OECD urges reforms to address South Africa's 'structural' electricity constraint

17th July 2015 By: Terence Creamer - Creamer Media Editor

OECD urges reforms to address South Africa's 'structural' electricity constraint

Photo by: Duane Daws

The Organisation for Economic Cooperation and Development's (OECD's) latest economic survey of South Africa urges government to increase private electricity generation and pursue fundamental market reforms to address the country’s growth-sapping “structural” electricity constraint.

Flanked by Finance Minister Nhlanhla Nene at the release of the report in Johannesburg, OECD secretary-general Angel Gurría said the current electricity shortage was damaging the South African economy, which the organisation expected to grow by only 1.9% in 2015.

He also argued that, despite large investments into additional capacity to be introduced by 2021, the supply shortage was structural in nature and could, thus, “reappear”, owing to the fact that a third of South Africa’s capacity was currently more than 40 years old.

South Africa should, therefore, migrate power tariffs to cost reflective levels, “which is not the case today”. In addition, it should secure additional generation capacity by accelerating independent power producer (IPP) programmes and by facilitating higher levels of cogeneration by industrial facilities.

“The efficiency of the system would be enhanced [further] by the introduction of an independent system and market operator,” the fourth OECD survey of the South African economy asserted. The report noted that South Africa’s own National Development Plan also proposed the transfer of Eskom's system operator, planning, power procurement, power purchasing and power contracting functions to an the independent system and market operator.

Nene said government was conscious of the negative economic consequences of the current electricity shortage, which could shave as much as a percentage point off 2015 economic growth.

Government, he added, was prioritising the restoration of security of supply by stabilising Eskom and facilitating the introduction of IPPs and cogeneration. “So in this sector, we are on a path to achieving sustainable energy provision.”

Nene made no reference, however, to the Independent System and Market Operator Bill, which had been withdrawn from Parliament.

Responding to a question on the advisability of pursuing a large-scale nuclear programme in the context of South Africa’s current financial frailties, Nene stressed that, so long as tariffs were cost-reflective, the reactors would be “self-financing”.

The Department of Energy planned to initiate a procurement process later this month for the acquisition of 9 600 MW of new nuclear capacity, which would involve the construction of up to eight reactors.

“We need to move toward cost-reflective tariffs in order to meet the cost of provision,” the Finance Minister said, while stressing that South Africa would pursue an electricity mix that helped it resolve its “energy challenge”.

Gurría said the “logic” behind the financing of any large infrastructure project, such as nuclear or hydropower schemes, lay in ensuring that the tariffs were correctly set so that the project could “pay for itself” over time.

However, he acknowledged that it might require some upfront financing “effort” from government, or the extension of guarantees to the private investors providing the capital.