This article is adapted from a statement on Ramaphosa’s speech, arising out of a meeting held on the 27th of July 2022. The meeting’s participants included representatives from AIDC, Amcu, Assembly of the Unemployed, Giwusa, Naledi, Nehawu, Num, Nupsaw, Rural Women’s Assembly, ISAGRC, Saftu, Satawu and Tued.
IT IS UNDENIABLE LOAD SHEDDING IS a national crisis that requires decisive action. The recent stage 6 load shedding has put severe strain on the economy and further immiserated a country already experiencing a cost-of-living crisis. And it has finally stirred the state to commit to drastic action.
We agree with President Ramaphosa when he said in his Address to the nation on energy crisis that government must take bold measures to address loadshedding as expeditiously and efficiently as possible. However, the proposals aimed at addressing load-shedding that have been put forward by government and the private sector are unrealistic and likely to make the situation worse.
These proposals reflect the interests of the Independent Power Producers (IPPs) and their desire to secure subsidies. They also reflect the privatisation designs of the neoliberal institutions, primarily the World Bank, the IMF, and the European Commission. The subsidies give them guaranteed returns on investments and enable them to grow their businesses at the expense of Eskom.
The proposals are likely to result in an increase in the price of electricity. This will cause inflation in general goods Equally important, the proposals will impede South Africa’s transition to a low carbon energy system and expose the country to a state of energy dependency. South Africa has no wind industry and its solar industry is negligible. There is currently no means to produce lithium-ion batteries. We will further surrender energy decision-making to multinational companies that do produce these technologies. The solution to load shedding and the achievement of a just energy transition in the coming decades depends on a well-resourced national public utility.
Repair and maintain existing fleet
According to Eskom, 17,022MW of capacity is currently unavailable due to breakdowns. Clearly, repairing and maintaining the existing fleet of power stations should be the main strategy. In his statement, the president pledged to support Eskom in improving its efficiency, in expanding its maintenance budget, and in hiring people with the necessary skills to do the job. The need for these measures was clear that same day when electrical faults tripped five generating units at Kriel Power Station, removing 2,000MW from the system. The underperformance of Medupi and Kusile should also be addressed as a top priority. However, the statement by the president does not give details on how the problems confronting these power stations will be rectified.
We support this “fix Eskom” approach in the short term. This should constitute the first step in re-establishing Eskom as a world-class public utility, fully resourced, transparent and accountable to democratic institutions. A transformed Eskom can lead a transition to a low carbon energy future, one that is socially just and does not depend on decisions of private investors.
Eskom is currently a corporatised and commercialised entity, expected to operate on commercial logic despite being ostensibly state-owned. As long as this is the case, it will continue to run up against contradictions. Eskom is expected to facilitate the introduction of its own competition through investment in battery storage and transmission grid upgrade. These will allow for more for-profit renewables. But it is also expected to make a profit through electricity sales and at a time when its “market base” is rapidly shrinking due to the intractable crisis of mass unemployment, coupled with double-digit inflation in most basic commodities. The recent riots in Tembisa over the cost of electricity show that ordinary South Africans have gone beyond the limit of what they are prepared or able to pay.
The public has reacted with outrage over Eskom’s recent proposal for a price increase of almost 33%. Unfortunately, this is the only rational option open to a corporatised Eskom operating on full-cost recovery. There is no doubt that this will lead to a further decrease in the demand for electricity. Because of this, Eskom’s will receive far less than 33% in additional revenue. This will prompt it to raise its prices again, further lowering demand. This is a cycle known as the “death spiral”. It has been seen in countries the world over. Government’s interventions will accelerate the death spiral. For the next two decades or even longer, Eskom’s coal-fired generation will need to co-exist with power generated from non-coal sources.
No one seriously challenges that. At what point does Eskom’s “death spiral” hit bottom? Under the current policy, there is no bottom. If the procurement process known as Renewable Independent Power Producer Programme (REI4P) is expanded as planned, by 2030 Eskom’s market share and revenues will have shrunk further. This will make it even less economically viable. But it will still be expected to produce more than 60% of the country’s electricity while being subject to the same funding and operational requirements as a private for-profit company. This is a dead-end route that will lead to continued need for bailouts for Eskom and vastly worsened energy poverty for the majority.
Install needed capacity
The president said that fixing Eskom’s fleet will still leave an “energy gap” of several GWs that must be filled as soon as possible with new generation capacity, mostly through the REI4P. We see three major problems with this approach:
First, it is not clear how much new capacity is needed in order to address load-shedding. We accept that the transition to a low carbon energy system will require new capacity and that this capacity will be installed during the course of the next 2 or 3 decades. But the need for new capacity in the short term is unclear.
Second, installing (perhaps unneeded) capacity by way of the REI4P will incur costs for Eskom. Power purchase agreements (PPAs) lock in a price for 20 years. And transmission upgrades and increased battery storage capacity are needed to be able to handle the variable generation of renewables. This will give further impetus to the “death spiral”. Fixing Eskom in the short term in order to undermine it over the medium term makes no sense, especially when (according to the government’s own Integrated Resource Plan) Eskom will still be providing the majority of the country’s power for the next 20 years. Third, if new wind and solar capacity is needed to address load-shedding, then the REI4P program has proven to be both a cumbersome and expensive means of adding capacity. The IPPs are struggling to get their projects funded because of the rising costs of components and transport.
The recent report Resolving the Power Crisis by Meridian Economics is suggesting a 30% increase on the winning bid levels of the last round of contracting in Bid Window 5 (BW5). Even if fully funded and on schedule, these projects will not begin generating power until mid-2024 at the earliest. Proposals to beef up the capacity through procurement under Bid Window 6 (BW6) will not deliver power until 2026.
Direct Public Procurement the way to go
We propose an indefinite moratorium on BW6. We say no to any across-the-board increases to the IPPs to account for any additional costs they claim to have incurred since BW5. Expanding the REI4P will not address load shedding in a timely fashion. There is every reason to bring the REI4P program to an end. Globally, the growth in wind and solar power has been almost entirely dependent on public subsidies. In South Africa’s case, the subsidies take the form of PPAs with the IPPs, as well as a legal obligation for Eskom to purchase IPP generate wind and solar power even when the power is not needed. The “system costs” such as transmission upgrades and extensions are shouldered by Eskom; they will be “passed through” to consumers.
Business is fond of referring to the many billions of rands of investment that the REI4P has brought into South Africa. But the PPA model has had the same impact on investors as a honey pot has on bees. PPAs guarantee returns on investment to private companies and developers.
So in through the front door comes investment in building new capacity. But this is overshadowed by what goes out the back door – higher electricity costs for 15 years or longer. And on top of that, a good portion of IPPs’ revenues leave South Africa as profits to private investors overseas. Additional capacity should be procured directly on the basis of a cost-plus procurement model. That is a model in which a supplier is paid for expenses and given a fixed amount for profit. This should be the model for the short-term, to address load-shedding. It should also be the model for the longer term, to install low carbon capacity to gradually and efficiently replace the ageing coal fleet. Eskom can purchase and deploy technologies as needed. Under this simple model, Eskom will have no need to purchase electricity at above-market prices from IPPs. The private suppliers of the technologies are likely to be based in China, Europe or the US. They can mark up the price based on a reasonable return. The advantage of this approach is that key components or whole ready-to-operate systems will be owned by Eskom and will thus become public property.
Towards a global alternative to Green Structural Adjustment
In his July 25th statement, the president said the government will “use climate funding provided through the Just Energy Transition Partnership to invest in the grid and repurpose power stations. “The partnership, it is claimed, will “mobilise an initial commitment of $8.5 billion for the first phase of financing, through various mechanisms including grants, concessional loans and investments and risk sharing instruments, including to mobilise the private sector.” The Partnership is an example of green structural adjustment. In plain sight, the Partnership announced at COP26 in Glasgow last November proposed “an inclusive task force comprised of South Africa and international partners”. Their job was, among other things, to “create an enabling environment through policy reform on the electricity sector, such as unbundling and improved revenue collection.”
It dangles the possibility of “concessional” financing while endorsing the South African government’s effort to further privatise the energy system. This type of finance is deeply problematic, on two levels. First, the amount is tiny when measured against the levels of investment required. Second, the deal is contingent upon South Africa’s willingness to comply with a reform agenda intended to lead to the full-on privatisation of the sector.
As of now, there is no money on the table. Even Pravin Gordhan, the public enterprises’ minister, has expressed concerns that the finances for the deal may never materialise: “The developing world as a whole has to learn some lessons from our past 18 months of experience in access to Covid-19 vaccines. The reality is that you will get a few minor donations, but the rest of the stuff is going to cost you money.”
A direct public procurement approach is both affordable and possible. New capacity can be financed by utilising the annual surpluses of the Government Employment Pension Fund (GEPF). This must include investing in SA’s capacity to locally manufacture the infrastructure required for the development of a renewable energy industry aimed at providing electricity as a public good and decarbonising our economy.
Each year, the GEPF makes a surplus of between R40 billion and R50 billion. It can invest these surpluses in increasing Eskom’s energy capacity instead of continuing to re-invest in the Johannesburg Stock Exchange (JSE). As it stands, the financial sector in South Africa is valued at almost three-and-a-half times the size of the real economy. Investing in Eskom and the future of the country’s energy sovereignty would be a far better use of public resources. At the global level, the government should publicly announce its support for a public goods approach to the energy transition. This should be facilitated by state-to-state agreements in which, in the short term, countries of the Global North and also China accept payment for generation technologies, storage batteries, etc in rands. This would allow South Africa to begin to advance decarbonisation with government-issued currency. If the rich countries want to see South Africa transition away from coal, they can make this happen.
Building a public pathway
Government policy has continued on the same neoliberal path for more than 20 years. The results have been load shedding, corruption, job losses, and a growing subservience to the dictates of the Global North and the institutions under its control.
We are not simply calling for a halt to the neoliberal energy agenda; we are calling for the reforms that have wrecked South Africa’s power system to be reversed. The government should note the recent assessment of Riccardo Puliti, the World Bank’s Global Director for Energy and Extractive Industries: “The 1990s model alone will not be sufficient to deliver on global energy objectives…Key environmental and social objectives did not figure into the 1990s paradigm of power sector reform.” We wonder why the government persists with a policy that, according even to the World Bank, does not meet key social and environmental objectives, only adding to the intersecting crises facing South Africa today.
Sean Sweeney is from Trade Unions for Energy Democracy, and City University of New York (CUNY).
Dominic Brown and Jaco Oelofsen work for the Alternative Information and Development Centre (AIDC).