(A look at how the South African government has introduced new laws to combat the current energy crisis)

Stark Reminder Having just returned from a business trip to South Africa, my first since the COVID pandemic started, I was reminded of that very special term in South Africa called “load shedding”, when on my first evening in the hotel I found myself in complete darkness mid-shower. Now for those of you who are not familiar with this term, essentially it entails the deliberate shutdown of power in a part of parts of a power-distribution system, generally to prevent the failure of the entire system when the demand strains the capacity of the system.

 
In South Africa, the public utility responsible for the production of power is Eskom, which was once one of the largest producers of electricity in Africa and was among the top utilities in the world in terms of generation capacity and sales. Sadly, however, largely due to the administration under the ANC, coupled with mismanagement, Eskom has slipped dramatically in both categories. By way of simple example, the performance of Eskom’s power stations has declined from above 90% in the early 2000’s to an average of 64% for 2022. In short, there is a critical shortage of power which has lead to dire consequences for the local economy and GDP as the country currently has a power generation shortfall of between 4,000MW and 6,000MW.

Failure of Existing Infrastructure
Eskom’s fleet of coal fired power stations, excluding Medupi and Kusile, are on average 41 years old. These power stations have been run far harder than international norms and have not been maintained as they should have been. In addition, the new generation plants, Medupi and Kusile, which were supposed to alleviate and ease the strain on the power grid, have design defects that will take time and money to address. In the words of the current president Ramaphosa, “South Africa’s energy crisis is a calamity of enormous proportions”.

 
The Medupi and Kusile stations were supposed to be the solution to the energy crisis but have in fact dug the country into an even deeper hole. These stations were originally to be completed by 2014 but these are now expected to be completed in 2024 and 2026. In addition to their overruns, both projects are way over their initial budget of R80 billion and will come in around the R154 billion and R146 billion mark respectively. Sadly though, an explosion at the Medupi station shortly after its initial completion caused significant damage and was a major factor in this station not being completed. The design defects will also require each unit to be shut down for around 75 days in sequence to complete the work and the associated costs will be shared between Eskom and Mitsubishi Hitachi Power Systems in Africa.

Silver lining
With this as a very bleak background and outlook, one would be forgiven for being pessimistic at best, but like all things in life, there is always hope and opportunity even in the most desperate of situations. As the old adage goes, we are all in this together and the South African government has realized that it is critically dependent on the private sector to help tackle this electricity crisis head-on by implementing major economic reforms.

 
Following an extensive public consultation process and a significant amount of technical work undertaken by the Department of Mineral Resources and Energy, the government amended Schedule 2 of the Electricity Regulation Act to increase the licensing threshold for embedded generation projects from 1 MW to 100 MW in 2021. This amendment exempted generation facilities to supply up to 100 MW electricity without obtaining a license from the National Energy Regulator of South Africa’s (NERSA) licensing requirements, whether such projects were connected to the grid or not. This removed a significant obstacle to investment in embedded projects. In addition, generators were also allowed to wheel electricity through the transmission grid, subject to wheeling charges and connect agreements with Eskom and relevant municipalities.


Further Amendments
In late July 2022, president Ramaphosa announced a number of additional measures in a bid to contain the power supply crisis. One of these was to remove the cap of 100 MW for the exclusion of having to obtain a license from NERSA. These new provisions, once effected into law, will allow private companies to set up power generation systems of any size without requiring a licence from NERSA. The systems will however need to be registered by the regulator. In addition, president Ramaphosa announced that his administration was creating a single point of entry for all energy project applications, to ensure the coordination of approval processes across the government as investors had often criticized the onerous and sometimes frustrating approval processes for power projects.

Power to the People
Power to the people. Literally, this is the current need and focus of South Africa. Where the government has failed in its responsibility to provide power to South Africans, the private sector now has a significant opportunity to step up and show the administration how its to be done. This means that the scope for potential project development in this sector is very interesting. Already, we are seeing new companies operating in this sector, particularly in the solar and wind field areas, where they are actively sourcing projects not only with the government and municipalities, but also with the corporate sector. There are limitless opportunities that could be taken advantage of, and with a solid long-term strategy, would open up even more opportunities down the road which far exceed merely the power sector, but these I will touch on in future columns.

Korean Power Companies
Korea and its power companies, both public and private, are a roster of heavy hitting, technological advanced and well respected companies. With their credentials, background and ability, one would expect Korean power companies to be licking their lips at the tremendous opportunities in this regard in South Africa.

 
Hyosung has recently been awarded the pilot battery energy storage system (BESS) project of 293MW by Eskom. The contract is for the design, supply and installation as well as operation and maintenance of this BESS for a 5-year period. This project will help to alleviate the pressure on the national electricity grid. This is a clear example of how the relaxation of laws and regulations by the government has resulted in foreign companies being able to win these tenders without the rigorous and frustrating process of obtaining the NERSA license. The government fully realizes its current predicament and I would not be too surprised if there were not more additional measures brought in by the government to assist the private sector in propping up the power grid and supply in South Africa.

Korean companies however, have been somewhat coy about looking at investment into Africa in general, despite the gaze of the world starting to focus their interests on the continent. The US, in August, announced through Secretary of State Blinken’s visit to the continent their new strategy towards Africa, the EU announced earlier in the year their 150 billion Euro investment plan for Africa and of course there is always China, who are already heavily involved in the continent and have created 25 economic and trade cooperation zones in 16 African countries.

In November 2021, the governments of SA, France, Germany, the UK, the USA, along with the EU, announced a long-term Just Energy Transition Partnership to support South Africa's decarbonization efforts. The partnership will mobilise an initial commitment of $8.5 billion for the first phase of financing and is expected to prevent up to 1-1.5 gigatonnes of emissions over the next 20 years and support South Africa to move away from coal and to accelerate its transition to a low emission, climate resilient economy.

Surely then, Korean companies with their tremendous expertise, ability and quality product, should also reset their thinking and look at the continent for future opportunities. Where better than to start in South Africa where the current energy crisis makes the opportunities and potential ripe and ready.


Outlook & Regulatory Change
With there being significant issues with Eskom and government not being able to meet their electricity generation output levels, this leaves a massive hole to be filled by the private sector. Opportunities galore. In addition, the following regulatory changes have transpired which will further enhance the speed and ease of private investments and projects:

National Treasury is working on a sustainable solution to deal with Eskom’s debt in a manner that is equitable and fair to all stakeholders. This solution should be finalised shortly.

 
Eskom will use climate funding provided through the Just Energy Transition Partnership to invest in the grid and repurpose decommissioned power stations. The first solar and BESS projects (Hyosung) at Komati, Majuba, Lethabo and several other power stations will result in over 500 MW being added to the system.

Additional capacity will be made available in the short term by allowing existing IPPs to sell surplus power to Eskom. This will involve amending contracts with existing IPPs from previous bid windows to enable them to sell additional capacity.

 
The capacity procured through governmental projects Bid Window 6 has been doubled from the current allocation of 2,600 MW to 5,200 MW.

 
The release of further bid windows for renewable energy, gas and battery storage will be brought forward, and the amount of new capacity procured will be increased.

The upliftment of the cap on the licensing threshold allows for easier power supply with essentially no cap on the size of facility.

The government has identified significant potential for households and businesses to install rooftop solar PV and connect this power to the grid. This has benefits for users as well as for the country as a whole.

 
To speed up the rollout and reduce the cost of rooftop solar, Eskom will develop a feed-in tariff for small-scale embedded generators.

 
In addition, National Treasury will consider the expansion of tax incentives for residential and commercial installations.

Eskom has established an independent transmission company and is on track to separate its generation and distribution businesses by the end of 2022 to facilitate reform of the electricity sector.

Broader reforms to establish a competitive electricity market will be expedited through the finalisation of the Electricity Regulation Amendment Bill to enable private investment. These changes will allow multiple generators (both private and state-owned) to compete on an equal footing, while the grid remains public and managed by an independent transmission company.

All in all, the outlook is positive if you are forward thinking, have a little courage and belief that by producing power, you will in fact empower a nation.