The Reality of SA’s Electricity Crisis

This article was originally published in June 2022, but has been updated since.

South Africa’s power sector is navigating an almost perfect storm of a growing electricity supply deficit, exacerbated by Eskom’s deteriorating generation because of increasingly unreliable coal plants, resulting in skyrocketing electricity prices. Together, these forces are crippling the economy.

With the country emerging from a COVID-induced economic slowdown over the past two years, it is becoming clear that we have been lulled into a false sense of progress regarding the rollout of new energy generation.

The stark reality of the situation is alarming, with almost weekly load shedding and the possibility of stage 8 recently mentioned by the government. We are on track to break another record for the worst year of load shedding. By Eskom’s own admission, load shedding so far for 2022 has already exceeded its predictions and is set to worsen in the months ahead.

Figure 1: Hours of load shedding from 2015 to 2022

Source: EskomSePush Twitter page

Given the delayed roll-out of the emergency power procurement plan set to start a year ago and due to come online this month, Eskom has been forced to rely even more heavily on its diesel-fuelled generators, at an enormous cost to the utility. South Africa also faces growing pressure to transition to clean energy to meet environmental commitments and avoid punitive international trade terms.

Key questions that need to be answered are: What has been done to address this situation? Will the current plans be enough, and how could the country accelerate the power sector’s reform?

PLANNED INTERVENTIONS - BUT ARE THESE ENOUGH?

South Africa’s successful Renewable Energy Independent Power Producer (REIPPP) programme over the past 10 years and planned reform of the power sector and transition to cleaner energy has been internationally recognised and achieved significant support. Since 2019, the government has announced several notably bold plans, given the country’s historical reliance on Eskom’s centralised command and control of electricity supply. These have included:

• Eskom’s unbundling and energy sector reform in September 2019 (“Roadmap for Eskom in a Reformed Electricity Supply Industry”).

• The updated Integrated Resource Plan (IRP-2019) in October 2019, which outlined the planned electricity procurement over the next 10 years and the transition in the energy mix towards renewables.

• The launch of the Emergency Power Procurement Plan (RMIPPPP) in 2020 and announcement of RMIPPPP preferred bidders in March 2021.

• The resurrection of the REIPPP programme, with the launch of Bid Window 5 in April 2021 and the announcement of preferred bidders in October 2021, following a hiatus of procurement from Independent Power Producers since Bid Window 4 was announced in 2015.

• Government’s move to unlock private power generation and grid access by replacing the previous licensing requirement by Nersa with a simpler registration process, and then scrapping the 100 MW size limitation of eligible projects.

• Local research and the development of green hydrogen and battery storage, technologies that are globally acknowledged as key to power generation in the future.

• A doubling of the allocation for new power procurement under REIPPP Bid Window 6 from 2 600 MW to 5 200 MW, and consideration of a pragmatic approach to local-content requirements that have impeded financial close of Bid Window 5.

Over the past eight months, plans by Independent Power Producers have been complicated by an international supply backlog in the equipment required to build new power plants, together with a significant increase in shipping and insurance costs. Unfortunately, the delays and unpredictability of contracting Independent Power Producers since 2015 has almost wiped out the local supply industry, necessitating a measure of foreign-sourced procurement. However, there is optimism about re-igniting the development of the local supply sector, given the amount of renewable energy set to be rolled out over the next ten years. 

MUCH HAS BEEN ACHIEVED ON PAPER

In theory, much has been achieved in terms of the intention to reform the energy sector and unlock new sources of electricity supply. In summary, the following steps to take electricity generation forward have been made:

• RMIPPPP: Eleven Independent Power Producers were awarded almost 2 GW of new power contracts more than 12 months ago, but only three are nearing financial close.

• REIPPPP Round 5: 25 Independent Power Producers were awarded 2.6 GW of new power in August 2021 in the most heavily contested bid window, resulting in the lowest tariffs awarded so far in South Africa.

• Private power generation: dozens of projects totalling some 4 GW are in the pipeline to commence construction and supply corporate and industrial off-takers with embedded generation.

• IRP 2019 has outlined the decommissioning of more than 10 GW of coal by 2030, replacing it with 31 GW of new power (including 21 GW of renewables) over this period.

• Eskom’s unbundling has progressed and the first step of legally unbundling its transmission operations into a separate company was achieved in late 2021.

• 56 Solar PV and Wind projects submitted bids totalling 9 666 MW under the Bid Window 6 of REIPPP by the deadline in early October 2022. This represented an oversubscription of bids relative to the 5200 MW energy allocation under this Bid Window.

THE REALITY OF THE SITUATION

Despite the ambitious plans and the initial steps taken, there is growing frustration with the glacial progress of their execution. 

The first three projects under the RMIPPP programme concluded Power Purchase Agreements by Eskom in early June 2022, with financial close shortly thereafter, but most of the programme has stalled. Environmental issues and litigation plague the Karpowerships, and the pass-through of gas costs are now prohibitively expensive for Eskom. Many REIPPP Round 5 projects are struggling to close, given the significant price adjustments of engineering, procurement and construction contracts against the backdrop of the tight margins bid under the REIPPP programme. Despite already having registered with Nersa, dozens of new private power projects have delayed the start of their construction whilst waiting for clarity about connecting to Eskom’s national grid for purposes of selling power to corporate and industrial off-takers.

The capacity of Eskom’s national transmission grid is highly constrained in the Northern and Western Cape, limiting the potential for new projects to connect to the grid. Furthermore, the reliability of Eskom’s coal plants is rapidly deteriorating. The Energy Availability Factor (EAF) for the year to date has averaged less than 60%, and the trajectory is increasingly moving in the opposite direction to the 75% targeted EAF that was envisioned in the government’s plans under the “Roadmap for Eskom in a Reformed Electricity Supply Industry”. The increasing cost of maintaining Eskom’s aging assets, together with the huge cost over-runs and interventions to address design flaws of mega coal plants Medupi and Kusile, has driven up the real cost of electricity by more than 600% over the past 15 years.

Figure 2: Eskom average tariff vs. inflation (CPI)

Source: Eskom tariff increases vs inflation since 1988 (with projections to 2024)

Note: The graph depicts overall average increases – actual increases will be different for different types of consumers (residential, commercial and industrial) and will vary between municipalities.

THE ROADMAP TO TURNING AROUND THIS DIRE SITUATION

We urgently need to simplify and fast track the approvals to connect private embedded generation projects to the national grid through better coordination among Nersa, Eskom, the Department of Mineral Resources and Energy (responsible for electricity procurement), the Department of Public Enterprises (responsible for Eskom) and National Treasury.

To assist Eskom, private concessions should be given to Independent Power Producers to upgrade parts of the grid network where they need to connect. Independent Power Producers could achieve cost recoveries if the wheeling fees Eskom charges for using its grid network were reduced.

To expedite the financial close of Round 5, consideration should be given to granting a once-off adjustment to the tariffs to help projects address the unexpected increase in equipment supply costs. Doing so would arguably be cheaper than the cost to the economy for every additional day of load shedding, plus the cost of running diesel generators by Eskom.

Another update to the IRP is needed, given the delays in project closings and performance deterioration in Eskom’s coal plants. This should include the increased allocation to electricity procurement from Independent Power Producers by municipalities in good financial standing, expected to be a growing factor in South Africa’s electricity sector reform in the years ahead.

A formal plan to facilitate the use of Eskom’s infrastructure by municipalities in good financial standing that wish to procure electricity directly from Independent Power Producers, and consumers who wish to sell power into the grid, would greatly assist in rolling out the decentralisation of power away from Eskom generation.

Conclude requirements for Eskom to utilise the $8.5 billion climate finance deal unveiled at the United Nations Climate Change Conference (COP26) in late 2021. This capital could be applied in a variety of uses such as grid upgrade expenditure or renewable investments by Eskom.

The updated IRP should include an increase in the speed and scale of developing additional renewables and battery storage.

EXECUTION OF THESE PLANS IS THE KEY TO A BRIGHTER FUTURE

There is an urgent need to fast track the build-out of new power generation to minimise the reliance on Eskom’s coal plants and reduce the negative impacts of load shedding. Many positive factors support energy reform, including the extensive national grid infrastructure, significant amounts of private investment in the pipeline, South Africa’s vast natural resources, and global support for the clean energy transition.

The key issue is prioritising, coordinating and executing decisions that are primarily still on paper. We cannot afford further delays; this is a national emergency for South Africa. We need to do more, faster. However, inflexible regulatory paradigms restrict private sector investors who have the capital, expertise, and the will to make a difference. Significant capital investment is required to upgrade/strengthen the grid. It cannot be left up to Eskom alone, and offers an opportunity for public-private partnerships that will ultimately lead to a brighter future for our country.