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Embedded Generation: Turning the lights back on.

Updated: Jul 20, 2021

It has been over a decade since ESKOM first introduced and implemented load shedding. Though the country experienced some periods of stability with minimum disruptions in electricity supply between 2008-2014 and again between 2015-2019, corruption, lack of maintenance and mismanagement at the power utility has resulted in many unresolved issues.

Last week the president of the Republic, as part of his economic recovery plan, announced that the embedded generation licensing threshold has been increased from 1 MW to 100 MW. This move will relieve pressure from Eskom and allow time to run the required maintenance on the plants. The announcement came as a win for the private sector, which for a long time has felt the impact of load shedding on their business’ operations. To give some perspective, a megawatt capacity can produce electricity able to power an average of 700 homes for a year. This would not be able to support large operations such as mines and other big manufacturing plants. To increase generation capacity above 1 MW, entities previously had to obtain formal licensing from the National Energy Regulator (NERSA), a process which created barriers for private investments.

The new policy resolution is expected to boost production and thus contribute to growth in the short-medium term. This can only happen however, if the interested entities have existing infrastructure to increase generation capacity without large capital investments, otherwise, there will be a longer lag in the impact this has on growth. The government will also need to be efficient in the issuing of permits, sticking to the stipulated 3 months turnaround time or even less. New energy infrastructure investments are also expected to flow from both local and foreign investors which is to increase employment.

Privatisation however works almost perfectly for striving economies with less social incoherence and better policy support. The long term effects of privatised energy generation as it relates to costs and prices will be inefficacious. Normally, a positive relationship exists between privatisation and higher cost margins, which ultimately leads to higher prices. If we run shortages, the private sector will then offer surplus electricity to municipalities, provided this is permitted, at a higher cost which will ultimately trickle down to the consumer. To deal with this issue, private producers would need to be incentivised to act in the best interest of the public. For our government, this means production subsidies which lays a demand on the fiscus. The inflation of costs for private producers is also as a result of a lack of economics of scale which renders price regulation less desirable.

“There is a need for clarity in policy and one mark of such clarity would be insight on which sources of energy generation will be prioritised”

South Africa will need to contemporaneously do the ground work to create an environment which will support and enable efficient implementation of embedded generation at the desired scale. There is a need for clarity in policy and one mark of such clarity would be insight on which sources of energy generations will be prioritized. This is to also ensure that we are in line with our goals of reducing carbon emissions through adopting renewable energy. On the other hand, to be prosperous in the near future, government should use this opportunity to perform the necessary plant maintenance and carry out their strategy to fix the energy crisis. If this new amendment does help at alleviating load shedding as the president expects, this should not remove the pressure of attending to the underlying problem. The danger is for attention to shift away from Eskom in the short-term but only to experience more energy related issues in the future. This has the potential of discouraging future investment in other industries which do not necessarily have the capacity to generate their own energy but still need electricity supply.

If government can follow through on their plan to increase nuclear capacity to 1GW by 2030, further lengthening the lifespan of the plant by 20 years, this should give confidence on the commitment to energy security. Though political uncertainty and the instability brought by changing cabinets stands to stifle the progress towards achieving this goal, if the mandate can be made a government’s central objective instead of a political agenda, we might succeed. I do not think that South Africa’s problems are bigger than its ability to solve them but there is a need for greater commitment to see these problems getting solved.

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