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    Quick View: Ramaphosa's Energy Action Plan To Strengthen South Africa's Power Sector


    August 15, 2022 - Fitch Solutions Sector Intelligence

     

      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Quick View: Ramaphosa's Energy Action Plan To Strengthen South Africa's Power Sector

      • 26 Jul 2022
      • South Africa
      • Power
      • Eskom Holdings

      The Latest:

      On 25 July it was reported that the South African president, Cyril Ramaphosa, had announced a host of measures to urgently address the country's lack of power capacity that has led to continued load shedding. Load shedding has been plaguing the country's power sector since 2008, which continues to negatively affect economic development. As such the government’s latest policy changes and measures ordered by the president aim to:

      • Boost the overall performance of Eskom's, South Africa’s leading power utility, existing power generating capacity.
      • Speed up the process of procurement of new capacity.
      • Accelerate the participation of the private sector in the country's overall generating capacity.
      • Increase investment into rooftop solar for both the commercial and residential sector.
      • Reform the country's overall power industry to ensure sustainability.

      The Implications:

      The measures announced by the president indicate a marked shift from the country's existing regulations for the power industry. We believe this shift will lead to a large uptick in private investment in generation, reducing the effects of load shedding on many businesses and eventually the risk of load shedding itself.

      Similarly, as more private generation is introduced to the grid it will reduce the burden on Eskom, particularly during periods of higher demand. It will enable the utility to ramp up maintenance on its existing power plants, which it has previously been unable to do to the required level. This is due to the need to balance the demand for electricity in the country as well as undertake the much-needed maintenance at power plants that have reportedly had to operate beyond their normal scope. As can be seen from the chart below, the utility's energy availability factor has been decreasing due to a lack of maintenance in the past, resulting in power plants suffering from more frequent breakdowns.

      Power Plant Efficiency Decreasing
      Eskom - Energy Availability Factor (2015-2021)

      Source: Eskom, Fitch Solutions

      We also expect that, with more private generation kicking to supply the grid as well as overall capacity increasing, Eskom will be able to provide better power supply to lower-income areas and consumers that are not able to afford their self-generation solutions such as either rooftop solar or diesel generators.

      However, we expect that these measures will take time to take effect and as a result load shedding will still be a factor for the country's power sector over the short-term until capacity has ramped up sufficiently. We also expect that there are risks to these measures being implemented, particularly given strong opposition from the country's trade unions and even some members of the ruling party against the participation of private power producers in the country's electricity market.

      What's Next:

      The list of measures to be undertaken can be listed as follows:

      For Eskom:

      • Purchasing extra capacity from existing independent power producers (IPPs) as well as private generators (mills, mines, shopping centres). The utility will also look towards importing any excess capacity from neighbouring countries.
      • Deploying mobile generators as a stopgap measure
      • Introducing a programme aimed at reducing peak demand
      • A solution for Eskom's debt levels, to be introduced during the medium-term budget policy statement in October
      • To utilise the climate funding from other countries to repurpose older power plants and strengthen the country's power network. The Lethabo, Majuba and Komati power plants are the first earmarked for repurposing and will reportedly be converted to solar and battery storage capacity of 500MW in total
      • A special enforcement team from the police service to combat sabotage, theft and corruption at Eskom
      • Appointing boards for Eskom's transmission and generating companies under the planned unbundling.

      To encourage private investment:

      • Licencing threshold for capacity will be removed completely (after previously being lifted from 1MW to 100MW in 2021).
      • Temporary special legislation to be brought to parliament that will remove obstacles to the development of private generation
      • Existing process will be streamlined to allow quicker turnaround times for projects
      • A feed-in-tariff will be introduced by Eskom, which will allow the utility to buy electricity from business and households with installed rooftop solar. This will enable owners of solar installations to earn from power they supply to the grid as opposed to the previous system of earning credit to where their bill is zero.
      • The development of a competitive electricity market, which will be established after the Electricity Regulation Amendment Bill is finalised.

      On a governmental/policy level:

      • The government will aim to ensure that all projects under the fifth bidding window of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) start construction as soon as possible, while also lessening requirements for local content procurement. At the same time, total capacity under the sixth bidding window of the REIPPPP will be doubled to 5.2GW.
      • The government will launch a request for proposal (RFP) for battery storage in September, after which it will also extend an RFP for gas power.
      • An Energy Crisis Committee will also be established, which will be led by former CEO of Nersa, Phindile Baleni. Various government departments will also be represented under the committee.

      Related Research:

      Quick View: Lifting Generation Cap To 100MW To Improve Electricity Supply In South Africa

      South Africa Power Capacity To Underperform Due To Government Policy Delays

      South African Power Sector Growth Impaired By Policy Uncertainty

      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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