Johannesburg, 21 August 2020
Roger Baxter, CEO of the Minerals Council of South Africa, spoke on 21 August 2020 at a webinar organised by Nedbank, EE Business Intelligence (EEBI) and the Joburg Centre of Software Engineering at Wits University (JCSE) on “The prospects and grid impacts of self-generation by customers in South Africa”.
He highlights the damage inflicted on South Africa’s economy by the lack of implementation of plans drawn up 22 years ago to separate the generation, transmission and distribution functions of Eskom.
Baxter also warns of the consequences of not immediately creating new, cost-effective capacity to replace Eskom’s aging power stations and outlines suggestions from the mining sector on addressing power shortages, grid stability and the soaring cost of electricity – through self-generation.
The speech by Roger Baxter follows here:
Thank you for this opportunity to discuss issues relating to the prospects and grid impacts of self-generation by customers in South Africa.
I think South Africa is at a particular juncture in its further economic trajectory, where, certainly, some key decisions need to be made on how we really get this economy back on track from a growth perspective.
In 1998, I was one of the four business negotiators on the Policy White Paper which was adopted by government at that particular time. This was a policy paper that basically put in place a very pragmatic view, based on good global evidence, of what needed to happen in terms of separating generation, transmission and distribution, and allowing competition to take place on the generation side of the business, with some competition also on the distribution side through the six regional electricity distributors (REDs) that were being proposed.
Unfortunately, government did not implement the Energy Policy White Paper, even though it has since been encapsulated in the Eskom Restructuring Roadmap that came out last year. But I think the critical point to make here is that South Africa retains an outdated, vertically integrated electricity supply model, whereas most countries around the world have moved to disaggregated networks, microgrids, distributed generation, smart grids and embedded generation.
Given the significant changes that have taken place at the global level, I think that one of the reasons why we sit in the crisis that we face at the moment is because of the lack of progress on implementing what was agreed upon in the Government Energy Policy White Paper. Now, 22 years later, we still have not yet got an independent system and market operator in the form of a national transmission company, as much as that is now work in progress in terms of Eskom’s own internal dynamics. But that will probably be touched on by the next presenter, Mr Segomoco Scheppers, CEO of Eskom Transmission.
The point that I want to make is that we need to understand how this has massively impacted on South Africa’s ability to grow as an economy. If we stay in the existing vertically integrated electricity supply model, will we have much of an economy left in the next ten years, if we do not put in place some real changes, and bring in significant competition on the generation side of the business, with the state still owning the national transmission company?
So, let us look at what has happened to our economy in the last 20 years.
In the period from 2001 to 2008, South Africa’s economy grew at 4,5% per year, and total factor productivity growth was half of the growth that took place. A lot of the rest of the growth was contributed by fixed capital formation which was obviously in the form of investments, and that investment follows productivity growth.
In the last three years – 2018, 2019 and 2020 – total factor productivity has actually shrunk, and our economy has been growing at less than 1% per annum. In fact, if you look at the last decade, South Africa’s economy only grew at 1,5% per year, versus an average growth rate of 4% for other emerging economies.
After 2009, and pretty much after the significant load shedding that had already started taking place in 2008 (when you will remember the tough period on 26 January 2008 when Eskom effectively pulled the plug on the mining sector at that time), South Africa decoupled from other emerging economies. We have grown at a much slower pace, and there are a number of reasons for this.
A significant contributing factor in the fall-off in total factor productivity over the course of the last three years has been the increase in costs and lack of availability of electricity. But it is not just electricity, it is also the increased costs and inadequate growth and inefficiencies in rail, port and other facilities.
So I am not just talking about the mining sector but the whole economy. If you look at some of these network industries that the State owns, they are the very network industries that have significantly constrained the abilities of South Africa to grow from a productivity point of view because of a lack of competition in those specific markets.
Now if you think about that circumstance, in December last year we were sitting with an energy availability factor of just above 50%. The target in the IRP talks about a 75% energy availability factor, and at a global level the general focus on energy availability factors sits at about 85%, which was where Eskom was prior to 2007/2008 load shedding crisis that started the declining process.
One can argue what some of the reasons were behind that, but I think it is important for us just to put in context the impact of that lack of availability of electrons and lack of supply. If you just look at last year for mining specifically, we estimate that 3% of production was lost because of load shedding, and that is just for mining. The impact on the economy is obviously much more significant.
Now, if we look at the next ten years, I think it is important to understand that there is going to be another 10 to 11 GW of older generation coal-fired power plant taken of the grid. If you look further at this, by 2030 the IRP talks about 5 GW of additional storage capability, it talks about 8,3 GW of additional PV capacity, and another 18 GW of wind.
But this is all pushed out – most of this in 2023, 2024 and beyond. So, South Africa has a major short-term crisis, and this is simply because of the Eskom energy availability factor being so low, which is a function of many different things.
So, we have been engaging extensively with Eskom, and in particular with Andre de Ruyter and his senior executive team, and obviously we are working closely on how we can help improve that EAF. But it is a process. I think they still have a lot of challenges that they have got to deal with.
Our view is that in the short term and medium term, given the fact that we are going to see such a significant phase-out of the older generation power stations, and given the fact that we are going need to bring on a lot more capacity, our perspective is that this capacity needs to come on pretty quickly.
But the capacity also needs to come on in a way which also does not complicate the pricing arrangements. Let’s face the reality – for many of our large-scale, energy-intensive businesses, there has been a 523% increase in electricity price in the last decade, excluding the recent court orders in favour if Eskom in respect of the regulatory clearing account, which will probably push up the electricity price another 10%.
In our view, this is, in its own right, creating a death spiral for Eskom, because what it does is it is just making electricity more and more expensive for Eskom's customers. There is a smaller and smaller pool of customers that can actually afford the electricity, and we have seen that a number of smelters, refineries, alloys businesses and others have had to to shut their doors and go out of business because prices have got beyond the stage where these companies can remain competitive.
Large industrial electricity users also subsidise other users to the tune of about R13-billion on an annual basis, and these are all complicating factors in the equation.
So, what are we targeting from the mining industry side?
Well, at no stage are we saying that we want to shift away from Eskom. We make the point on a regular basis that Eskom and the mining, smelting and refining businesses are joined at the hip. In fact, we were pretty much the reason why Eskom was started in the first place, and we remain a significant customer, with the mining, smelting and refining businesses probably consuming about 30% of Eskom’s output.
What we as industry need to do, is to bring on additional capacity which will supplement electricity supply into the grid. There are many different and very important markers that we need to draw in the sand. One of them is obviously around the greening of the economy.
Clearly the IRP talks about the extra capacity coming on stream. This is not baseload capacity. A lot of the extra capacity that will come on stream by 2030, and in the years to 2050, will obviously be more renewables focused. This does not provide the same level of baseload capacity, but it is still important in the equation.
The reduction of carbon intensity in the economy began in 1998 when we started seeing a fall-off in the carbon intensity per unit of GDP created, which has a lot to do with the significant growth in the services side of our economy. But there are also some incredible useful opportunities now and going forward around the hydrogen economy and the hydrogen roadmap that will be developed over the course of the next period, and the links to the future businesses that we can also create.
In the mining space, we have got companies that are looking at developing PV facilities to create green hydrogen. That hydrogen will be used in powering fuel cell driven, electric motor driven, heavy mining vehicles underground. Obviously the emissions that come out of that are much lower, and the energy efficiency is much higher. South Africa actually has an incredible opportunity to capture some serious intellectual property in some of these types of technologies, where we could play a key role in developing appropriate solutions.
So, on the mining side, we have about 2,3 GW of additional self-generation capacity that we have been thinking about. We have been in a very intensive discussion process with Minister Mantashe. He has renamed me Frank, I call him Candid, and that is simply because we put the facts on the table, and we don’t beat around the bush.
We have had a really good constructive discussion on this issue, and I think we have agreed to the development of a one-stop shop facility on all these projects related to self-generation that we want to bring on board. And that one-stop shop is facilitated through DG Jacob Mbele. The Minister’s blanket exemption for approval from non-compliance with respect to the IRP for self-generation projects is all very good.
So what we have done is that we have been a lot more practical, and we have said, Minister, what we are going to do is that we are going to come to you and your team with specific projects where we see there are challenges, because the Nersa licensing component tends to happen right at the end of the process.
So, to quickly paint or sketch a few of the critical complexities:
We have got challenges related to the complex regulatory approval process in the build-up to the Nersa process. On the environmental side, the environmental permitting, water-use licenses, EIAs, even approvals for putting in place a diesel tank on a solar PV site by the local municipality, become issues that need to be dealt with.
So, environmental, permit, change in land-use applications and grid-tie arrangements are all big issues. There obviously has to be a grid-tie agreement with Eskom if you need to wheel power, with all the costs related to that. In our view, it needs to be a cost competitive arrangement, but what we have found is that this is an area where we think that government also needs to get involved in the conversation between ourselves and Eskom on the grid-tie arrangements.
I think that all this will become a lot easier as Eskom goes through its own internal restructuring process, particularly on the transmission side, which I am sure our next presenter, Mr Scheppers of Eskom, is going to give us a bit of a perspective on.
Then we have obviously got the Nersa generating license issues. None of our projects are going to be less than 1 MW. So it will be a regulatory generation license, and it is not going to be simply a registration process.
We do have some challenges, and I think Mr Gumede of Nersa did raise the point where, in cases of some of the older generation mines, we might develop a long-term PV project with a supplier where we conclude a 20-year off-take agreement. But the mine may close in ten years, and that has an impact in terms of stranded capacity after that. This is something we need to think about very carefully as a country. But again, I think these are things that can be overcome.
So, from the Minerals Council side, our focus is very much on how do we practically get ourselves out of the crisis that we’re in. We think that self-generation for own use is a critical component to that equation. We know that only two of our members have so far made license applications to Nersa, as far as we are aware.
We are working in a close team. We are engaging with our Eskom colleagues. We are engaging with the Minister. Obviously, we are trying to unblock these things as we go forward because, ultimately, having this extra capacity coming on is going to be critical to enabling mining and the economy to recover from the COVID-19 pandemic.
The mining industry in South Africa, represented by the Minerals Council of South Africa, want to be part of the solution, and we think we certainly can be, and so, with these few words, I hope this contribution helps.