Balance of power: Growth and population expansion are placing greater demands on the power supply

With a history of making the most of its domestic energy resources, South Africa adapted its power stations to accommodate its plentiful but low-quality coal, and developed innovative synthetic fuel technology to replace imported crude oil during its years of economic isolation. Massive coal reserves, a successful nuclear power programme, potentially game-changing shale resources and a rapidly expanding renewables segment mean that South Africa has plenty of options when it comes to meeting its future energy needs. However, the frequent televised warnings over power usage when the national grid reaches peak load are a reminder of the urgency of tackling a troublesome electricity deficit, while the nation’s limited water resources have become a concern for both business and private citizens. Ensuring that the economy is well served by South Africa’s energy resources has become one of the government’s overriding concerns.

Strategy

The task of efficiently exploiting the nation’s energy wealth falls under the Department of Energy (DoE), which came into being in May 2009 as a result of the separation of the Department of Minerals and Energy into two units, the restructuring of which was led by Dipuo Peters, the former minister of energy and current minister of transport. The DoE’s mandate is a straightforward one: to formulate and implement overall energy policies, and to ensure all South Africans have access to affordable and reliable energy produced in an environmentally friendly manner.

Applying the tenets of its mandate to the nation’s energy sector, however, is a more complex matter. A wide range of energy policy documents inform the sector’s development, while the evolving nature of South Africa’s energy base, such as new technologies and the potential residing in previously untapped energy resources (see analysis), means that the nation’s energy strategy is almost permanently under review.

To provide a dependable framework for its planning, the DoE has established a number of core objectives that are derived from its mandate, including ensuring energy security, achieving universal access, providing for effective regulation and prioritising sustainable development, among others. More detailed strategic plans cover five-year periods, with the current iteration being the Revised Strategic Plan 2011/ 12-2015/16. This, in turn, is anchored on the Integrated Energy Plan (IEP) 2003, which outlines in broad terms the steps that must be taken to meet the nation’s energy needs. A subset of the IEP is known as the Integrated Resource Plan 2010-30, which represents the nation’s electricity strategy.

The IEP calls for universal energy provision and advocates the diversification of energy sources, partially through adopting renewables, and the current plan includes a number of programmes that are aimed at achieving these goals, covering areas such as hydrocarbons, nuclear and clean energy. Numerous supplementary policy frameworks also play a role, such as the 2004 Energy Efficiency Strategy, the 2007 Biofuels Industrial Strategy of the Republic of South Africa and the 2008 Nuclear Energy Policy.

Regulation & Promotion

Oversight and regulation of the electricity, natural gas and petroleum industries falls to the National Energy Regulator of South Africa (NERSA), established in 2004 by the National Energy Regulation Act. The principal legislation that governs these segments is the National Energy Act No.

34 of 2008, which also empowers the minister to undertake necessary measures to ensure energy security, including integrated planning and research. Other significant components of the framework include the Petroleum Products Act No. 120 of 1977, by which companies involved in the manufacturing and sale of petroleum products are licensed and regulated.

The nuclear segment is overseen by a dedicated body known as the National Nuclear Regulator (NNR), established by the National Nuclear Regulator Act No.

47 of 1999. The NNR exercises regulatory control in accordance with the Nuclear Energy Act No. 46 of 1999, which established the state-owned South Africa Nuclear Energy Corporation, delineates the nation’s relationship with the International Atomic Energy Agency (IAEA), and regulates the acquisition, possession and disposal of nuclear fuel and other material.

A number of other bodies that report directly to the DoE assist it in monitoring, regulating and promoting the sector, including: the South African National Energy Development Institute, the functions of which are defined by the National Energy Act and revolve around the promotion of energy efficiency, as well as research and development; and the Central Energy Fund (CEF), the principal objectives of which are to finance and promote the acquisition of coal, the exploitation of coal deposits, and the manufacture of liquid fuel, oil and other products derived from coal. The CEF’s subsidiaries, which include the Petroleum Agency of South Africa, the Energy Development Corporation and the South African National Energy Research Institute, are familiar voices in the public discourse on the sector.

Coal

South Africa’s coal deposits represent the nation’s primary energy resource, with proven reserves of 30.15bn tonnes at the end of 2012, according to the BP “Statistical Review of World Energy”. The majority of the nation’s coal deposits are notable for their low quality and high sulphur content, but South Africa has become adept at exploiting them in its 19 coal-fired power stations – to such an extent that coal currently meets 77% of South Africa’s total energy demand and is a power plant feedstock for around 90% of its electricity supply, according to state-owned power utility Eskom. A production rate of about around 224m tonnes of marketable coal per year makes South Africa the fifth-largest coal producer in the world. It is also the world’s third-largest exporter of coal, with 25% of its annual production shipped overseas each year.

The country’s most productive fields have traditionally been those of the Highveld and Witbank, both part of a central basin that also includes the Ermelo, South Rand and KwaZulu-Natal coalfields. However, as the ageing fields reach maturity, attention has shifted towards the Waterberg field, in the north-eastern Limpopo province, which is thought to account for more than half of the nation’s remaining reserves (see Mining chapter). The size of South Africa’s coal industry has attracted some of the world’s largest mining firms, such as Anglo American, BHP Billiton and Xstrata Coal, but exploiting the nation’s deposits has come at a price: a reliance on coal as the primary feedstock for electricity generation has placed South Africa in the Energy consumption by fuel, 2010-11 global top 20 carbon dioxide emitters, and government strategy therefore calls for a reduction of its contribution to the energy mix between now and 2030. Nevertheless, an electricity deficit in South Africa has resulted in the government commissioning two more coal-fired power stations in Kusile and Medupi, currently under construction and facing delays. The World Bank, the Export-Import Bank of the US and the African Development Bank are contributing to the development costs – R85bn ($10.36bn) for Kusile and R100bn ($12.19bn) for Medupi – and when completed the new plants will each add 4800 MW to the national grid, making them among the largest in the world.

South Africa’s coal also plays an important part in the energy sector beyond its contribution to electricity generation. The nation’s modest hydrocarbons reserves and its economic isolation during the apartheid era both acted as catalysts for the development of coalto-liquids technology – of which the nation is now a world leader. Around 30% of South Africa’s petrol and diesel demand is met by synthetic fuels produced in this manner, and Sasol’s Secunda plant is the largest coal liquefaction plant in the world with a nominal capacity of 160,000 barrels per day (bpd) of oil equivalent. Sasol has in the past announced plans to increase capacity at Secunda by 30,000 bpd, but has recently revealed a more moderate growth programme based on incremental upgrades interspersed with periods of evaluation – the first of which is expected to result in a 3.2% production increase by 2014 over the 7. 3mtonne baseline of 2010. The firm is also assessing the potential of developing a 80,000-bpd greenfield project at Mafutha, which might make use of coal transported from the Limpopo area or coal-bed methane gas, although the implementation of the feasibility study has been delayed while Sasol seeks a commercially viable carbon capture and storage solution.

Oil

South Africa’s oil reserves are relatively modest – around 15m barrels at the end of 2011compared to the 37bn of sub-Saharan oil giant Nigeria – the bulk of which is located off the southern coast in the Bredasdorp Basin and off the west coast near the Namibian border. Commercial production at the Bredasdorp’s Oribi field began in 1997, and was undertaken by the national oil company PetroSA.

The country retains full ownership of Oribi and the nearby Oryx field, as well as a 60% stake in the Sable field, which lies just to the west of these formations and began production in August 2003. Despite an increasing amount of well interventions, production at the PetroSA fields has been in decline since the mid-2000s, a trend which prompted the Petroleum Agency, the government body responsible for managing exploration activity within the nation’s jurisdiction, to begin licensing rounds for offshore blocks in 2007. By 2009 the agency had completed its fourth licensing round, and today the overseas firms that have entered the sector include BP, Chevron, Total and Shell.

The Petroleum Agency is currently promoting a number of locations with exploration potential: the Orange Basin Deepwater area, with a licence area of 43,000 sq km; the East Coast Basin, containing 14 exploration licence blocks of 2500 sq km, as well as eight partial blocks; the Northern Pletmos Basin, an area of around 18,000 sq km off the country’s south coast; and the Western Bredasdorp Basin, the westernmost portion of the already exploited area. Of these, the little-explored offshore Orange Basin near Namibia is of the most interest in the eyes of many industry observers.

Shell was granted exploration rights over a 37, 000-km block in the basin in 2009, but exploration activity to date has not extended beyond seismic work; while the source rocks in the deepwater areas of the Shell block show significant oil and gas potential, any commercial exploitation is years away. Total oil production in South Africa is estimated at 180,000 bpd by the US Energy Information Administration (EIA), yet the estimate for South Africa’s total petroleum consumption for 2011 was 610,000 bpd. Most of the crude oil utilised in the domestic market, therefore, is imported from OPEC countries such as Iran, Saudi Arabia, Nigeria and Angola, and the bulk of this is destined for South Africa’s well-developed refinery system.

Gas

Just as with coal, South Africa’s proven natural gas reserves are relatively modest compared to other African producers. The most significant existing fields are the offshore F-A and E-M gas fields and their satellites, which have supplied the Mossel Bay gas-to-liquid (GTL) plant since 1992, although a number of more recent discoveries have broadened the geographical spread of the nation’s reserves. These include six gas discoveries in the Orange Basin, one of which – the Ibhubesi gas field – is being developed by PetroSA, with first production expected in 2016. PetroSA is also developing the F-O field, commonly known as Project Ikhwezi, in an attempt to sustain gas supplies to the GTL facility. Production here is expected to commence in the second half of 2013 and continue for six years, although PetroSA plans to exploit nearby formations to prolong production from this area. Total gas production reached 1.27bn cu metres in 2011, yet consumption of natural gas in the same year reached 4.5bn cu metres, with the gap between demand and domestic supply being filled by gas imported from Mozambique by pipeline.

Recent discoveries off Mozambique’s coast also have the potential to significantly enhance South Africa’s supply of natural gas, and two companies are currently developing the offshore area. US-based Anadarko estimates the reserves in its fields to total 991.08bn-1.8trn cu metres, while Italian oil firm Eni said its natural gas discoveries off Mozambique as of the close of 2012 are in the region of 1.92trn cu metres.

Potential gas imports from Namibia may also play a role in South Africa’s future energy mix, while in the domestic market PetroSA’s development of the F-O field represents the largest putative addition to the gas supply from conventional sources.

However, it is the possible addition of a sizeable unconventional source that currently generates the most interest in the natural gas sector. The presence of massive shale deposits in the Karoo Basin, which covers much of the central and southern part of the country, has been known about for decades, but advances in hydraulic fracturing, or fracking, technology have recently made exploitation commercially viable. The EIA estimates that about 13.7trn cu metres are present in the Ecca Group formation. According to the EIA, this gives South Africa the eighth-largest technically recoverable shale gas resources globally.

The Petroleum Agency has also engaged with international oil and gas companies such as Falcon Oil & Gas and Shell by granting technical cooperation permits. However, further exploration activity in the Karoo Basin was halted by the government in April 2011 due to environmental concerns. The temporary ban was lifted in September 2012, and exploration activity in the area has started once again. While the reserves have yet to be proven economically viable, and any commercial exploitation is at least a decade away, the shale gas in the Karoo Basin has the potential to transform the nation’s energy mix and make a significant contribution to South Africa’s economy (see analysis). Bonang Mohale, the chairman of Shell South Africa, told OBG, “Potential development in the Karoo brings great benefits to local communities through job creation and local business opportunities.”

Refineries

Despite its small hydrocarbons resources, the country’s importation of large volumes of crude oil supports a sizeable downstream sector. South Africa has four crude oil refineries with a total capacity of 484,547 bpd, giving it the second-largest refining capacity on the continent after Egypt. The largest of these, with a nameplate capacity of around 180,000 bpd, is the Sapref refinery, a joint venture between Shell and BP, which accounts for approximately 35% of the nation’s refining capacity. Located south of the east coast city of Durban, its output comprises 10 main products in 46 different grades, which include diesel, jet fuel, marine fuel oil and speciality fuels. South Africa’s second-largest refinery is also located in Durban. The Engen Refinery (Enref) has a capacity of 135,000 bpd and is owned by South Africa-based Engen, the majority shareholder of which is Malaysian state oil company, Petronas. The refinery’s capacity is supplemented by its associated lubricants plant, which blends around 8m litres of finished lubricants every month destined for the South African market and Engen’s affiliates in Lesotho, Botswana, Swaziland and Namibia.

Chevron’s 110,000-bpd facility near Cape Town, Chevref, is the third-largest refinery in the country, and produces inter alia petrol, liquefied petroleum gas, diesel, jet fuel, fuel oil and asphalt. Finally, the recently expanded Natref, owned by a joint venture between Sasol and Total called National Petroleum Refiners, has a total capacity of 108,500 bpd and is located in Sasolburg. Unlike South Africa’s coastal refineries, Natref receives mostly medium-gravity fuel oil rather than heavy fuel oil, and produces a larger quantity of white product.

The most significant industry issue presently faced by the nation’s refineries is a government plan to introduce tighter fuel standards by 2017, which will bring the country in line with the new Euro V standard. “Mandating Euro V is something the industry agrees with, so long as we can be assured of cost recovery,” Christian des Closieres, the CEO of Total South Africa, told OBG. While the proposed change carries environmental and efficiency benefits, refineries will be compelled to upgrade their facilities in order to be able to produce the new fuel grade. This presents some challenges for the sector. A new refinery that PetroSA plans to construct at Coega, near Port Elizabeth, will be in a position to meet the new fuel standards, should it be completed. The project has suffered delays as a result of funding problems, but in March 2013 PetroSA announced that it had signed a $10bn deal with China’s Sinopec to move ahead with its development.

According to current plans, the new facility will have a capacity of 360,000 bpd, which will nearly double the national capacity and allow PetroSA to market its production in the rest of Africa. Critics of the development, however, point out that the location chosen for the new refinery is questionable, requiring the construction of expensive pipelines to carry refined product to the main markets in Gauteng, or impractical shipping to Transnet’s new multiproduct pipeline in Durban. For this reason, many industry participants believe that upgrading existing refineries would be more efficient. Tseke Nkadimeng, the CEO of Afric Oil, told OBG, “Long term, a new refinery in the Eastern Cape makes sense as it would migrate industrial activity to a less developed part of the country. But is it economically feasible in the short to medium term?” Others have questioned whether the new refinery will create as many jobs and benefits as expected. Gerard Derbesy, the CEO of BP Southern Africa, told OBG, “We understand that the government plans to build a new refinery in Port Elizabeth based on a desire to spread economic activity to other parts of the country, but refineries are not huge job creators and they tend to be very expensive job creation vehicles. Brownfield redevelopment including the expansion and upgrade of existing refineries offer a far better economic rationale.”

As well as its crude refinery system, South Africa has two synthetic fuel, or synfuel, plants. The Sasol One plant, built at Sasolburg in 1952, converts coal to synfuel using the Fischer-Tropsch process, invented in 1920s Germany, and is a good fit for South Africa’s energy profile. Today, Sasol’s synfuel activity takes place at the Sasol I and Sasol II facilities at Secunda, which began operations in the early 1980 and use natural gas as a supplemental feedstock to the primary intake of sub-bituminous coal. South Africa’s second major synfuel operation is PetroSA’s Mossel Bay refinery. Commissioned in 1992, it was the world’s first GTL refinery and is now the third-largest in operation. The facility also uses the Fischer-Tropsch process, taking the natural gas produced off of South Africa’s coast to produce low-sulphur, low-aromatic synfuels, including unleaded petrol, paraffin, diesel, propane, distillates, eco-fuels, process oils and alcohols. Its current output capability is equivalent to 45,000 bpd of crude oil.

Uranium

South Africa has considerable uranium reserves, estimated at 295,000 tonnes, or 5% of the world’s total, according to a 2009 study by the OECD Nuclear Energy Agency and the IAEA. The Department of Mineral Resources identified the beneficiation of uranium for power generation purposes as a potential area of growth in its “Beneficiation Strategy for Minerals Industry in South Africa” document, released in June 2011. While domestic uranium enrichment took place during the apartheid era for the manufacture of a small number of nuclear weapons, the enrichment programme was stopped in 1985 and the nation’s nuclear weapons dismantled. Plans to increase the amount of nuclear power capacity in the country have led to speculation that domestic uranium enrichment will resume, although political opposition to such a development may present an obstacle.

“The South African Nuclear Energy Corporation ( NECSA), Eskom and the NNR need to play a lead role in informing and educating local industry, be it construction companies or manufacturers, on how they can develop capabilities to participate in the nuclear build programme. We also need to engage the public on what nuclear energy entails, as there are commonly held misconceptions, and address concerns from anti-nuclear lobbyists,” said Phumzile Tshelane, the CEO of the state-owned NECSA. Currently, the country operates two nuclear reactors, each with a capacity of 900 MW, which feed the Koeburg Nuclear Power Station and provide around 6% of the nation’s electricity needs. Commissioned in 1984, the facility is the only commercial nuclear power station on the continent and uses the pressurised water reactor design.

Electricity Infrastructure

The relatively small contribution of nuclear power to the national grid may grow considerably as a result of government plans to boost and diversify its electricity base. Eskom, a parastatal utility, produces around 95% of the electricity consumed in South Africa and about 45% of the electricity consumed in Africa – a measure of the poor state of generation elsewhere on the continent. It dominates the electricity sector, from generation to Electricity consumption, 2002-11 transmission and distribution, providing power to residential customers, as well as industrial, mining, commercial and agricultural clients across the country. It also buys and sells electricity to and from countries in the Southern African Development Community.

In terms of generation capacity, its current manifest of facilities is weighted heavily towards coal as a feedstock. The vast majority of its output is provided by 13 coal-fired power stations, three of which (Grootvlei, Camden and Komati) have recently been recommissioned and returned to service. Between them they contribute 34,952 MW to Eskom’s total capacity, with the largest contributor being the 3510-MW Tutuka Power Station, which has been operating since 1990 and is located in the northern province of Mpumalanga. Four gas-liquid fuel turbine stations add a further 2409 MW, the bulk of which is derived from the 1327-MW Ankerlig Power Station, a gas turbine that was opened in 2007 in order to address the increasing power demands of the Western Cape. Hydroelectric stations add a negligible amount to total capacity: two stations combine to bring 600 MW to the grid, while the output of a further four is deemed by Eskom to be too small to include in its total net maximum capacity data. Two pumped storage schemes at Drakensberg and Palmiet bring 1000 MW and 400 MW to the grid, respectively, while the nation’s single nuclear power station at Koeberg adds another 1800 MW. The remaining 5% of electricity, which is generated independently from Eskom’s system, is produced by municipalities and energy-intensive industrial projects, such as those operated by Sasol, which generate a portion of their own electrical supply. A single independent power producer (IPP) currently operates in South Africa: the UK’s Ipsa operates the Newcastle gas-fired power plant, an 18-MW facility in KwaZulu-Natal.

Boosting Capacity

As the DoE concedes in its current strategic plan, investment in the nation’s energy sector over the past 20 years has not been sufficient to meet the rapid demand growth that began in the early 2000s. The rolling blackouts suffered by the country throughout 2008 underlined the urgency of the nation’s growing energy deficit, and their recurrence has only been prevented by the cooperation of heavy industry in limiting consumption and the reprieve afforded by the global economic crisis.

Security of the electricity supply in South Africa remains precarious, and the load-shedding seen in 2008 may return before 2016, according to the government’s Medium Term Risk Mitigation Plan. Moreover, despite achieving the highest electrification rate on the continent, at 75% nationally and 88% in urban areas, only 55% of the rural population has access to electricity. With economic activity in the country picking up, the DoE has acknowledged the need to “fast track the interventions that will improve the power supply-demand situation”. Using the nation’s energy resources efficiently as it engages with the long-term process of building new base load capacity is therefore a national priority. The Integrated Resource Plan (IRP) 2010-30, finalised in 2011, represents the nation’s roadmap to this objective. Initiated by the DoE after a round of public participation in 2010, the IRP establishes the proposed new build fleet for South Africa for the next two decades based on optimal cost, as well as qualitative considerations such as job creation and environmental impact. The IRP has been described by the DoE as a “living plan”, which will be revised every two years, an undertaking that has already resulted in a number of changes that have increased the allocation of renewables to the overall energy mix, more clearly defined the technology split of the renewables allocation, increased the allocation for natural-gas-fired, open-cycle gas turbines (OCGT) and reduced the initial allocation of combined-cycle gas turbines (CCGT) used for peaking (the cycling capability of these plants means they are often used only during periods of peak demand). The current iteration of the IRP sets a number of targets for the 2030 national energy mix in terms of new build which, if met, will result in 22.6% of added capacity being derived from nuclear technology; 14.7% from coal; 6.1% from imported hydro; 9.2% from OCGT for peaking; 5.6% from CCGT; and 41.8%, or 17,800 MW, from renewables (of which photovoltaic will account for 8400 MW, wind for 8400 MW and concentrated solar power for 1000 MW).

The identification of nuclear technology as a major contributor to the future energy mix has rekindled enthusiasm in an industry that has seen little development since the establishment of the Koeberg plant in the mid-1980s. Anticipation rose still further in November 2011, when the former energy minister indicated that some $50bn would be spent on the nuclear programme by 2030.

The plan calls for six new 1600-MW phases to be brought on-line at 18-month intervals from 2023, and Eskom has stated that it is considering Generation II designs from China and South Korea. Bids are expected to be called in early 2014, and an environmental impact assessment begun in 2006 has already identified three possible sites for the first of South Africa’s new nuclear power units: Thyspunt, Bantamsklip and Duynefontein, all of which are in the Cape region. Despite fears that the Fukushima accident would derail the implementation process, in November 2012 the cabinet endorsed a “phased decision making approach for implementation of the nuclear programme”.

Renewables

However, it is the IRP’s ambition that renewable energy should provide close to 42% of new electricity capacity by 2030, that has generated the IPP procurement tariff caps, 2011 most interest in the energy sector. “South Africa is becoming one of the world’s most exciting renewables markets. It has come to renewable technology late, but with a high growth rate,” Nicholas Greene, an energy, utilities and infrastructure analyst at Standard Bank, told OBG. Solar and wind power will provide by far the largest tranche of new capacity, and South Africa holds comparative advantages with respect to both. Most of the nation’s land mass shows an average insolation in excess of 5000 Wh per sq metre per day, with some parts of the country enjoying average rates of more than 6000 Wh per sq metre per day.

While solar energy projects have to date been largely off the grid, a raft of new solar energy developments is presently in the pipeline as the government starts to make efforts to follow the path laid out by the IRP: 300 MW of new solar photovoltaic power from 2012 to 2024, further increased by 500-1000 MW per year until 2030, and 200 MW of concentrated solar power (CSP) by 2015, with 1000 MW added annually through 2025 (see analysis). South Africa’s wind power potential, meanwhile, resides in the onshore winds of the Western and Eastern Cape that are among the best sites for wind power in the world. According to the South African National Energy Research Institute, the country has the potential to attain wind power capacity of between 10 GW and 15 GW, and the identification of suitable locations was made easier in 2012 by the launch of the Wind Atlas for South Africa. The project is a result of R22m ($2.68m) worth of funding from the DoE, the UN Development Programme’s Global Environment Facility and the Danish Embassy in South Africa, and brings together 30 years’ worth of data verified over a year by 10 measurement masts in the Eastern, Western and Northern Cape provinces.

The government aims to achieve the renewable energy targets outlined in the IRP through the Renewable Energy IPP programme, by which it hopes to reduce its funding burden by ensuring the private sector plays a larger role. The initiative also covers the renewable technologies delineated in the IRP and allocates generation capacity to successful bidders by which their electricity will be bought by Eskom’s Single Buyer Office, according to a power purchase agreement (PPA). A number of feed-in capped tariffs have been established in order to kick-start the process of increasing renewables’ contribution to the energy mix, with wind and solar enjoying the most generous support. Generating capacity allowances are to be granted to IPPs in a phased process. The first bid submission date came in November 2011, and in December 2011, 28 preferred bidders from the 53 applications were disclosed, their eventual success was dependent on achieving financial closure by June 2012. The combined capacity of the solar photovoltaic projects at the preferred-bidder stage amounted to 651.53 MW, while two CSP projects added another 150 MW. The wind projects listed at this stage contributed about 634 MW to the total. While some projects were unable to achieve financial closing on time, by October 2012 the first PPAs, direct agreements, implementation agreements and connection arrangements were signed. A second bid submission date passed in March 2012, and a third submission date is set for August 2013.

Tariffs

Eskom’s massive new build programme is crucial if it is to increase its base load, but it comes at a price. The utility’s precarious financial position in recent years has compelled the government to support it with R350bn ($42.66bn) of loan guarantees, which, combined with R60bn-80bn ($7.31bn-9.75bn) of shareholder loans, represents a level of proportional government support (around 17% of GDP) greater than the banking bailouts of the UK (8.1%) and the US (5%), according to Standard Bank.

For Eskom to make its financial position sustainable it must raise tariffs, and in October 2012 it asked NERSA for a 16% rise in electricity prices each year for the subsequent five years. The new Multi-Year Price Determination for the period from 2013/14 to 2017/18 was supposed to have come into effect in March 2013, and if Eskom’s tariff proposals had been accepted would have raised its rate from R0.61 ($0.074) per KWh to R0.128 ($0.014) by 2017. Protests from both industry and business groups, already adjusting to price rises in previous years, quickly followed, while unions also pointed out the impact that tariff rises would have on low-income households, such as consumers falling into arrears and substituting electricity for dirty, less reliable energy. Eskom, in turn, acknowledged that its capital expansion programme amounted to asking consumers “to pay for capital expenditure for services they would enjoy later or services that they may not even be able to afford in future”.

The regulator’s response reflected these concerns: in February 2013 NERSA announced its determination that Eskom would be allowed to raise tariffs by only 8% for the next five years – a decision which Eskom is evaluating and may yet appeal. How the tariff changes will affect Eskom’s development strategy, therefore, remains unclear: 3% of its original 16% request was to be set aside to support IPPs, a third of the increase was intended to meet greater coal costs, a quarter of it was to meet increased operating costs, and the remainder was earmarked for essential equipment replacement and debt servicing.

The balance which must be struck between allowing Eskom to grow its base load, re-establishing the utility’s economic stability and protecting the wider economy from potentially damaging price rises will remain one of the energy sector’s most challenging issues for some time to come.

Water Infrastructure

As with electricity, the future supply of water has become a central concern of both the business community and ordinary citizens in South Africa. The Municipal Structures Act and Water Services Act of 1997 establish the nation’s 52 districts and 231 local municipalities as the bodies responsible for the provision of water and sanitation services. Sanitation and water services are most often provided directly through a municipal department, although provision may be outsourced to a water services provider. Bulk water supply infrastructure, such as dams and major pipelines, are within the purview of 13 water boards, which also provide technical assistance to municipalities and manage some retail infrastructure. The state-owned Trans-Caledon Tunnel Authority, meanwhile, is charged with financing and developing new bulk water infrastructure and sells water directly to the Department of Water, which in turn sells it to municipalities and independent users such as large industrial projects.

The Water Gap

The voluble public discourse surrounding South Africa’s electricity challenge has, in the eyes of some, stifled debate concerning another important issue: the nation’s rapidly rising demand for water, which has been described as a “water volume gap” by Edna Molewa, the minister of water and environmental affairs. The iniquitous division of water resources during the apartheid era ensured that access to adequate supply became an issue of some importance during the framing of the country’s new constitution, and it is now a constitutional right for all South African citizens. Government policy since 1994 has been centred on increasing access whilst at the same time enhancing cost recovery. After attempting to crack down on tariff avoidance through the promulgation of the Water Services Act of 1997, the government changed tack and introduced a free basic water policy in 2001, which rested on a revised tariff policy that allowed for 6 cu metres per month per household.

New Partners

There has also been a degree of privatisation of the water system: Johannesburg’s water supply was operated by a private firm until 2005, and a number of cities continue to offer water management contracts to the private sector. The government has achieved considerable success in terms of access to water, connecting almost 15m people between 1990 and 2010 to achieve a population coverage of 91%, according to the WHO/UNICEF Joint Monitoring Programme for Water Supply and Sanitation. In achieving this, the government has undertaken a number of large-scale water infrastructure projects, the most significant of which is the Lesotho Highlands Water Project. The project has seen water piped from Lesotho to South Africa since the construction of the 155-metre-high Katse Dam in 1998. In 2011 a second phase of the development commenced, which involved the construction of a 165-metre-high, 2.2bn-cu-metre dam – the project’s third – which will address the industrial and water needs of Gauteng province while also generating hydropower for Lesotho. Nevertheless, concerns regarding future supply and the effect of a growing water gap are mounting. A 2009 report by the 2030 Water Resources Group (WRG), a public-private partnership to ensure sustainable water management, often referred to as the McKinsey report as a result of that firm’s input, highlighted the growing supply-demand differential in South Africa, and focused more on the approaching economic challenge rather than civil rights. “The McKinsey report gave a different perspective on water, particularly for a country like South Africa where current legislation has taken a water rights approach. Until recently the question of the economic use of water has not received due attention,” Julia du Pisani, the senior advisor to the Strategic Water Partnership Network, told OBG.

The WRG report identified population expansion, economic growth and the emergence of a new middle class as the primary causes of a looming water deficit, which it anticipates will lead to a supply-demand gap of 17% by 2030. In 2011 the Department of Water moved to address the challenge of water supply by joining with the WRG to form a partnership that has established a project with two key areas of focus: a water conservation programme, which seeks to engender more efficient usage and reduce leakage from distribution networks, and a strategy to diversify the water mix through the reuse of effluent, desalination and a greater use of groundwater, where it may be carried out in a sustainable manner.

If the partnership is to bring about meaningful results, its efforts must be replicated throughout the economy, and to this end it has established the Strategic Water Partners Network (SWPN), a public-private sector group chaired by the director-general of the Department of Water. The network is made up of large consumer stakeholders in the water sector, among them Anglo American, Coca-Cola, Eskom, Nestlé, South African Breweries (SAB) and Sasol, which have established a number of pilot projects and sector strategies that provide useful templates for other companies. To date, the members of the SWPN have implemented an array of easily transferrable pilot projects that include: Anglo American’s eMalahleni water reclamation plant, which desalinates rising underground water; Coca Cola’s water recovery project, by which it has re-engineered its can-rinsing process to include a water treatment plant; and SAB’s use of cascading water over a number of processes in order to maximise usage.

Outlook

South Africa’s energy deficit has been a hindrance to development across a number of sectors for some years and is unlikely to be resolved in the short term. According to Standard Bank, the nation’s typical available capacity is in the region of 30 GW, whereas peak demand, according to Eskom’s “2011 Annual Report”, stands at around 37.5 GW. Eskom’s drive to build new base load capacity is accompanied by rising demand from electricity-intensive industry, including the beneficiation of mineral resources, which forms part of the nation’s industrial growth strategy (see Industry chapter). As new capacity is added, demand continues to rise, and this “moving target” characteristic of the electricity deficit will exercise the minds of government planners for years to come. The finite supply of water in South Africa results in a somewhat different scenario. Although the provision of new infrastructure remains important the more efficient usage of the water resources is the ultimate goal. While the effort to use South Africa’s limited water supply in a more sustainable manner has gained some momentum, future demand will compel government and municipalities to balance competing requirements.

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The Report: South Africa 2013

Energy & Utilities chapter from The Report: South Africa 2013

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