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SA faces bleak future if IPP plan goes ahead

Apr 12 2018 06:01
Rob Jeffrey

THE National Union of Metal Workers of South Africa (Numsa) recently went to the North Gauteng High Court to stop Eskom signing the 27 remaining independent power producer (IPP) agreements.

It would appear that the legal issues surrounding these agreements have now been settled. It is a great pity that economic issues and arguments were presumably not considered. On economic grounds, Numsa has an extremely strong case.  

The key questions that must be asked and answered are: firstly, does South Africa need this electricity over the next three to five years?

Given the country’s supply surplus and current low economic growth rate, the answer must be no.

Secondly, will the decision lead to a permanent and ongoing increase in employment in the economy? Again, the answer is no. Employment is created during the construction phase only; there will be few ongoing jobs unless new construction rates are maintained.

Thirdly, will this lead to a reduction in permanent ongoing jobs elsewhere in the economy? The answer to this is an unambiguous yes.  

Mistruths and blatantly ignored truths 

It is only possible to summarise the likely, sometimes unforeseen consequences, mistruths and blatantly ignored inconvenient truths that will emerge if the current plans contained in the current IRP 2016 are followed through.

Large-scale high penetration use of renewables will have negative long-terms effects on the economy. 

The first of three major impacts is that it will lead to a significant decline in the mining sector generally, and the coal sector in particular. 

The sector could shrink by 46% given the direct, indirect and induced impact, reducing South Africa's gross domestic product (GDP) by over 2.5%.

This will result in a loss of at least 29 000 jobs in the coal mining industry and almost 162 000 jobs in the economy, which will detrimentally affect more than 600 000 dependants.

Secondly, wind only produces 35% of the time and solar only 26%. Because they are variable, unpredictable and unreliable, renewables require 100% back-up at all times. 

This will primarily be provided by gas turbines. Due to large gas imports, the country's balance of payments would be seriously detrimentally affected.

Thirdly, the drive for renewables would deprive South African citizens of the value and added value of the country's coal and uranium reserves.  The value of each of these is more than R10trn. This translates into many hospitals, schools and other social benefits.

The country needs to give urgent priority to raising the economic growth rate. 

The national development plan (NDP), an excellent guiding economic plan, has set a GDP growth target of over 5% per annum for the country to be able to meet its economic, social and political objectives. 

In order to achieve such long-term high growth sustainably, the country must re-industrialise. 

The mining and the industrial sectors have been static and shown little growth for many years. Since 1986, the mining sector’s share of GDP has fallen from about 13% to just 7% at present.

The industrial secondary sector’s share of GDP has fallen from 30% to only 19%.

These sectors also supply over 60% of the country’s exports. They are electricity intensive and need security of supply at the lowest possible economic and financial cost. 

The inefficiency and high cost of wind and solar electricity are notorious, in regions ranging from Europe to South Australia. The failure of Energiewende - the transition to a low carbon, environmentally friendly and affordable energy supply - in Germany is well documented, as are disastrous consequences to moves in South Australia and King Island's wind farm project in Tasmania.

Wind and solar costly and inappropriate

Studies show that major wind and solar sites are inappropriate for South Africa; they require many hidden subsidies and are extremely costly.  

An examination of Eskom’s annual results in 2017 reveals that the power utility's revenue was R177bn. Of its raw energy budget of R83bn, 24% was paid to IPPs.

A substantial amount of that electricity was not required. About R20bn was paid for electricity from IPPs. This in effect amounts to a direct subsidy for renewable energy. 

There is nothing like the test of global reality. In 2016, prices paid by industry in Germany were 52% higher than in France (nuclear) and 86% higher than Poland (coal). 

There is no country in the world with high penetration renewables, where electricity prices are cheaper than coal or nuclear-powered electricity where available. 

South Africa is well endowed with the world’s most efficient and cheapest energy sources, namely nuclear and coal. It has no legal commitments in terms of the COP21 global agreement on climate change. 

SA must put own economic and social interests first

It must do what other high growth emerging economies are doing, “placing their own economic and social interests first”.

Some commentators believe that purchasing nuclear will lead to South Africa losing its sovereignty to overseas vested interests. However, nowhere is this statement truer than in the high stakes renewable industry. 

South Africa is rapidly losing its sovereignty to the overseas vested renewable interests in Germany and Denmark. The country will be committed to long-term purchase agreements of high tech renewable imports for decades to come, while creating minimal ongoing employment.  

It has been estimated that about 60% of expenditure will go to foreign interests. Over the next 20 years the renewable plan will cost over R1.4trn. R800bn will be spent on imported components and foreign payments. 

Before signing any final agreements, the government needs to reconsider these issues very carefully. If South Africa goes ahead on its current path it will slow economic growth, insidiously increase poverty and inequity and ultimately lead South Africa to political and social instability. 

Indeed, South African and its citizens will be facing a dark future.

  • Rob Jeffrey is an independent economic risk consultant and the former MD of Econometrix. He is an expert on South Africa's energy crisis. Views expressed are his own.

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opinion  |  ipps  |  energy  |  renewable energy
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