Big business’s energy conundrum
Industry in SA, hit hard by sizeable tariff increases, has warned of the danger that rising power prices pose to the country’s economy. But the big energy users remain tied to the national grid
It’s a simple fact that SA power utility Eskom is in its worst state ever — both financially and operationally. Its debt has ballooned, while its electricity sales continue to decline. It’s also facing severe coal supply shortages and its power plants appear to be falling apart.
Yet the mammoth state-owned company now wants a 15% annual increase for the next three years in the price it can charge customers for electricity. In 2018 it got a 4.5% hike in the power price.
Consumers and business alike are raising the alarm over the effect of higher power prices, though it is well understood that Eskom, run into the ground through corruption and mismanagement, desperately needs more income. The problem is that no matter how much money Eskom gets, it is clearly unsustainable in its current form. However, any restructuring has so far been crippled by politics. Undoubtedly, something has to give.
Business has responded to rising power prices by trying to reduce usage as much as possible. But it’s not nearly enough to offset the sizeable tariff increases.
For example, electricity comprised 9% of Sibanye-Stillwater’s operating costs at its gold mines in 2007. Today it accounts for 19%, even though the division has cut its power usage by as much as 3% every year since then.
Business has warned that further tariff hikes will come at an enormous cost to the economy.
So what is industry to do? Though there are countless reasons to move away from relying on Eskom, there are few projects of significance among SA’s largest power users that will enable them to cut the cord.
Shaun Nel, of the Energy Intensive User Group of Southern Africa (EIUG), says big business started looking at the potential of generating its own power in about 2009, after being hit by a double whammy of load-shedding and several large tariff increases of about 25%.
"From a security of supply perspective, the EIUG as an organisation recognised we needed to be less reliant on Eskom for power," he says. But he concedes no members have made a significant move away from the grid.
With the exception of Sasol, which generates a large portion of its own power needs, existing power generation projects are relatively small.
For example, Afarak’s Mogale Alloys has partnered with Swedish clean-tech company Ripasso Energy to turn toxic gas produced by its ferrochrome furnaces into electricity for the power-intensive operation.
The project will only supply 2.8MW — 3% of its energy needs — but there is potential to expand it to 10MW, Afarak says.
Embattled steel manufacturer ArcelorMittal SA invested R138m in a 10MW off-gas or waste-gas boiler in 2017, enabling it to now generate 10% of its total electricity requirement. The company says it continues to invest in the search for alternative energy sources, as "access to affordable electricity and securing viable alternative energy solutions are critical to ensuring the sustainability of ArcelorMittal SA’s operations".
Multinational mining company Anglo American generates up to 1MW through its solar photovoltaic (PV) project at its Coal SA operations. That’s enough to meet about 1.5% of its energy needs at Greenside colliery and Highveld hospital.
Motivated to reduce exposure to escalating power costs and scale down its carbon intensity, Anglo is also planning a much larger 60MW solar PV project at its Mogalakwena platinum mine. The project is at the "request for interest" stage.
Sibanye-Stillwater has done a feasibilty study for a 150MW solar PV project, to be built in 50MW stages, to supply power to its Kloof and Driefontein gold operations near Carletonville. Consuming about 600MW of power, Sibanye-Stillwater accounts for 2.5% of Eskom’s annual sales and is among the utility’s top five private customers.
However, the average power that will be produced by each 50MW of that installed capacity "is actually very small", says Sibanye-Stillwater business improvement manager Jevon Martin. It would amount to just 2%-3% of the company’s total energy consumption from Eskom.
Still, there are benefits. "You can put down a renewable energy project today and produce power that is cost competitive to Eskom — so there’s immediately a financial benefit," Martin says.
There are other gains: a 20-year project such as this shows commitment to the country, reduces the company’s carbon footprint and creates jobs. But renewable power projects such as these will have a limited effect on a company’s reliance on Eskom, Martin says. "If a company wanted to really go off the grid it would have to move to a base-load solution," he says. Base load is the minimum load experienced by an electric system over a given period of time, which must be supplied at all times.
It’s technically feasible. Some large mines in Chile are completely independent of the grid, Nel notes. But in SA there are no such operations.
Sibanye-Stillwater had considered the Waterberg Coal Project, which looked to produce power from discarded coal and had the potential to be a medium-to long-term sustainable power solution for the company. But these ambitions fizzled out after discussions with the Waterberg Coal group were terminated in 2016.
Years back, Anglo also looked to build a power station — Khanyisa — which could generate power for the company from its coal mine dumps and offset the power usage at its Rustenburg operations. But as the platinum business shrank and cash became tight, the economics of the project became less compelling. The project still went out on tender, but it is no longer Anglo’s baby; it exists as one of two coal independent power projects under a department of energy procurement programme.
A plan by Glencore to generate electricity at its Witbank coal operations, with an intention to offset power usage at Rustenburg smelters, was abandoned when the wheeling charges Eskom would impose to "send" the power through the grid were considered, Nel says.
Synfuels producer Sasol stands out from the crowd. With a capacity to generate 70% of its own electricity requirements in SA, it is the country’s second-largest power producer, after Eskom.
The company generates power at its Sasolburg and Secunda operations from gas, as well as from steam turbine generators integrated with its proprietary process. "That said, Sasol requires a strong connection to the grid for electrical stability reasons," the company says. "It is not technically feasible, or an ambition, to run the Sasol facilities on a power island."
Whether coal or gas, building your own base load supply comes with risk, and it would likely be more costly than current Eskom power, Martin says. But potentially you could do it if you foresaw the Eskom tariff would escalate enough to support such a project.
However, if a large power user could get off the grid, it would pose significant risk to Eskom, and effectively hike power prices for ordinary consumers.
That’s where the regulator comes in.
Anyone who wants to generate more than 1MW of power themselves requires a generation licence from the National Energy Regulator of SA. Anyone generating less than 1MW requires a registration certificate.
To put it in perspective: 1MW is equivalent to 3,200 solar panels, says Sola Future Energy CEO Dom Wills. "A typical shopping centre’s load can vary between 3MW and 10MW, an industrial user’s is similar and some smelters can go beyond that."
Any deviation from the Integrated Resource Plan (IRP) — SA’s electricity supply plan — such as licence applications above 1MW, requires ministerial approval.
An updated draft of the IRP proposes that this requirement be axed for projects from 1MW-10MW.
Proponents of embedded power generation are concerned about a proposed annual cap of 200MW on generation licences in the draft IRP, which means that "once [the authorities] have given out generation licences for projects between 1MW and 10MW that add up to a total of 200MW for a year, no more generation licences will be awarded", says Wills. There is an expectation this should be revised upward in the final policy document following public feedback, he says.
Even if big business were to see a chance to get off the grid, the solvency of Eskom is a major consideration. SA companies may even have an obligation to not pursue something that would put the utility at risk of a default, or at least until SA’s energy transition strategy is mapped out, Martin says.
The EIUG’s position is this: Eskom is not sustainable in its current form and needs to be restructured.
Without that, there are only two options: a default on its debt, or yet another bailout from the government. Both have enormously negative implications for the economy.
The turnaround at the state-owned entity, started by President Cyril Ramaphosa a year ago, is proving too slow. And it looks as if industry will have no choice but to accept whatever tariff increases are implemented. But it will come at a price.
At Sibanye-Stillwater, the proposed tariff increase, along with the regulatory clearing account recoveries of 4.5%, could put some shafts out of business.
"It would make them uneconomical, so we have to look internally for cost or operational efficiencies. In some instances you physically can’t do it. Potentially it could lead to job losses," Martin says.
"In the end, the fates of business and Eskom are tied together. You can’t get away from that."