South Africa opens up power grid to private players to improve energy security

Companies will be able to generate up to 100 megawatts of electricity without a regulatory licence

The coal-fired Matla Power Station in South Africa's Mpumalanga province. A partial privatisation could lead to 100 billion rand being invested in assets to generate more power in South Africa, accordShow more

The misery of ongoing power cuts that are damaging Africa’s largest industrial economy may finally be coming to an end, with industry now allowed to generate its own energy.

South Africa generates most of its electricity from a fleet of ageing coal-fired plants, which are prone to breakdowns. When this happens, state energy utility Eskom cuts power to large parts of the country, sometimes for many as eight hours a day.

However, President Cyril Ramaphosa made a surprise announcement in June that companies could produce up to 100 megawatts without requiring a regulatory licence. To put it into perspective, a typical gold mine, which is among the largest users of electricity, requires between 20MW and 30MW for operations.

“The energy shortfall is a major risk to our economy,” said Mr Ramaphosa during a televised address. “Energy security is one of the priority interventions in our economic recovery plan.”

The sudden announcement caught many off guard, though.

“This was quite a surprise,” says Henk Langenhoven, chief economist at the Minerals Council, which represents the mining industry. Mines had been lobbying for a 50-megawatt exemption limit, while just two weeks earlier South Africa's Minister of Minerals and Energy Gwede Mantashe had been insisting that no more than 10 megawatts was on the table.

Many of the mines and related industries already had plans to set up solar, wind and other electricity-generating projects.

“We estimate there is at least 30 billion rand ($2.1bn) of electricity projects ready to go, which is equal to a third of the country’s fixed investment in 2019,” says Mr Langenhoven.

Beyond the mining industry, total investment could be as much as 100bn rand in the coming decade, according to Intellidex, a Johannesburg financial consultancy.

So far, there has been no directive as to what form the electricity generation will take but the general assumption is that for the most part it will be renewables such as wind and solar, says Prof Sampson Mamphweli at The Centre for Renewable and Sustainable Energy Studies at Stellenbosch University.

Other sources of energy are also expected. “With natural gas, we expect some capacity will come from there,” he said.

However, coal is the least likely candidate, in spite of the large deposits found in the country. This is because few banks or lending institutions are now making finance available for new coal mines or power plants, says Prof Mamphweli.

“It is very difficult to get finance for coal projects. We cannot rule it out, but expect a lot of solar and biogas.”

Already, companies are unveiling plans. Private hospital group Mediclinic says it will install solar panels across six of its hospitals countrywide.

“The solar PV systems will generate electricity that is supplied directly to each hospital site, affording them cost savings on their monthly power bills while relieving pressure on the constrained national grid,” the company said.

Also moving ahead is US car manufacturer Ford, which has a large assembly plant near the capital, Pretoria. The company will build one of the world’s largest solar-covered parking bays – a total of 4,200 covered spots for cars awaiting delivery. The project will deliver 13.5 megawatts and reduce reliance on the national grid.

Mining company Gold Fields has already received permission for a 40MW solar farm at its flagship South Deep gold mine, east of Johannesburg. The company is drawing on lessons it already learnt from its Australian operations, where it uses battery storage together with wind and solar.

Given that the country now has an unemployment rate of about 75 per cent among youths – classified as school leavers under 24 years of age – according to government statistics, it is hoped the infusion of energy projects will lead to mass job creation.

However, the scope of deregulation raises some questions. For instance, most towns and cities rely heavily on electricity sales for their revenue. They buy power from Eskom and sell it to businesses and homes within their borders.

“Around 70 per cent municipal revenue is from electricity sales,” says Lungile Mashele, an energy specialist at the Development Bank of Southern Africa.

The move, she says, would ultimately affect their bottom line.

“Municipalities also provide vital services such as clinics, water and roads, which are cross-subsidised by energy sales.”

Still, it appears the government will press ahead with its plans, Eskom's chief executive Andre de Ruyter said during an online conference last month.

He said consumers and industry could soon expect relief from power cuts.

“Judging by the example of Vietnam, where they were able to add about 7,200MW to the grid in a period of 18 months following similar deregulation, we are hopeful that we will see more capacity added to the grid sooner,” said Mr de Ruyter.