SOUTH AFRICA HAS A NEW ENERGY PLAN indicated under the Integrated Resource Plan“ base case”, the question to put to Treasury is –“ are you feeling lucky”?
The tricky question of forecasting demand
With power cuts still in the minds of many, it is perhaps difficult to appreciate the significant shift from deficit to surplus power supply achieved this past year. With two of the world’ s largest power generating stations under construction and electricity usage trending downwards, South Africa may have an excess of generating capacity for some time to come.
In addressing these issues, the revised plan has set back new build nuclear power plants to 2037, and re-phased other new build dates as well. Still, significant levels of additional generation capacity are called for as early as 2021. These accumulate throughout the decade and beyond.
Planned-for generating capacity is driven by assumptions on future electricity demand, and studies will have been carried out in forming these estimates. To the degree that the assumptions on future demand drive investment plans – and they do – there are a
couple of points worth mentioning. The plan assumes trend growth in electricity demand of 2.7 % per year. This is probably overstated for two reasons. First, there is the tendency to be overly optimistic on assumed GDP growth, which largely drives estimates of electricity consumption. This was the case in the 2010 version of the Integrated Resource Plan, and the same could be said for the revised plan.
Perhaps of greater significance is how electricity demand is assumed to respond to price increases. In looking at inputs to previous iterations of the plan, the price response catered for was based on the assumption that a doubling of tariffs leads to a 0.02 % decrease in usage.
This is wrong, as backed up by numerous studies and just plain common sense. Electricity usage at residential, commercial and industrial levels does respond to large price increases. The tariff increases needed to recover the costs of additional generating capacity are substantial, and would no doubt add downward pressure on electricity demand. This matters a great deal because the assumption about how much more demand there will be drives the plan’ s capital expansion requirement. It points to the need to add, on average, almost 4200 MW of generating capacity per year for the duration of the planning horizon – roughly equivalent to building another Medupi power station every 14 months up to 2050.
A bankable energy plan
The process for finalising the plan includes Cabinet approval. Perhaps this is why the plan does not focus on investment and funding. That said, does it make sense to develop an energy plan that is unlikely to be bankable? But let’ s hope that this assumption is wrong, and that tariffs can remain stable in the face of increasing costs, that Eskom’ s finances are strong, and that the National Treasury can sustain further increases to its exposure to the power sector.
With the contentious issue of nuclear build seemingly pushed back to 2037, perhaps there will now be time to consider these more pressing issues facing the energy sector. – Stephen Labson is Managing Director at SLECONOMICS PTY LTD, Senior Research Fellow, University of Johannesburg- The Conversation
2016 | Business Times Africa 33