SOUTH AFRICA
South Africa has a new energy plan. But will it break the bank?
By Stephen Labson
THE PLAN ASSUMES TREND GROWTH IN ELECTRICITY DEMAND OF 2.7 % PER YEAR.
The release of South Africa’ s long awaited update to the Integrated Resource Plan is certain to inspire renewed debate about the country’ s energy future. Once public consultation has taken place the plan will drive policy decisions on the mix of renewables, nuclear, coal and gas fired power generation to be added to the grid until 2050.
In briefing the media, Energy Minister Tina Joemat-Pettersson pointed to a number of factors that had been incorporated in the updated plan. Importantly, it addresses the fundamental shift in South Africa’ s electricity demand; the implications of technological innovation in decreasing the costs of renewables; and the addition of new generating capacity that has quickly turned the country’ s electricity deficit to surplus.
But one important matter is surprisingly absent in the discussion. Can the county afford the energy plan?
Funding the plan
In normal times an energy plan might not need to focus on issues of finance and funding. But with South Africa’ s credit rating under review, the National Treasury’ s ability to provide support to the sector reaching its limits, and Eskom’ s finances under threat, normal does not apply. In looking at funding issues, the first point to clarify is that private sector development of power projects offers no panacea. It is largely irrelevant whether these facilities are developed by the private sector or through public-private partnerships. In either case government will need to provide financial guarantees to make them bankable. This has been the case for government’ s partnership with the private sector in bringing more than 1800 MW of renewable power generation online, and for Eskom’ s capital expansion programme which will add well over 10000 MW of new power generation capacity to the grid by 2022.
The problem is that government guarantee exposure to the power sector is already very high. At some R368 billion at the start of the financial year, this represents the lion’ s share of total government guarantee exposure of some R467 billion.
This very point was raised by two rating agencies late last week. Moody’ s Investor Services highlighted the“ downward pressure” on the nation’ s credit rating brought about by the accumulation of these contingent liabilities while FitchRatings cited concern over the level of government guarantees to independent power producers.
Eskom is essentially the“ man in the middle”. Government is relying on the utiliy’ s ability to repay borrowings used to fund its capital expansion programme, and pay for power supplied from the private sector. Government stands as guarantor for both. How is Eskom proposing to meet its obligations? First up, it sees tariffs needing to increase by some 13.6 % year-on-year through to 2021 to cover the costs of power purchases. Add to this the cost of borrowings needed to complete Eskom’ s build programme. This could add another R50 billion or more to the tariff base by 2022.
The probability of Eskom receiving double digit tariff increases to the end of the decade has to be low. Consumer sentiment is negative, and there is a growing backlog of tariff determinations awaiting resolution in the Courts. If adding to these risk factors the hundreds of billions of added exposure
32 Business Times Africa | 2016