BLSA CEO’s letter 23 March

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Last week’s announcement of preferred bidders in the independent power producer’s emergency procurement round is a step forward for energy security, as was the request for proposals that starts off round five of the renewable energy procurement programme.

There are features of the emergency procurement that leave something to be desired – particularly the heavy reliance on fully imported gas-burning power ships – but the urgency with which we must deal with our power crisis was made abundantly clear again by the load-shedding we are again enduring. While it will still take until August next year for the first suppliers to be up and running, at least the clock has now started.
But, as is so often the case, with each step forward, we take one step back. At the same time as the progress announced on IPP rounds, minerals and energy resources minister Gwede Mantashe oddly declared himself opposed to companies generating their own electricity above 10MW without need for a licence. This is compared to the 50MW limit proposed by various parties from the CEO of Eskom to specialist energy economists.

Research conducted by EE Business Intelligence found that companies including mines, mineral processors, factories and farms would create their own generation adding up to 5,000MW if the licence threshold was raised. This would trigger many billions of investment by companies to improve their own energy reliability. They could also supply excess generation into the national grid, improving overall energy security.

The question of own generation is often conflated with supplying power into the national grid – but they are separate. If a company wants to create a 50MW generator for its own use, why on earth should it be frustrated in doing so? It is not only the investment triggered by creating the capacity itself, but the downstream benefits to business of more reliable energy supply thereafter that triggers wider capacity expansion and efficiencies.

Energy generation

It is hard to understand what possible reasons the minister may have in mind to resist the raising of the cap beyond 10MW. I can only guess that there is some ideological resistance to private investment in energy generation in general, that plays into an artificially low constraint imposed on companies. Of course, businesses can apply to the National Electricity Regulator of SA to construct larger generating facilities, but that is a cumbersome and time-consuming process with no certain outcome that turns off many.

Some in government continue to think that Eskom is the beginning and end of solving the energy crisis in this country, even when Eskom itself has realised it cannot be. I would have more sympathy for the minister’s view if we lived in a country with a highly effective state-owned generator that was able to meet demand.

But we have nothing like that. We must be honest – government does not have the resources or capabilities to solve the energy crisis alone. It can only be done by freeing up the set of solutions for the private sector to be able to invest capital and skills to resolve the crisis. The insistence on state-led generation is going to make the recovery much harder and constrain our economic trajectory for longer.

The only realistic way open to ensure we stabilise supply and start growing this economy again is to liberally involve the private sector in power generation. We are doing that through the IPP programme, but we could score an easy win by freeing up companies to start investing immediately in their own generating capacity. The minister must see this – yet stubbornly resists. As a result, we end up with a stalemate that means we don’t escape the low growth trap we are stuck in.

This week BLSA is releasing an important report on infrastructure investment in South Africa. We commissioned an investigation into why investment levels have been sinking for five years despite wide agreement that greater investment is needed for our economic recovery. The report, conducted independently by Intellidex, identifies constraints in all the main ways infrastructure investment takes place – by the state, by state-owned companies and by private companies.

It shows that to increase investment to the 30% of GDP level proposed by the National Development Plan, we should be investing an average of R1.6bn/day extra in infrastructure. That is enough to build a new university every day.

To get that volume of investment happening we are going to need every corner of our economy, both the public and private sectors, optimising the volumes of investment. But, critically, the investment must represent value for money. It must generate a bigger payoff for the economy than the cost, something we have gotten grossly wrong in the past as some examples from Eskom and Transnet attest.

The constraints on embedded generation are just one of many policy blockages that prevent the private sector from investing more. The state faces both skills and financial constraints that have meant large shortfalls in investment volumes against budgets.

The report will argue that we can resolve many of these problems through policy reform to improve both public and private sector investment efficiency. It also argues that we need the private and public sectors to work together through public-private partnerships that optimise capabilities of each partner to minimise the cost of new infrastructure and maximise the value it can deliver society.
Join us in driving forward the conversation about improving investment levels. The report will be released on Friday.

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