LUNGILE MASHELE: Financialisation of the energy sector comes at a cost

I’ve followed the National Energy Regulator of SA’s (Nersa’s) public hearings and submissions on trading and import and export licences with interest. I encourage every South African to pay attention; they will be pivotal in determining SA’s energy future and whether 90% of our population can afford electricity after 2024.

The unbundling of Eskom, independent power producers, traders, commercial and industrial customers, the Electricity Regulation Amendment Bill, regional imports and exports and the role of municipalities — all of these issues are coming to the fore in this application.

Of particular interest was a submission made by Penny Herbst. A force in the industry, Herbst’s verbal submission to the regulator was insightful, but it sounded many alarm bells. Based on her submission I want to focus on two critical issues. The first is the financialisation of the energy sector, and the second the true cost of the energy transition.

In her submission Herbst asked “how the regulator intends to proceed with licensing more and more intermediaries in a transforming electricity environment without interrogating the financial consequences, including the financialisation of the sector, where a largely public purpose good which has significant implications for socioeconomic outcomes [is] at play”.

Over the last decade we have seen the liberalisation and financialisation of the energy sector, driven by private sector interests, profits and bankers. This has culminated in a perfect storm where electricity tariffs are increasing beyond inflation, reflecting all the policy choices that supported private sector investment.

The cost of complex generation and transmission mechanisms, guarantees, double-digit returns and lender profits are finally laid bare for all to see, and consumers to pay for. The financial sector has led the energy revolution, not just in SA but globally, and the results are higher tariffs, complicated ownership structures, threats to energy security and increasing energy poverty.

Bankers offer financial, not engineering, solutions. When bankers acquire electrons, they deem them the same. Coal, nuclear, gas or solar megawatts are all the same to them, but the engineers know this is false. Bankers prefer electrons that are quick to connect, present minimal risk and have predictable cash flows. The technologies and funding solutions that favour lender cash waterfalls are therefore often punted at the expense of engineering sense.

Nersa has tried to address financialisation by making ancillary service recommendations to try to curb the bias; however, few have heeded the call. The irony is not lost on me that these are the same bankers who live in SA and experienced the worst of load-shedding. Then again, as Baron Rothschild famously said: “The time to buy is when there’s blood in the streets, even if the blood is your own.”

Herbst’s second point was that “there are hidden costs associated with the transition and this is not being communicated”. The energy transition was billed as affordable because it was based on “cheap renewables”, but this is untrue. The true cost of SA’s transition is just over R1-trillion. Billions must be spent on ancillary services, transmission and distribution upgrades, and new generation. This R1-trillion has a tariff attached to it, which those who cannot find alternatives will have to pay. The socioeconomic costs are the lost jobs, economic migration and closed businesses.

The energy industry is getting increasingly complex, and the scale and pace of the transition is unknown. Yet we carry the burden of unemployment and inequality alongside a shrinking revenue base and struggling municipalities. We have prioritised profits at the expense of socioeconomic outcomes and energy security.

Sadly, the reality is that as the market continues to liberalise Nersa will not be able to regulate it. Market forces will dictate prices, and the dogs of war will be unleashed on the unsuspecting masses because the market is freely accessible to profiteers and bankers, lawyers and consultants who are looking to add to their Maserati collections.

• Mashele, an energy economist, is a member of the board of the National Transmission Company of SA.