Medupi: Cash-strapped Eskom will prove a stumbling block
Medupi: Cash-strapped Eskom will prove a stumbling block

It’s funny to think that less than six weeks ago, the National Treasury’s "number one" task was to resolve SA’s electricity supply crisis.

That was a different, pre-Covid-19 lifetime, and the pandemic has radically changed government spending priorities, if not forever, then for a long time to come.

Before Covid (BC), SA had made some promising moves towards reforming the energy sector. Eskom would be unbundled, another round of renewable power would be procured, red tape preventing self-generation of power would be cut and municipalities in good standing would be allowed to buy power directly from independent producers.

But the economic devastation wrought by the lockdown has prompted the Reserve Bank to forecast negative economic growth of at least 6.1% this year.

In a negative growth environment, with suppressed energy demand, even less money to go around than before and the rand on its knees, could SA’s energy plans be shelved?

Globally, renewable projects are already dropping off.

Riccardo Puliti, the World Bank’s global director for energy & extractive industries and regional director for infrastructure in Africa, says the economic slowdown, low oil prices, and the increasing shortage of required components will probably have an impact on the broader clean-energy transition — including the deployment of renewables.

In the US, the Solar Energy Industries Association is reporting supply-chain disruptions, delays to projects, and sales challenges, while Bloomberg New Energy Finance has cut its 2020 global solar demand outlook.

"This may be the first year that solar capacity additions decline since the 1980s," says Puliti.

Norwegian research company Rystad Energy forecasts that growth in newly commissioned solar and wind projects will now be wiped out for 2020 and cut by a further 10% next year as the US strengthens and currencies fall across the globe.

"We expect these movements in the foreign exchange market to cause companies to pause contracting key components, which are typically procured in US dollars," Rystad said in a statement. "Renewable projects in Australia, Brazil, Mexico and SA will be especially impacted, as projects in the procurement phase could face capital cost increases of up to 36% due to the rapid depreciation of local currencies in these countries."

In SA, the rand breached 19 to the dollar for the first time at the beginning of March and remains above 18 to the dollar currently.

Jennifer Layke, global director of the energy programme at World Resources Institute (WRI), a global research nonprofit organisation, says in some markets green-power project deployment has dropped as much as 30% this year.

But Tobias Bischof-Niemz, director of renewable energy company Enertrag SA and co-author of SA’s Energy Transition, sees the economic downturn as temporary.

Tobias Bischof-Niemz: An investment is not an expense if you invest in the right things. Picture: Russell Roberts
Tobias Bischof-Niemz: An investment is not an expense if you invest in the right things. Picture: Russell Roberts

He says governments around the world are likely to consider economic stimulus — such as investing in infrastructure — to kick-start their economies back into growth mode.

Puliti says stimulus packages and development funds should promote investments in sustainability and resilience, to help meet development and climate goals and to better prepare for future shocks.

In SA, this stimulus could take the form of building new power generation — something which might have been viewed as a luxury just five years back, but is not the case today, Bischof-Niemz says.

"[The cost of] building new wind farms and solar plants in many instances is lower than the pure cost of burning coal."

Furthermore, he says, an investment is not an expense if you invest in the right things.

"The very small space that the Treasury has to manoeuvre is now even smaller. It must use that to help those who lost their jobs in the past few weeks. It should not be to spend scarce resources on energy infrastructure that is not future-proof. That would be a luxury."

He says SA’s energy blueprint, the Integrated Resource Plan (IRP), will remain valid, though the demand projection may be temporarily out of step with a post-Covid-19 reality.

But he says the main reason the IRP needs SA to build new power stations is less about the demand projection and more about the 13GW of power produced by ageing coal-fired power stations that need to be replaced by 2030.

"We know from the long-term planning what we need. That won’t change, but if we build it today we can stimulate the economy in the short term at the same time," he says.

Cash-strapped Eskom will, however, prove a stumbling block. Already its inability to bear the responsibility of buying power from independent power producers (IPPs) has stalled the launch of a new round of projects, despite SA’s pressing energy crisis.

"Eskom’s financial problems are infecting the IPP payments," says Bischof-Niemz.

However, he says that could be instantly resolved if the responsibility for payment of IPPs is taken out of Eskom and transferred to a transmission system operator, as envisaged in the government’s plan to unbundle the utility.

The coming economic downturn provides even more reason to fast-track Eskom’s restructuring.

The government would also do well to quickly remove the regulatory hurdles preventing business from generating its own power.

According to Niveshen Govender, COO of the SA Photovoltaic Industry Association, any economic stimulus plan will require power to drive it, and self-generation can play a key role.

"Self-generation could potentially have zero cost to the government and quick build times allows for rapid access to energy," he says.

"Unlocking the market segment will lower demand and allow Eskom to better serve its key clients. And as an economy we can better reach many non-urban South Africans through small-scale systems or mini-grids to achieve universal electrification."

Even if the local economy is expected to contract, and suppresses power demand in the short term, Bischof-Niemz thinks the government should also not abandon any of its emergency power-procurement initiatives too soon, given that SA produces many commodities which are key for global industries.

"SA’s electricity demand might be driven more by what the world economy does, and less by what SA’s economy does." he cautions.

In a post-Covid-19 world, the WRI’s Layke says, green energy has a critical role to play in economic development and it remains the key to mitigating climate change.

To help revive projects, the government should encourage these investments through various incentives, Layke says.

Though incumbent industry has the ear of many major governments, now is the time for that to change as business leaders — like Richemont’s Johann Rupert — warn of a fundamental economic reset.

"We have to look at impact on humanity through our economic decision-making. I hope policymakers recognise investment in a business-as-usual approach doesn’t build for those attributes," says Layke.

"Government budgets are going to be cash-strapped and in most markets, the economics of renewables will come to the fore."