Who Will Pay for South Africa's New Electricity Plan?

By Saliem Fakir · 5 Apr 2011

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Picture: Pibmak

Two weeks ago Cabinet approved the new 20-year electricity plan also called the Integrated Resource Plan (IRP 2010-2030). Without getting into too much detail about the new plan, simply put - coal is down, while nuclear and renewables are up.

The IRP, like all plans, is changeable subject to the vagaries of our political economy and the availability of public finances to pay for the new fleet of power plants envisaged by the plan.

The unsaid, though, is who’s going to pay and how for the new power plants?

The IRP envisages a price path over the next 10 years that includes the new energy mix with old power plants to be around R1.12 cents per kilowatt hour (kWh) in the worst-case scenario, and perhaps 98 cents per kWh in the best-case scenario. The current generation costs from coal-fired power plants is between 40-45 cents per kWh.

As the authors of the IRP note, there is considerable uncertainty about the future cost of electricity generation. We will only know the true cost once we get on with the exercise of building new plants.

Coal-fired power plants will cost far more. Eskom’s new coal-fired power plant Medupi, which has seen unexpected cost overruns of about 30%, has already reached the ballpark figure of R1 per kWh.

Future costs for coal are also uncertain. They are likely to go up rather than down.

Moreover, if we go the nuclear route, we can expect more trouble.

Nuclear plants are notorious for cost over-runs. Estimates for South African nuclear energy in earlier versions of the IRP had to be adjusted. The adjustments were marked upwards by 40% even though nuclear is said to be cheaper than renewables (this is still to be seen). The Japanese nuclear disaster also highlights the need for more regulatory oversight and this will also increase costs for nuclear power.

Looking back at the historical development of electricity in South Africa, for a long time we doled out cheap electricity to big mining corporations and heavy industry before we handed out free basic electricity (FBE) to the poor.

South Africa’s electricity needs pretty much evolved around the needs of mining and large industry before the needs of the general populace were considered. They always, as they do today, owned the largest share of the supply.

Historically also, the vast majority of the population who lived under apartheid legislation were underserviced. Surplus electricity was simply flogged onto the market and big iron, steel and aluminium smelters found South Africa an attractive place to set up their plants.

Contracts with large users still sit secure under the cover of ‘commercial secrecy’. Cheap electricity for big industry amounts to a hidden subsidy and will have to come to end.

About 40% of available electricity is consumed by what is referred to as energy intensive users (mining and industry) and 17% by residential users.

Such policy generosity (call it state ‘philanthropy’) has come to haunt us in more than one way.

Little of the true costs were ever recovered from the largest users. As these old contracts were forgotten, the burden of costs for future power plants was going to be left for others to solve.

In the meantime, the new post-apartheid state needed to increase access to the underserviced. Despite progress with electrification after 1994, about 2.5 million rural and urban households still don’t have electricity.

Most of the poor that have access to electricity primarily rely on FBE provisions by the state and there have been increasing numbers whose electricity has been cut off because they can’t afford to pay the costs beyond the FBE allocation.

Cost burdens mean outstanding claimants to basic electricity provisions will either have no access or simply, access will be delayed.

Cheap electricity supply nonetheless has also encouraged bad behaviour by industry, commerce and richer households in general. Electricity usage was and continues to be wasteful to the extent that South Africa performs very poorly when it comes to every unit of electricity used, per GDP output.

Electricity price increases should have been consistent and incremental over the last 30 years or so. The current price hikes are an attempt to play catch-up given the fact that we didn’t increase prices, as we should have. The dramatic increases needed are not politically palatable. As a result, the twenty-year plan now carries the burden of past excesses and also risks being buried by them.

Widening access to electricity for the broader population means that the share of electricity and costs has to be spread more extensively. But we can’t do this so easily because of the affordability factor.

Since we can’t spread the costs with a great deal of fairness, it means that the state can’t generate sufficient revenues from the electricity tariff to pay for all the new power that is needed and projected in the new IRP.

The challenges for the state are by no means simple. Electricity supply is vital for economic development. Power shortages delay investments in new projects. Power disruptions also affect economic output and threaten jobs. The knock-on effects on the whole economy, due to poor power planning and disruptions, are significant.

However, poor planning and co-ordination in the electricity sector continues in South Africa.

Some intermediate options are available to ease the burden, but won’t solve the problem entirely.

Firstly, we should avoid building any new infrastructure by increasing our saving of electricity. In other words, using less electricity will help us reduce overall demand and the need for new power stations. We need only build fewer power stations than called for by the IRP.

Secondly, it may be necessary, for the next five years, to increase FBE for the poor from the current 50 kWh to 100 kWh to allow more poor households to be kept within the net of access.

Thirdly, electricity rations may have to be the norm in the next five years or so, particularly for heavy users. Their unfair gains from state subsidised electricity are no longer tenable.

Fourthly, those who cannot reduce their overall demand should either pay a special levy or be encouraged to build their own plants (some mining companies are already considering this). The special levy could be used to fund new public power stations.

Fifthly, the current input of renewables into the electricity grid is well below 1%, thus, presenting are four good reasons to increase the use of renewable energy in South Africa. 1) Cheaper competitive technologies are close to future coal-powered electricity prices. 2) Renewables can be deployed very quickly (much faster than coal and nuclear). 3) Cheap loans available from international finance institutions are increasingly shifting away from coal to the financing of renewables. 4) Unlike coal-powered stations, there are no future fuel costs for renewables, which eliminates price uncertainty.

Finally, low cost housing infrastructure will see sustained growth for a while because of the national housing backlog. These houses should be designed and fitted with ways to save both energy and increase access to alternatives. While they may cost more now, in the long-term, they avoid the need to increase the grant amount to the poor and will stimulate new economic activity.

These links between poverty reduction, housing and access to energy can only be made if we have better strategic planning and co-ordination at the state level.

The IRP needs to be supported by an electricity pricing strategy that keeps access affordable, but also allows true costs to be apportioned to the biggest users -- they are not the poor.

Fakir is an independent writer based in Cape Town.

Read more articles by Saliem Fakir.

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