Can Independent power producers turn the tide in electricity generation for South Africa?

The complexities of power generation in South Africa

As detailed in our recent report on the generation of electricity in South Africa, Independent power producers have become indispensable in South Africa, but one must ask whether they will help steer the country to more energy efficiency.  

In its efforts to curb rolling blackouts, Eskom resorted to immediate or short-term but inadequate solutions of open cycle gas and diesel turbines to meet the power supply shortfall. In the short-term it was beneficial in that South Africans had to deal with lower loadshedding stages than what would otherwise have taken place. But the cost of producing this electricity is high.

Managing an economy is very complex, strategic, and longer-term in nature. For a country like South Africa, with one of the most unequal societies in the world, it requires a concerted effort to achieve an increase in wealth and well-being, a viable economy that can grow based on its competitiveness, and an ability to supply goods and services at the lowest cost and the highest value-add. This would generate meaningful and contributing employment and start to uplift those at the economic fringes.

The importance of cheap reliable electricity

To uncover the fundamental building blocks to achieve a successful economy, Charlie Robertson, in his recent bestseller The Time-travelling Economist, includes not only electricity, but cheap and abundant electricity, as one of the three most fundamental underlying pre-conditions for economic growth. The graph demonstrates South Africa had abundant and cheap electricity from the 1970s up to 2006.

Germany is an example of what happens when you abruptly replace cheap and reliable electricity (when it closed its nuclear stations) with expensive alternative energy in response to the Fukushima incident in Japan. Germany’s economy, which used to be the powerhouse of Europe, is struggling and was the worst performer in 2023 as it went into recession.

The graph shows the extraordinary increase in electricity prices in South Africa since about 2007. Like Germany, this was not without consequences for the competitiveness and growth potential of the economy.

The Cost of Delay: South Africa’s Energy Sector

New investment in energy is always more expensive than the average cost of an existing fleet of generating units. South Africa was late to add new generating units and when it did it, the projects were excessively mismanaged, resulting in cost overruns, below par outputs and a resultant high cost of the electricity generated from the units.

Deregulation of the power sector was first mooted in the 1990s, but only saw some kind of implementation very recently, driven by sheer necessity in the face of the poor performance of Eskom and dire impact on the economy.

The role of independent power producers in South Africa

Independent power producers will bring an element of competition in the sector which will keep a tab on pricing. This is already evident in the solar industry, where smaller players have emerged and are making great strides.

The economy will self-regulate, with non-performing private sector producers being subjected to the standard economic process of closure or bankruptcy, and more competent producers thriving, leading to what Austrian economist Joseph Schumpeter (1883-1950) termed “creative destruction”. The private sector, unlike the state-owned enterprises, will not be saved by bailouts, where government generally throws good (taxpayer-funded) money after bad.

Independent power producers from the private sector should not be limited to wind and solar, but be allowed to bid for nuclear, gas or any economically viable project. Government needs to consider the need for baseload and reliability of supply in a multi-source energy supply mix, and phase the implementation of various sources, in line with infrastructure availability, to bring generated power to the end user. The needed 14,000km of new transmission lines will not be built in a year.

Progress for South Africa means GDP growth of more than 5%. This will not happen without electricity availability, never mind cheap electricity.

To achieve the required affordable electricity, a sound collaboration between government and independent power producers is needed, and a concerted effort by government to address the country’s complex economic environment through a strategic, competitive, and well-managed approach to the energy mix is sorely needed.

The potential of independent power producers and a rational phased implementation of a multi-source energy mix are crucial for sustainable energy generation and economic growth. The time is now.