Shaun Nel, executive director of the Energy Intensive Users Group in South Africa, talks to James Wilson about South Africa’s energy market, the key concerns of large energy consumers and the current developments in the market that will change the landscape.
What is the EIUG and what is your role at the group?
The Energy Intensive Users Group (EIUG) represents 32 of South Africa’s largest electricity consuming organisations and they are primarily in mining, industry and manufacturing. It represents probably about 44% of total electricity consumed in South Africa. The members are concerned with both consumption and generation and being large industrial users access to self-generation is one of the biggest areas that is being looked at right now. My role is as the executive director.
What are the most important issues for EIUG at the moment?
There are three major areas. The first issue is that of the price trajectory for electricity in the country. Obviously, as energy intensive users, price is a significant contributor to input costs and international competitiveness and since 2006 the price of energy has gone up from about 8% of total input costs to now being around 22% of the input costs. The new build programme that Eskom is undertaking is the biggest significant cost-driver going forward. The second driver is the regulatory methodology which grants Eskom guaranteed returns which are significantly high. Lastly the revaluation of its asset base in line with regulatory changes in the tariffing structures has caused a significant jump in price.
The second issue is the security of supply issue. Adequate and reliable electricity supply is a significant problem at the moment and will continue to be until such time as new power stations come online. There is insufficient energy right now to meet the demands and since November (2013) there have been three emergency declarations in the country which have required large energy users to cut consumption by 10% and in one case up to 20%. That is obviously having an impact on productivity as well as further investment plans. The third issue is that of independent power generation.
In this context, what is your evaluation of the Renewable Energy IPP Programme (REIPPPP) and how will it help intensive users?
Any additional power coming into this system particularly when it is being done by independent power producers means that it reduces the risk on the country’s balance sheet given that Eskom is the off-taker but the financing of those projects are obviously other IPPs. Also the IPPs themselves will only start getting a return once they produce energy, unlike Eskom which starts charging for power stations even before they are built. That does delay the cost impact of new generation but it also means that as new energy on comes there are actually more people to consume it, so you are in a situation of a being in a constrained environment from an energy perspective and being charged for future energy that could provide opportunity for further cuts to consumers and reduce the price, so there some benefits to that. What we have seen with the renewable energy process is that the cost of renewables have come down significantly and that there has not been significant requirement for subsidies for renewable energy, which is good.
The generation expansion is governed by what’s called the Integrated Resource Plan and this Plan lays out the capacity required coming from this type of generation and when it’s likely to come on. While it will continue it is still subject to the REIPPPP constraint on what technology will be used and granted licenses in the future. That doesn’t preclude private individuals and private companies from producing renewable energy for their own consumption, as it just relates to the national capacity. Large users are working on a range of options from co-generation plants to captive generation.
Is the environment favourable for large users to generate their own energy?
The biggest stumbling blocks right now to self-production are the issues related to wheeling, because the way in which wheeling charges are accounted for – with Eskom being a fully integrated monopoly – doesn’t actually reflect the economic reality of transmitting power across the network from one point to consuming it at another. That right now is the biggest hurdle to self-generation where consumption and generation are at different sites, which is often the case. You might have a coal mine and a smelter but it can’t produce at the same location, they have to produce at the coal mining area and transmit it and consume it at the smelter. The wheeling charges are currently in place make this uneconomical. This hasn’t stopped cases where it is generated and consumed at the same site. There are a number of other opportunities being looked at for industrial co-generation and right now there are a number looking at captive plant opportunities but the thing that is holding these projects back now are the economics and they go back to wheeling, so we are hamstrung in that perspective.
Are there other important national energy projects or regulatory changes on the horizon?
The national energy regulator is looking at a complete revamp of the wheeling framework, which would obviously unlock bilateral or wheeling arrangements. The two biggest energy projects coming online are the Medupi and Kusile, two coal-fired power stations of 4,600MW each and they are due to start coming online from 2016, which will create a significant capacity surplus over the next five to six years if the current demand trajectory continues. That will provide some breathing space to re-look at some of the structural issues related to the whole industry sector because right now it is very difficult when you under such a constraint to be able to look at different options. The biggest regulatory move that is in a bit of a stasis at the moment is what was called Independent System and Market Operator Bill, which looks at creating an entity outside of Eskom and breaking up part of Eskom to create an independent system operator which would be the central buying office for IPPs and the central dispatch of power. This would take away some of the power which Eskom has as a monopoly. That is the biggest regulatory advance towards liberalisation of the energy market but there a number of political hurdles which that idea still has to go through and there is obviously significant pressure against it, particularly from labour unions.
Are some of the regional developments important for you?
The issue of gas in Mozambique and Angola might be transformative as it opens up other sources of energy and what it could bring to the South African power pool would be huge. Developing countries like Angola and Mozambique have the opportunity to become significant power exporters and this move towards a regional grid I think would create further opportunity for cross-border power sharing and electricity sharing. As a country South Africa is relatively emissions intensive so looking at alternative electricity from our neighbours would help mitigate our international obligations on that front.
What structural changes would you like to see to improve the energy market in South Africa?
For us the most critical component is the development of capacity and capability in the independent regulator. We need a really strong regulator. When you have a monopoly you have a very strong asymmetry of information and control in Eskom’s favour you really need a well capacitated regulator. It would then be able to unlock issues related to wheeling and it would have a much better grasp on the price and the management of tariff applications from Eskom. It would also create stability, particularly in the rating agencies’ minds and in terms of policy certainty. I think the latest changes to the regulator will give more power to the executive to appoint to the regulator, which doesn’t make it more independent.
When do you and the Intensive Users Energy Group need to turn to external counsel?
At the moment we look to external counsel in two major areas. The first is where we need to understand the impact of regulatory change proposals and new laws that are being proposed, looking at what we could do in that scenario, and the second is from a security supply perspective: when these emergencies are being declared and there are these forced outages and forced consumption reductions what the legality of this is, particularly because it is only being done on a very small portion of the economy.
Is the legal market well stocked to advise you on these issues, are there developments you would like to see?
I wouldn’t say there is a wide range of expertise but there are a few well known counsels and they tend to have their specific areas. There are counsels that are focused very much on power purchase agreements (PPA) and the financing agreements for independent power, those that are the regulatory focused and look at the impact of legislative change on the power system. For us the most important aspect is political insight, because sometimes we have a case where there is well intentioned policy behind oncoming legislation and a counsel that has good political insight can say “this is what the government is trying to achieve”. This is good input for our group. The challenge we have is that there are a lot of specialist skills as I mentioned, lawyers focusing on the regulatory aspect or on the financing and PPA, but sometimes it needs a much broader generalist type of skill and there are very few people that have that. Someone that we work with generally on this is Greg Nott from Werksmans Attorneys. He brings a very broad swathe of experience to the energy discussions. It’s all very well getting a specialist to do one piece of very in-depth work but too often in a market like South Africa unlocking one hurdle will only lead you to the next one. We need someone who can understand all the hurdles that have to be unlocked in a certain sequence to be commercially effective and that is critical for us.
Has the arrival of international law firms in the country effected you as someone who instructs counsel?
We haven’t seen that particularly. Where we have seen it most acutely has been on the experience these firms bring particularly on power purchase agreements and on power financing, so we’ve seen it there. Obviously international connections on the regulatory side we have not seen the impact, the market here is more unique with a development-focused government and very strong labour unions which are anti-privatisation, so the experience is more local. Foreign experience has been welcome on the issues of independent power.
Energy Intensive Users Group / BDO Consulting
About the author
Shaun is a founding Director in BDO Consulting Services. Shaun has extensive experience in Project Management and Organisational Effectiveness both in South Africa and internationally, for public and private sectors. For the last three years Shaun has been involved in Energy related projects and is highly regarded as an authority on the subject. Shaun has been invited to speak at a number of Energy conferences, locally and abroad. Shaun’s experience in the Energy Sector includes the establishment and operation of the National Electricity Response Team (NERT) PMO for the Department of Energy (DoE), established in response to the country’s electricity crisis in 2008. He assisted in the development of the RSA’s Integrated Resource Plan (IRP 2010) and is currently part of the technical task team established to assist in the implementation of this plan with the DoE. He is Project Director and Advisor to the Energy Intensive User Group of Southern Africa (EIUG). This is a representative body of the largest energy users, including mines, smelters etc. The group currently has 33 members across the mining and manufacturing sectors of South Africa. He is Project Director and Advisor to the Industry Task Team on Climate Change (ITTCC). The ITTCC is primarily concerned with providing a solid fact base giving the real and achievable mitigation and abatement opportunities for business in response to the county’s pledges at Copenhagen to reduce carbon emissions in the global effort against climate change.