The plan recognises the need to adjust regulations and financial mechanisms, like tax incentives and tariffs, to encourage more potential generators to enter the market. The increased efforts to prevent damage, theft and sabotage at Eskom facilities are also welcome.

Among the positive steps, there are still areas where policymakers will need to proceed cautiously. For example, relaxing the local content rules so that today’s new energy projects are not delayed must be balanced with fostering increased local production of components and upstream industrialisation. And, as ever, energy efficiency should receive more attention.

However, the good news comes alongside worrying indicators that policymakers have not yet closed the door on mistakes of the past, leaving room to pursue projects contrary to the national interest.

Lessons from the last rolling blackouts ‘solution’

To solve the current crisis effectively, policymakers need to understand why prior plans to address rolling blackouts failed and avoid the same mistakes.

A previous strategy, the RMI4P, aimed to fill the short-term power supply gap and alleviate electricity supply constraints. Unfortunately, the RMI4P has become an embarrassment. It set out to connect power to the grid by June 2022, but to date, only three solar and battery projects have even signed power purchase agreements, and these still need to be constructed. The other eight preferred bidders (with most of the capacity coming from gas) are in limbo.

From inception, many energy analysts pointed out the flaws in the RMI4P design. Firstly, it appeared to favour gas generation. Secondly, the criteria did not allow for interconnected system benefits (each RMI4P project is treated as an island). Thirdly, the programme is not aligned with the shifts expected as the energy transition progresses — for example, strict 05h00 to 21h30 operational hours ignore how storage will change the energy demand profile.

These concerns were ignored, and the criteria resulted in inefficient project design, ultimately leading to unnecessarily high tariffs. To make matters worse, the power purchase agreements then forced Eskom to buy electricity at these inflated prices for a very long time.

The new electricity procurement strategy must not repeat these missteps. In the short term, the priority is to bring new capacity online as quickly as possible. To achieve this, the procurement process should be straightforward, and streamlined, allowing each project to be optimally designed to its strength.

Last time around, additional technical requirements, potentially to favour gas, pushed up the costs of all other projects. As renewables and storage projects have the shortest lead times and are best aligned with a low-carbon transition, they should be the immediate focus.

In the medium to long term, procurement must be aligned with the energy transition or face mounting opposition and dwindling avenues for acquiring finance. Given the context, the role of fossil fuel-generated electricity will decline as renewables come online.

However, the ramifications of the RMI4P go beyond a cautionary tale. The president’s new plan also contains concerning carve-outs for projects that have already been selected under the RMI4P.

Smuggling bad apples

Within the RMI4P, most of the 2,000MW tender was awarded to the controversial Karpowership projects.

Karpowership, a Turkish energy company, provides floating gas power plants on ships, which are moored at harbours and burn imported liquified natural gas (LNG). Under certain short-term, emergency circumstances, using these powerships could be justified.

However, the 20-year deal between South Africa and Karpowership obligates Eskom to pay for at least 50% of the powerships’ available power each year, which is unprecedented.

And on top of that, these projects remain unable to conclude financial arrangements, are mired in legal challenges and lack many necessary environmental and port authorisations. They are also subject to volatile fossil fuel prices.

By contrast, recent analysis by Meridian Economics has shown that if LNG has any future role in the power system, it is very small — utilising only 3-5% of available gas plant capacity per year. The ideal, lowest-cost scenario would see any gas plants in the system sitting idle most of the time, running only occasionally to fill in peak demand as the last resort.

Many other modelling groups agree: it is not logical to run gas plants for 12 hours a day in the South African context, and in the end, both the consumer and the environment would pay for it. A conservative estimate puts the unnecessary costs of the Karpowership deal at R42-billion over the 20-year contract period.

Since the evidence is clear that the Karpowership projects are not in South Africa’s best interest, they should be put on hold while the government investigates alternative options to the current deal. However, there are signs that the opposite will happen.

The Presidency has stated that work is underway “to ensure that these [RMI4P] projects reach financial close as quickly as possible”. Additionally, the Presidency has committed to “table special legislation in Parliament on an expedited basis to address the legal and regulatory obstacles to new generation capacity for a limited period.”

Taken together, these announcements suggest that the government plans to remove inconvenient but essential environmental and economic safeguards, allowing them to push through more deals like those made with Karpowership.

Cutting red tape to reduce administrative and bureaucratic delays is prudent at this point, given the urgency of the situation. But it is a slippery slope, and decision makers must proceed cautiously and protect essential standards.

There is a dangerous narrative circulating that due to the current crisis, South Africa must take any and all electrons that are available. This is a convenient argument if you are peddling wares that would no longer make the cut in terms of economic, climate change or environmental metrics. But some electrons come at too high a price, and South Africans would be left paying for these panic purchases for a long time.

To ensure projects meet both short- and long-term objectives, they must be affordable, deliverable and not designed to benefit particular vested interests. Procurement processes should be fair and in line with environmental goals, to avoid getting stuck with stranded assets as the energy transition gathers pace.

South Africa is facing urgent electricity issues — but luckily there are many rational, measured and defensible solutions. The task at hand is to implement only those that serve the national interest, and not allow opportunistic projects that only serve the interests of a few to slip through under the guise of necessity during a crisis. DM

Richard Halsey is a policy adviser and Richard Bridle is a senior policy adviser on the South African energy team at the International Institute for Sustainable Development (IISD).

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South Africa

A good start

Lessons from the last rolling blackouts ‘solution’

Smuggling bad apples