Context

Energy is critical to a functioning economy. It supports economic growth and development and influences living standards through access and its impact on inflation and real household incomes. Energy and economic growth are interdependent, as greater economic activity tends to increase energy demand.

A stable, cost-effective energy supply is a precondition for investment and long-term economic growth. With its plentiful reserves of coal, South Africa has long benefited from cheap, non-renewable electricity as its main source of energy. However, from 2006, increasing demand coupled with inadequate electricity investment and maintenance of infrastructure led to an abrupt supply shortage and the need for loadshedding. Production and investment in the broader economy, especially in mining and manufacturing, was negatively affected by the unreliable electricity supply. Since 2006, economic growth has slowed, putting less pressure on electricity supply; but as the economy revives and the population grows, energy needs will increase.

Energy discussions are dominated by Eskom, the state-owned enterprise providing electricity. Nonetheless, the energy sector is much broader than coal-fired electricity, especially with the successful introduction of renewable energy options from a competitive private sector. South Africa is resource-rich not only in coal but also in solar and wind. These new options allow for pricing and efficiency gains, as renewable energy prices have fallen as technologies have improved. Increasing reliance on renewables would also demonstrate greater environmental responsibility in the energy sector. At the same time, it is important to assess the impact of climate change on energy supply and needs, particularly as a water-scarce country. Energy is a contested, important policy area requiring transparent, collaborative and innovative policy initiatives. South Africa needs a sustainable and evidence-based long-term energy plan.

Guiding principles

A stable, cost-effective energy supply is necessary for sustainable business operations in South Africa. As the representative of business, BUSA engages proactively and substantively with government on energy pricing and policy matters, as well as on Eskom’s functioning as the generator, transmitter and supplier of the bulk of South Africa’s electricity.

Energy policy, including the role of the private sector, should be developed in consultation with stakeholders outside government. Within government, energy policy should be consistent and coordinated across departments to ensure policy certainty. Furthermore, policy should be transparent, evidence-based and include correct assumptions and realistic energy supply and demand forecasts that are updated as underlying conditions (such as economic growth trends and cost of technology) change. Energy plans should also consider their effect on employment and the environment.

Challenges

• The Integrated Energy Plan is posited as the comprehensive long-term energy plan for South Africa. However, the draft released for comment in 2016 is flawed, as discussed in more detail below.
• It is unclear how the Integrated Energy Plan relates to other energy plans such as the Integrated Resource Plan and the Gas Utilisation Master Plan. This creates policy uncertainty as there is no single long-term vision for energy policy in South Africa.
• Policy uncertainty has a broadly negative effect, particularly on the private-sector renewable energy industry, which is relatively young in South Africa and has the potential to promote localisation and employment, and generate greater long-term investment and thus economic growth.
• Energy plans are inconsistently evidence-based. For example, energy supply and demand forecasts are not regularly updated or tied to economic growth trends.The energy plans currently in use were developed in 2010; the Integrated Resource Plan was published in 2011. Legislation governing these plans requires annual review.
• As Eskom dominates the energy sector in South Africa, its severe governance and financial problems present challenges for the energy sector as a whole, as well as placing an immense risk on the economy as a result of the sovereign guarantees that support the Eskom debt.

Analysis

Energy supply cannot be generated instantaneously, on the basis of current demand. Instead, it must be planned, costed and built well in advance of need. It is therefore extremely concerning that the South African energy sector displays poor long-term planning and incoherence across different energy plans within government. Energy is needed both for current production and to attract investment that will grow the economy. Energy plans must be clarified, aligned and developed into a road map of implementable goals that can be assessed at regular intervals.

The draft Integrated Energy Plan, released in November 2016, aimed to provide an integrated long-term energy vision for the country in respect of primary energy for electricity generation, gas and liquid fuels. Unfortunately, there are several serious problems with the document. These can be summarised as:

• A lack of coordination across energy plans makes it seem as though they are independent of one another rather than forming an integrated vision. For example, basic assumptions in the economic models used differ across the Integrated Resource Plan and the Integrated Energy Plan, when the two plans should share an understanding of factors like the discount rate.
• Insufficient analysis and policy recommendations. Although the Integrated Energy Plan includes recommendations, these are high level and sometimes disconnected from the plan’s modelling implications. It is unclear how the plan will be implemented, which is an essential component of policy.
• The process by which results are generated is not transparent. For example, modelling assumptions are not explained or justified. This prevents stakeholders outside the policy development process – such as BUSA, on behalf of organised business – from fully understanding and engaging with the document.

The way forward

• Prioritise public consultation for a coordinated high-level road map of all pending energy legislation and policies.
• Finalise and consult meaningfully on the Integrated Energy Plan and the Integrated Resource Plan, while addressing concerns over transparency in the planning process.
• Finalise and release other plans such as the Gas Utilisation Master Plan.
• Continue the Renewable Energy Independent Power Producer Procurement Programme and institutional arrangements with clear policy commitment.
• Engage with Eskom on challenges such as the long-term price trajectory and a sustainable funding model.

Conclusion

The experience of loadshedding more than a decade ago illustrated the importance of long-term planning and implementation for energy policy. Yet there are serious flaws in current energy plans. These flaws need to be addressed to create a clear vision for long-term energy policy in South Africa and so provide the certainty investors need. BUSA remains committed to partnering with government, and working with Eskom to meet the economy’s current and future energy needs.

Sources

BUSA. Draft Integrated Energy Plan November 2016: Submission by Business Unity South Africa. 31 March 2017.

BUSA and Jabu Mabuza. “Presentation to Energy Indaba 2017”. 8 December 2017.