Electricity plays a central role in economic development and has been called the oxygen of the economy. It is the source of power for many conveniences such as cellular telephones, computers, television, lighting, communication equipment and farming and industrial businesses. It is unlikely that a day will pass when you will not be touched by the conveniences provided by electricity in some form or another.
The economic growth experienced in South Africa in the late 1990s and early 2000s resulted in a continuously increasing demand for electricity. Coupled to the lack of expansion of South Africa's generating capacity, this had the consequence of a rapid erosion of the surplus generation capacity of the country and placed the generation reserve margin under severe pressure. More electricity infrastructure is thus required to meet the needs of the growing economy in a reliable way.
Electricity infrastructure projects are often large and relatively complex, requiring an enormous amount of resources, and particularly capital, upfront. The estimated required investment in electricity infrastructure in South Africa over the next seven years is more than R400 billion. This is equal to about 16 Gautrain projects or 40 World Cup soccer stadiums.
Given the critical role that electricity plays in the economy and the large investment needed, there is a need to move from an industry almost solely funded by the state to one where the private sector plays a larger role. In many countries the approach taken to introduce private participation in the industry varies from the sale of some of the parts to the allocation of certain new investments to the private sector. In almost all cases, it includes introducing private sector participation into the generators, which is also the largest investment item.
Private investors generally recover their costs and returns through tariffs charged over a long period (of up to 30 years). Depending on the size of the investment, most investors will require that their tariffs be secured for the duration of their supply contract and before any investment can be made.
All else being equal, the trade-off for providing capital and building the electricity infrastructure is potentially a higher tariff due to the higher returns required by any investor based on the risk they are taking. This is one reason for private power plants also being seen as the catalyst to charging the full economic cost of producing electricity, especially in countries with a history of subsidised electricity.
Commitment is also required from the government or state utilities to provide certain services - for example, appropriate road infrastructure to bring in equipment, water for the production facilities, transmission lines to transmit power to the towns and cities and the necessary permits and approvals to construct and operate the generators and to sell the electricity.
Although Eskom has initiated a generation build programme, signed contracts and commenced construction, this programme did not have a clear funding model and will only bear fruit in the medium term. To meet the short- and medium-term requirements Eskom actively engaged with many independent power producers (IPPs), both regionally and locally, over recent years in an effort to introduce new private generation capacity. Our experience has been that the private sector is eager to build new generator infrastructure if the process to participate is clear, transparent and meets their business objectives.
This includes clarity on how the tenders will be awarded, commitments that their full costs and returns will be recovered over a certain period (up to 30 years) and commitments from the country to provide the necessary support and guarantees.
Some of the better-known regional projects include the Mmamabula energy project in Botswana, the Moamba gas project in Mozambique, the Mpanda Nkuwa hydro project in Mozambique, the Moatize coal-fired power station in Mozambique, the Kudu gas project in Namibia and the Grand Inga and Inga 3 hydro projects in the Democratic Republic of Congo.
Nationally, Eskom has launched the pilot national co-generation programme (PNCP), the medium-term power purchase programme (MTPPP) and the multi-site baseload programme (MSBP). The PCNP targets co-generation plant that uses waste energy from industrial processes for electricity generation. The MTPPP is open to all types of technology and the MSBP is open to all technologies that can provide base load electricity.
Eskom has in the past few years also signed up short-term power purchase contracts with municipalities and IPPs as the opportunity arose and funding permitted.
The most successful of the programmes thus far has been the MTPPP. This was due to a supportive regulatory framework which included the gazetting of an integrated resource plan with MTPPP as a specific programme, a multi-year price determination (MYPD) by the National Energy Regulator of SA (Nersa) specifically allocating revenue to the programme and helping bidders with connecting their generators to the transmission network. In addition, the programme clearly indicated the acceptable contractual terms.
Approval has been given from Nersa for four of the six IPP projects that were successful under this programme. Two of the projects require approval from the IPP governance structures. At least 215 megawatts of capacity under this programme is already operational and the target is to get close to 400MW operational by March 2011.
Eskom has signed short-term agreements with IPPs connected to the Eskom distribution grid who are paid at the wholesale energy tariff.
A major milestone in starting to pave the way for introducing private generators into the South African market has been the gazetting of the new generation regulations by the Department of Energy in 2009. This provided, for the first time, guidance on the process to introduce new electricity generation capacity. It required the development of a national integrated resource plan, stating what new capacity needs to be built and what technology should provide this capacity. Further to this, Nersa published rules for the buyer of electricity produced from IPPs to recover the costs of the power purchase agreements.
IPPs are an important and necessary component of the future electricity supply industry in South Africa. However, their success is predicated on the establishment of an appropriate and enabling legislative and regulatory framework. Key factors in this framework include the inclusion of IPP programmes or projects in the future revisions to the national integrated resource plan, a price determination by Nersa that allows cost transfer to customers and allocates this revenue to the IPP programme or project, flexibility to access foreign funding sources and government guarantees for large projects, as is done elsewhere. It is also important to establish a governance framework that makes it clear how decisions on allocating generation capacity to IPPs will be done.
The successful introduction of private sector investment into South Africa's electricity supply industry can be achieved through the right mix of clear governance frameworks, enabling regulations, appropriate levels of guarantees and support and cost-reflective tariff signals.
Eskom is committed to collaborating with the government and other stakeholders to ensure this is done as soon as possible.
Kannan Lakmeeharan is the divisional executive for system operations and planning at Eskom.