The Consequences of Restructuring the South African Energy Market - The Dilemma of Sustainable Development or Sustainable Environmental Protection

Contents

Introduction

The Particularities of Energy Producers

Company Profile of ESKOM

Facts of Generating Electricity in South Africa

ESKOM’s Research and Development

The Nation State and Energy Production

Further Observations and Suggestions

Conclusions

References

Appendix A, South African Ministry of Energy, Chard

Appendix B, ESKOM's Tariff Proposal, Excutive Summery

Appendix C, ESKOM's Annual Report, Facts and Figures

Introduction

Energy is a key issue for the African continent due to the higher consumption of power in the developing countries. Rapid growth in the economies of developing countries in recent years has led to an increase in incomes which is reflected in higher living standards. This goes hand in hand with an increase in consumption of electricity, petrol, coal, natural gas and other fuels.

The dilemma of maintaining competitive energy prices in order to encourage economic growth on one hand, and on the other hand of generating energy in an environmentally friendly way is a global concern. This dilemma plays a key role in South Africa especially.¹The major energy producer, ESKOM Holdings, privatized 30% of its generating capacety in 2002 and is now caught in the triangle of providing its customers cheap electricity, in an environmentally responsible way and at the same time creating profits for its investors as well as the government. The above mentioned three interests are often in conflic with each other.

The aim of this research paper is to investigate how ESKOM will address pressing issues of satisfying the described conflicts. First, I will give a general introduction into the particularities of the energy sector, which is followed by a brief description of ESKOM. This includes an overview how electricity is currently generated in South Africa. Additionally I will critically assess ESKOM’s research projects. In the second part, I will give exam ples for environmentally sustainable energy production. In the concluding part I will give my outlook as to how the triangle of conflicts can possibly be addressed.

Right at the onset I would like to pint out that a further assessment on the effects of ESKOMs additional stake holders cannot be undertaken in this paper, since this should be addressed with the focus on private households which probably have to face higher energy costs due to an increase of profitability demands. As the Business Day analyzes regarding the para statal ownership dilemma: “It has become apparent since Alee Erwin was appointed Public Enterprises Minister in April that the state's biggest assets are in crisis….The issue of whether state-owned entities are privatized or not is really irrelevant. But those which operate in a business environment need to operate as tough, smart businesses.” (Klein, Marcia: 2004).

The primary focus therefore will be on the conflict between the costs of generating electricity and environmental protection. Because of the highly complex nature of the issue at hand, I will not be able to discuss all facets of it. For instance, the amount of water used to generate electricity or the condition of technical equipment can not be studied. Furthermore, this paper focuses on qualitative analysis since the time constraints were too high to enter a statistical quantitative research.

The Particularities of Energy Producers

The term ‘energy’ in this paper refers to the production of electricity. The energy industry has two significant phenomena which distinguish it from any other industrial sector like automobile, textile, machinery etc. Firstly, the product needs relatively little marketing, it cannot be stored or the quality improved. With this, I exclude mal-service, such as frequent power failures etc. Consequently energy producers have very little scope of improving their revenues by using any management strategy. An increase of revenues can usually only be achieved through additional investments, like electrifying households or if new industrial production plants are build. Since in the South African energy market almost no competition exists, we can disregard this aspect as well. I want to stress that in contrast to South Africa, the European energy market is liberalized since 1998. Although most of the private households in Europe remained with their local energy supplier, mass users in the heavy industry switched their suppliers in many cases. This indicates that a liberalized energy market is highly price driven, since the product is homogenous.

The second particularity is the inverse relation between electricity and the macro economic frame work. For instance, the inverse relationship between the amount of electricity used and the macro economy is noticed when the GDP decreases, it results in a lowering in production and lesser usage of power. An increase of GDP results in higher use of electricity. However, it is important to note that electricity costs are generally accounted as fixed costs, for example computers run the whole day, independent of the order volume a company receives.

Since it is relatively difficult to export energy, a change in the tariff structure between nation states does not effect the energy sector. This gets evident in the following quote where Hirschsohn describes the automobile and textile industries need to restructure: “...tariff reductions are being phased in over a number of years. As intended, the South African government’s policy is precipitating industrial restructuring in both industries and competition between domestic producers is being replaced by ‘real’ competition as imported products, particularly from low-wage Asian economies, challenge two long-protected and relatively uncompetitive South African manufacturing.”

The only key factors which determine the amount of energy being used, are structural: the technical debts, mechanization of the nations economy and the existence of heavy industry such as steel, metal processing, mining and so on. I disregard private households in this statement, as it is most likely that private households will not have many electrical appliances when they are located in an area based on the production of agricultural products. Looking at it from the other way around, the energy sector has a higher influence on the macro economy, than the economy on power producers. ‘Since the supply of power is vital to manufacturing industries and due to the constant need to increase efficiency to compete on global markets, an increase of power prices would slam down the economy immediately.’ (Green, H: 2004). To support this argument, I take the statistics of the German government, from which we can draw, that editional taxation on energy harms the economy. In 1998 the GDP growth rate in Germany was 3,2%, in 1999 the economy struggled to achieve a growth rate of 0,5%. Allthough the German government introduced in the beginning of 1999 heavy taxation on energy prices, the data from DE Statis (Statistisches Bundesamt) does not indicate a single corealation between energy prices and the downslide in the economy. Nevertheless, it becomes obvious that the editonal taxation on energy contributed to the harsh decierse in GDP.

This underlines the inequality between macro economy and power producers; an increase of power prices has a harsher effect on the economy than a down turn in the economy on the electricity producers. This issue becomes very pressing in a developing economy, like South Africa, which is being progressively integrated into the international community after a long period of isolation. To demonstrate the vitality of energy policies in South Africa, I have attached South Africa's total energy consumption for 2003 given by the Ministry of Minerals and Energy Affairs in Appendix A.

Additionally, South Africa competes for Foreign Direct Investment (FDI) with other countries, which might have not only cheaper energy costs to offer, but also cheaper labour; as Martenelli (2002) states in his presidential address: “Trans National Corporations … they continue to take advantage of the fragmentation of other markets, such as labor markets (allowing them to pay lower wages in countries where labor is poorly organized) and markets for natural resources (allowing them to avoid the costs of environmental protection in countries where ecological policies are not implemented).”.

Company Profile of ESKOM

Under this section, I will focus on Eskom Enterprises Group which carries out all non-regulated activities of Eskom Holdings, both inside and outside South Africa.

“95% of South Africa’s electricity is produced by ESKOM. The South African government sold 30% of its stake to private investors in 2002. Eskom Enterprises has identified and refocused its core business as the designing, building and refurbishment of the generation, transmission and distribution infrastructure. Before 1990, the company was mainly operating in South Africa. With now a presence in 33 of Africa’s 54 countries, ESKOM is one of the largest utilities in the world. It is headquartered in

Megawatt Park, Cleveland and it is a wholly-owned subsidiary of Eskom Holdings Limited. For the year 2003 ESKOM enterprises reported revenues of 317 million Rand, and has roughly 30.500 employees.” (ESKOM Enterprises annual report 2003)

In Appendix C I have given more facts and figures about ESKOM. Further in October 2004, the National Utility Regulator (NUR), decides over ESKOMs proposed change of tariffs for 2005. Since this paper deals with a different subject, I have provided the executive summery of this issue in Appendix B.

Concerning ESKOMs regional development I was told the following by Green in an interview: ‘The primary focus of ESKOM in terms of regional expansion is the Southern African Development Community (SADC): South Africa, Zimbabwe, DRC, Tanzania, Swaziland, Namibia, Malawi, Botswana and Angola. ESKOM’s staff has more international exposure within Africa than on a global scale.’

Facts of Generating Electricity in South Africa

“Eskom's generating capacity of 38,211 megawatts (MW), which is primarily coal-fired (33,878 MW), also includes one nuclear power station at Keeper (1,930 MW), two gas turbine facilities (342 MW), six conventional hydroelectric plants (661 MW), and two hydroelectric pumped-storage stations (1,400 MW). Eskom also has four mothballed coal-fired facilities that have a capacity of 3,800 MW.” (Internet: www.eia.doe.gov)

While addressing the issue of ESKOM’s high demand of mineral coal, Green replied the following: ‘ESKOM uses roughly 50.000 tons per day of low grade coal to generate electricity. In other countries this poor quality would not be worth mining, still we have the technology to burn this coal and more than 20 years experience in operating coal fired power plants.’

The following extract from an interview of ESKOM’s chairman, Thulani Gcabashe, explains very well the strategy ESKOM is engaging in the region of Southern Africa: “In 1995, 12 countries in the Southern Africa region established the Southern African Power Pool (SAPP) to pool their electricity supply resources and to coordinate activities across the region. The benefits of the regional power pool include the reduction of fuel costs and the ability to help members if they run short of power. SAPP also allows its members to purchase short-term surplus energy from each other at a price lower than that of the market. Beyond the SADC region, another example of pan- African cooperation is the Union of Producers, Conveyors and Distributors of Electrical Energy in Africa (UPDEA). The UDPEA is a non-profit, nongovernmental association of African electrical companies. Its main objective is the creation of a forum for the consultation and exchange of experiences between African power utilities…. Eskom Enterprises is already emerging as a key ingredient in the recipe for the successful implementation of New Partnership for Africa’s Development (NEPAD) projects in the energy sector. One of the primary enablers for sustainable social and economic development lies in the upgrading of infrastructure in developing countries and the provision of essential services to all sectors of society. We are committed to illuminating this continent, not only by bringing light, but by sharing whatever expertise we may have at our disposal.”

ESKOM’s Research and Development

Since ESKOM is till 2020 not going to change its coal generating plan, for reasons which I will point out in the conclusion part of this paper, I am not going to elaborate on coal generating techniques further. Hydropower and micro hydro power, basically the diversion of rivers to generate electricity, although a renewable resource is not going to be discussed either, primarily because South Africa is a relatively dry country and has therefore limited potential for hydroelectric generation as compared to other regions.

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¹“In 2001, 75.4% of South Africa’s total energy consumption was from coal consumption. This reliance on coal, a highly carbon-intensive fossil fuel, has negative environmental impacts. For example, electricity generation from coal combustion in the industrial sector is the prime contributor to air pollution. Mining, itself, adversely effects the environment through the disruption of ecosystems and the pollution of groundwater.” (www.eia.doe.gov)