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Junk Status. How this affects SOEs

It was a late night firing. But its results were immediately obvious and a sign that international markets seldom if ever sleep as the dismissal of South African Finance Minister Pravin Gordhan and his Deputy Mcebisi Jonas showed on the night of Thursday, 30 March. Read More

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The Energy Conundrum in South Africa

The Energy Conundrum in South Africa

Our very existence depends on the sun, water and earth. These vital elements are often taken for granted and as a result we spend very little time and energy on finding out how best to sustain, conserve and respect these life-sustaining elements. It is therefore not surprising that humans continue to ignore the numerous warning signs indicating that we are making a huge contribution to the destruction of these vital naturally created life- sustaining elements. We are on course in destroying our planet. Only a global combined effort will save the earth.

In our previous edition we featured an article on Global Warming. Reading the various scientific reports and analysis it is clear that the earth is experiencing significant climate changes. It is an undeniable fact that the earth is warming as a result of us releasing too much greenhouse gases into the atmosphere. Scientists and experts advise that we have to find ways of arresting the global warming phenomenon without much delay. Failing which we will have to endure severe climatic changes that we may be ill prepared for. Every country on the planet has thus far experienced massive shifts in climatic patterns. A new direction is needed to provide the earth’s population with the required energy and still save the planet.

The Energy Situation in South Africa

ESKOM is the SOE that has the responsibility to ensure that the energy needs of South Africa are met. ESKOM generates about 95% of South Africa’s electricity and approximately 45% of Africa’s electricity. ESKOM is therefore an important if not a vital SOE in this sector. ESKOM is an entity overseen by the department of energy.  In recent years ESKOM has been embroiled in controversy. We all experienced load shedding, increases in electricity tariffs, the report by the Public Protector involving the “state capture” of ESKOM by the Gupta family, the alleged tender rigging of coal supplies to ESKOM, the sudden resignation of the CEO, Brian Molefe, from ESKOM amid the “state capture” scandal and most recently the reluctance of ESKOM to sign the agreed contracts with the Independent Power Producers (IPP).

In view of our energy structures the department of energy and ESKOM play an important role in our efforts and campaigns to save our planet. Our scientists and researches have all advised the government of the need to reduce fossil fuel usage and to phase in cost effective renewable energy. Numerous reports have been published that clearly proves that South Africa is blessed with an abundance of solar and wind energy that can be harnessed in a cost efficient way to replace fossil fuels and in the process contribute to the reduction of greenhouse gasses. Throughout the world renewable energy research and supply has topped the agenda in an effort to replace fossil fuels with renewable energy. While almost all countries on the planet have recognized the need for the urgent phasing out of fossil fuels, South Africa, despite its abundant resources of renewable energy has been dragging its feet in its endeavours to replace fossil fuels with renewable energy. In fact given our enormous natural energy resources South Africa should be in the forefront in the drive to produce a long -term plan to replace fossil fuel energy with renewable energy. What we are now experiencing is that countries that have much less natural renewable energy resources such as Germany, Denmark, Norway (and many European countries) are leading the way in phasing out fossil fuels and research and development in renewable energy. Even now ESKOM is reluctant to enhance the volume of renewable energy into the energy mix. Speculation is that the government is desirous of steering our energy needs to nuclear power and limiting the purchase of renewable energy. It appears as though ESKOM and the government are in conflict on how the country should proceed with establishing a long- term plan to replace/integrate fossil fuel with renewable energy. In November 2016 the Minister of Energy released the draft new Integrated Energy Plan (IEP) and on 22 November 2016 released the Integrated Resource Plan (IRP). The IEP seeks to address the energy landscape in general, while the IRP focuses specifically on the production of electricity. Both documents are projections and forecasts up to 2050. It was envisaged that the process of public consultation would take place during December 2016 and January 2017, with final adjustments in March and promulgation thereafter.  The draft plan envisages a new build programme of energy generating capacity between 2021 and 2050 in the following manner:

  1. Solar PV, capacity of 17 600 (MW) representing 13.5%
  2. Wind, capacity of 37 400 (MW) representing 29%
  3. Nuclear (will only start generating power in 2037), capacity 20 385 (MW), representing 16%
  4. Open cycle gas turbine, capacity 13 332 (MW), representing 10%
  5. Combined gas turbine, capacity 21 960, representing 17%
  6. Coal, capacity 15 000 (MW),
    representing 12%
  7. Hydro-electric power from the
    Congo River, capacity 2500 (MW), representing 2%
  8. With this drat plan South Africa will be generating 128 177 MW by 2050. The present capacity is 51 000 MW.

 

After the announcements and publication
of the IEP and IRP a huge outcry emerged from stakeholders, the main complaint
being the haste in which the minister
seeks to conclude the public participation process. Most commentators were of the view that the government and ESKOM
were rushing the process in order to proceed with the procurement of nuclear power. As a result of this outcry the minister has extended the deadline for public comment to 31 March 2017.

Criticisms of the plan in respect
of renewables

The CSIR pointed out that in the draft updated IRP, limits had been placed on the annual capacity to build wind and solar PV and that these limits are not technically or economically justifiable. Such constraints had not been placed in the draft updated IRP on any other power technology. In addition the CSIR pointed out that the cost assumptions for solar PV and wind are far too high, representing an excess of 50% and 30%, respectively, above the latest South African tariffs in those sectors. These current tariffs reflect a cost for solar PV and wind of R0.62/kWh, whereas by comparison, the cost assumption in the draft updated IRP for new nuclear power is R0.97/kWh

If no constraints were placed on new build capacity for solar PV and wind and their costs in the model are reduced to reflect actual current market conditions, the CSIR model shows that there is no place for nuclear power plant construction up to 2050. The forecast electricity production in 2050 would have the following composition in an unconstrained model: 18% solar PV, 52% wind, 16% gas, 3% hydro, 12% coal and a negligible peaking requirement. The CSIR model shows that by 2050, its optimized scenario would be R90 billion (in 2016 Rand) per annum cheaper than the draft IRP base case of R580 billion that includes the nuclear component.

Demand for wind and solar parts and skills have picked up dramatically in 2011 when the Department of Energy began a process of commissioning 92 concentrated solar power, PV, biomass, landfill, wind and small hydro plants to be built and operated by private energy firms under the REIPPP programme. Half of these plants have been built and are operational, however the other 26 plants have been on hold for some 20 months now as ESKOM has delayed signing the contracts that will set the price for how much the state will pay for the power that these privately owned plants will generate over the next two decades. The estimated value of investment in these plants is R50 billion. ESKOM has come under fire from all quarters of the energy sector to sign these contracts as delays are causing serious damage to many companies as well as the country as a whole.

Ending the conundrum

It is clear that a number of major issues have to be resolved between the conflicts in the apparent policy of the Department of Energy, ESKOM’s declared preferences and the findings of independent institutions.

The process of ending the conundrum has commenced with the Minister of Finance and the President indicating that ESKOM will sign the contracts of those companies commissioned to provide renewable energy
to the grid.

In any final IRP, it is assumed that the Department of Energy will have to set out what the lowest cost option is and any deviation will require substantial reasons for deviation. In addition, some of the protagonists seem to forget that the current debate is aimed at determining long term policy and that it serves no purpose in limiting any specific technology because of short term difficulties that are experienced at present in integrating into the grid.

The desired process going forward would be that the final long term energy plan should represent a rational and defensible outcome, failing which litigation is inevitable, thus thwarting the development of a coherent energy policy and jamming electricity capacity for years to come.

 

Sources:   Own Politicsweb.
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2017 Budget Speech

IT was a stirring Budget speech, one befitting a general giving his troops an inspirational speech before a major battle, and one that drew Finance Minister Pravin Gordhan a standing ovation at a joint sitting of Parliament.

He deserved the accolades because he was honest and did not hold back the truth: growth in South Africa is slowing down.

Despite this harsh reality, the government still has a constitutional requirement to meet.

This said Gordhan was: “All who live in our country should have access to housing, medical care, social security, water and education. There should be a progressive realization of access to tertiary education and other elements in a comprehensive set of social entitlements. Wealth and economic opportunities must be equitably shared.”

For these demands to be met and for a win-win environment to be created, South Africa needs an economy that is flourishing, not one that is battling. Everyone wins when the economy
is blooming: profits are up and Government collects more taxes. But there are many losers when hard times impact the economy.

As Gordhan said: “These commitments impose obligations on government – and have implications for the business sector and all stakeholders. We have a shared responsibility to address the social and economic challenges before us.”

His overview of South Africa included pointers that:

  • Income growth has been uneven – the bottom 20% have benefited from social grants and better access to services, the top 20% have benefited from the rising demand for skills and pay increases. Those in the middle have been left behind;
  • Wealth remained highly concentrated – 95% of wealth was in the hands of 10% of the population;
  • At least 35% of the labour force were unemployed or had given up hope of finding work;
  • More than half of all children in Grade 5 could not read adequately in any language;
  • More than 50% of all school-leavers each year entered the labour market without a senior certificate pass. 75% of these will still be unemployed five years later;
  • Towns and cities remained divided and poverty was concentrated in townships and rural areas; and
  • Growth in South Africa has been too slow. A mere 1% a year in real per capita terms over the past 25 years.

 

“These are our realities. They mirror the stresses of poverty and vulnerability in many developing countries, and the inequality between rich and poor throughout the world,” said Gordhan.

The Budget, according to Gordhan, like the initiatives of national, provincial and local government, was a critical lever of change and also to unite South Africans.

However, because of the economy, South Africa was again at the crossroads. “Tough choices have to be made to achieve the development outcomes we seek.”

Not only was economic growth slow, but unemployment was far too high and many businesses and families were under stress.

“We face an uncertain and complex global environment. At the same time we face immense transformation challenges – we must overcome the inequalities and divisions of our society. All South Africans must share in a more prosperous future,” Gordhan believes.

The Government, he said, did have a plan for a more inclusive and shared economy. “Its implementation requires greater urgency and effective collaboration among all
social stakeholders.”

Among the key features of the Budget
he presented was redistribution in
support of education, health services and municipal functions in rural areas, which remained the central thrust of Government spending programmes.

“Our state-owned companies and finance institutions play a substantial role in infrastructure investment and financing development. Their borrowing requirements are taken into account in the overall
fiscal framework.”

There was a larger purpose a moral vision and intent behind the Government’s plans and programmes. “We need to build a new national consensus and a new commitment to deliver, focused on the triple challenges of poverty, unemployment and inequality. President Zuma articulated this intent in the State of the Nation Address, rightly emphasizing the radical nature of the socio- economic transformation we need.

“Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted
by patronage.”

Notwithstanding the economy, over the medium term, expenditure on public services would continue to grow moderately above inflation. “Though the fiscal envelope is constrained, billions of rands have been shifted to meet new needs. A substantial additional allocation to higher education is again proposed, adding R5 billion to the R32 billion previously announced. After debt service and post-school education and training, the fastest-growing spending categories are health, social development, and community and economic infrastructure.”

The Government, Gordhan, stressed would continue to safeguard expenditure that protected poor households. “But the medium term expenditure limits are tight. Across all three spheres of government, and in state-owned companies and public entities, those responsible for deciding how money is spent have to do so with scrupulous rigour and care. It is only right that if households and firms face tough choices in balancing their income and expenses, the same disciplines must be applied in public expenditure.”

He continued: “Our state-owned companies and finance institutions play a substantial role in infrastructure investment and financing development. Their borrowing requirements are taken into account in the overall fiscal framework.”

Gordhan called for accountability to ensure public funds were used for their intended purposes. In Mahatma Gandhi’s phrase: “Democracy is not a state in which people act like sheep.”

South Africans, said Gordhan, were
not like sheep. The new reality is that state-owned companies will find themselves under more intense scrutiny. The public will not take too kindly to paying higher taxes while those who are supposed to serve them live
it up.

The disclosure in February and early March that the acting CEO of Prasa, Collins Letsoalo, had demanded and received a 350% increase and the speed with which he was turfed out is an indication the Government is taking its austerity message to civil servants.

But one swallow doesn’t necessarily mean summer’s here. The tax-payer needs to see more of this if he/she will is to become less cynical. State-owned companies will have to come down to earth and be part of the national belt-tightening effort.

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GLOBAL CLIMATE CHANGE AND THE IMPACT ON SOUTH AFRICA

Overview

Global climate change is a natural and expected phenomenon. The earth has been subjected to climate change throughout history for centuries. In the last 650 000 years there has been seven cycles of glacial advance and retreat, with the abrupt end of the last ice age about 7000 years ago marking the beginning of the modern climate era and of human civilization. Most of these climate changes are attributed to very small variations in the earth’s orbit that change the amount of solar energy our planet receives. Read More