Private power generation cap raised to 100MW – victory for private sector, says Vegter

The effects of load shedding on the South African economy are well-documented. Businesses struggle to operate as power supply is constantly interrupted across the country. American multinational investment bank Goldman Sachs once described Eskom, the country’s debt-riddled power utility, as “the biggest threat to South Africa’s economy.” The surprise announcement allowing up to 100MW of private power supply without a licence, was greeted with open arms. The unreliability of electric power can now be mitigated, taking pressure off the economy. Below, freelance journalist Ivo Vegter notes that he “can think of many other sectors where numerous competing private companies could serve the public much better than staid, dysfunctional, corrupt and bankrupt government monopolies could ever do.” This morning, an announcement stating that 51% of SAA will be privately owned echoes what Vegter says, with a move to get the state-owned airline up and running once again. Listen to a BizNews Power Hour Interview with Neal Froneman, the Sibanye CEO who welcomes private power generation news. – Jarryd Neves

Surprise! Licence-free private generation cap lifted to 100MW

In a shock announcement yesterday, President Cyril Ramaphosa said that the cap for private power generation without a licence would be raised from 1MW to 100MW. This is great news.

When I started writing this column, it was a going to be a fuming denunciation of energy minister, Gwede Mantashe, for stubbornly clinging to the notion that the country is not ready to raise the cap on private-sector grid-connected (‘embedded’) electricity generators beyond 10MW.

Until now, the limit stood at a measly 1MW, so anyone wishing to operate generating capacity of more than 1MW, such as industrial co-generation plants, must obtain a licence just as if they were building a new 4 800MW nuclear or coal-fired plant.

draft amendment to the Electricity Regulation Act published by Mantashe on 23 April 2021 calls for this limit to be raised to 10MW.

Private sector companies, as well as the Democratic Alliance-run government of the Western Cape, had been demanding that the cap be raised to 50MW, instead.

How long must we wait?

It’s been 13 years since the first blackouts struck South Africa. Until 2008, electricity production was rising sharply. Since 2008, it has been on a steady decline.

There is a direct correlation between energy consumption and a country’s economic performance. Not only that, there is a unidirectional causal relationship between energy consumption and real GDP, meaning that rising energy availability and usage has a positive impact on economic growth, although the converse is not necessarily true.

If we want South Africa to return to economic growth and get it anywhere near the high-single-digit percentage levels that will make a dent in unemployment and poverty, we must have abundant, reliable and affordable electricity. There is no alternative.

Yet South Africa’s electricity supply continues to decline, despite a more than five-fold increase in the electricity tariff since 2008. Eskom claims they remain at least 30% too low and blames R300 billion in debt (almost two thirds of its accumulated debt of R480 billion) on tariff shortfalls since 2010.

So here we are, 13 years later. Eskom has two new but unreliable coal-fired behemoths that aren’t delivering anywhere near the power they’re supposed to be delivering. Eskom is the scene of a corruption saga of epic proportions. Eskom has increased its workforce by 50%, despite declining production, and pays some of the highest industrial wages in the entire country. Many of Eskom’s most skilled and experienced staff have long since abandoned ship. And once again, a third of Eskom’s total capacity is out of commission, most of it unplanned, and we have severe rolling blackouts as winter sets in.

Whether Eskom can ever be fixed remains unknown. Even if it can, it will take many years to refloat the ship. What we do know is that South Africa cannot afford to wait years for a miracle.

Surprise!

This makes Mantashe’s recalcitrance on the matter of raising the cap for self-generation beyond 10MW all the more puzzling.

As minister for energy, his concern should not be for Eskom, which would face competition from private generation capacity, but for the country’s electricity consumers, be they agricultural, industrial, commercial, or residential. As it is, even Eskom supported calls for the cap to be raised to 50MW.

As I was writing to excoriate the honourable minister for hobbling the country’s energy future, the power went out. Well, time for tea and toast… no, wait, can’t boil the kettle or run the toaster. Time for bread and water, while I wait.

Just then, an email arrived from the Presidency, giving a generous 45 minutes notice that president Cyril Ramaphosa would address the nation ‘live on all platforms’ at 12 noon.

When he did, the power was still out, and my mobile network provider was no longer able to stream any video to your humble columnist. I had to follow along on a live blog, like we did 15 years ago.

Then, the surprise. The cap had indeed been lifted, but not to 10MW, nor even to 50MW, but to 100MW. Up to 100MW can now be produced privately, without requiring a generation licence. Well, that’s given old Mantashe a bloody nose! And it ruined a perfectly good rant on my part, to boot.

To put this in perspective, a 100MW power plant is equivalent to about 50 industrial-scale wind turbines. More, if you consider that their efficiency factor is at most about 50%, and often closer to 30%. South Africa’s largest solar plant in De Aar has a nameplate capacity of 175MW. The country’s largest solar plant in terms of actual power production (thanks to integrated thermal storage), is the 100MW Redstone plant, which has just begun construction.

Companies that produce up to 100MW of power will also be permitted to transmit power, at a fee, across Eskom’s grid to customers, provided they do not charge those customers more than Eskom would have done.

This restriction is the major flaw in the new rules. There is no reason to cap prices for private power generators. Producers should be entitled to charge whatever they wish. If they happen to want more than Eskom charges, they might add the sweetener that their super deluxe electricity comes without the risk of regular and frequent load-shedding.

In any case, competition erodes away high prices. The cure for high prices is high prices, not price controls.

Whether customers choose to buy reliable but expensive electricity, or unreliable electricity at discount prices, is none of the government’s business.

Ambitious and bold

For all the hot air that our dear father-figure emits when he talks to his children, it is hard to quibble with Ramaphosa’s statement that ‘[t]his intervention reflects our determination to take the necessary action to achieve energy security and reduce the impact of load shedding on businesses and households across the country’.

The President said: ‘This measure will be crucial in developing a response to the energy crisis that is ambitious enough, bold enough and urgent enough.’

Whether it will be enough only time will tell, but it is certainly bold and ambitious. This opens the way for building a large, decentralised, distributed, and privately owned reservoir of generation capacity, supplying industrial, commercial and agricultural users as well as municipalities.

A vibrant network of small-scale private generators will go a long way to building what Nassim Nicholas Taleb calls an anti-fragile power system, which is more tolerant of localised failures, breakdowns and maintenance. It should also give Eskom itself some breathing room to revitalise its own ageing and ailing fleet of generators.

For all my cynicism about the glacial pace of Ramaphosa’s promised reforms and his enduring loyalty to the socialist cause, this is a big step in the right direction. It implicitly recognises that the private sector can, and should be allowed to, come to the rescue of long-suffering citizens burdened by the failures of government-owned enterprises.

Let’s hope this recognition is more than just a once-off appeal of a desperate government faced with a crisis of its own making which it is unable to resolve itself. I can think of many other sectors where numerous competing private companies could serve the public much better than staid, dysfunctional, corrupt and bankrupt government monopolies could ever do.

Free enterprise, and South Africa’s general prosperity, will be better for it.

  • The views of the writer are not necessarily the views of the Daily Friend or the IRR
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  • Ivo Vegter is a freelance journalist, columnist and speaker who loves debunking myths and misconceptions, and addresses topics from the perspective of individual liberty and free markets. As an independent researcher, he is the author of the recent report from the Institute of Race Relations (IRR) – South Africa’s Minibus Taxi Industry, Resistance to Formalisation and Innovation – which assesses the potential for innovation and modernisation in this vital transport sector.

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