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