Energy System Transition and Policy

Dr Kenneth Creamer

University of the Witwatersrand

19 October 2021

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Executive Education Programme for

South African Senior Government Officials

School of Government

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Introduction – A key policy questions of our times

• A key economic policy question currently is how South Africa’s energy transition, can be optimally designed to promote inclusive growth, industrial development, and employment creation?
• The answers must lie within the new investments, new industries and new products and services which will come into being due to the country’s decarbonising energy transition.
• Also certain employment, sectors and regions will be negatively affected by the transition – there will be winners and losers – what policy measures must be put in place to assist those who will be negatively affected?

What is driving the energy transition?

• Technological change – as we have seen in other sectors like telecoms, mobility, new technology has meant that it is cheaper and cleaner to produce electricity with wind and solar power
• Global warming and climate change – there is a policy imperative to produce energy in a manner that is not producing carbon dioxide or green house gases e.g. a recent UN IPCC report on climate changes shows that Southern Africa is already experiencing hotter, drier conditions than in the past 50 years
• According to Eskom, the energy sector will in the years ahead experience 4 D’s – decarbonisation, digitalisation, decentralisation, and democratisation

What are the potential economic benefits?

• According to the CSIR, South Africa’s energy transition can result in:
• net increase in employment
• reduced carbon emissions and reduced water consumption
• creation of new industries such as, renewables and electric vehicles
• restore the competitive advantage of low-cost electricity
• enable exports of hydrogen and clean synthetic fuels
• support universal access to electricity
• increased flexibility of the economy to respond to changes in growth and energy demand, and
• increased electricity security

What could go wrong with SA’s energy transition?

• Lack of investment in new capacity as old capacity fails – ongoing and deepening electricity shortages
• Poorly designed local content rules leading to delays and shortages
• Eskom and fiscus overly indebted cannot grow the national grid and facilitate enough investment to unlock the transition
• Inappropriate regulatory framework – getting prices wrong and not updated to deal with wheeling
• SA economy loses competitiveness due to unreliable electricity supply and carbon intensity of exports
• Lack of just transition framework leading to ghost towns and rising unemployment, in areas like Mpumalanga

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Cost of loadshedding

Modelling impact of of technological change

Success vs Failure

• Both sides of the argument have theoretical support:
• it technological changes may result in more employment and higher wages, or
• technological change may result in job losses and lower wages.
• The outcome which will be achieved is conditional – depending on how the economy actually responds to the technological change.
• This is not an inevitable process, it depends on the institutions and government policies that guide the introduction of new technologies.
• This is why a Social Compact on a Just Transition is crucial – not to slow down the transition, but to shape it and make it succeed

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Social Compact on Just Transition

• Legal frameworks, public policy and the practices of trade union and employer organisations will all determine the direction and the extent to which technology changes impact on employment and wage levels.
• If public resources are mobilised in order to re-skill workers, if public utilities are able to repurpose aging plant and provide new employment opportunities, then the risks to incumbent workers and affected communities will be ameliorated.
• If policy frameworks operate efficiently to ensure that new firms are able to gain licenses to begin deploying the new technologies and speedily commencing their operations, then the net effect may be increased employment levels and rising real wages.
• If Eskom’s debt is reduced, a restructured public-owned entity will be able to play a leading role in the energy transition – generation, distribution and most importantly transmission
• If such contingencies do not occur, then there is a real risk that losers will outnumber winners and that the net effect of the technology shift will be negative.  

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What are the key instruments?

• The Integrated Resources Plan – a key plan instrument that need to be constantly recalibrated and run independently through IPP Office, without corruption
• A Restructured Eskom – publicly-owned and with a sustainable debt level (so it can move beyond junk status and borrow again on the capital markets) in order to play a leading and strategic role in the energy transition
• Dynamic private sector investment by SA and foreign companies – including cutting red tape for independent power projects (IPP’s) of up to 100MW
• Smart and modernized regulation through Nersa to allowing cost reflective tariffs and charging for IPP’s to ‘wheel’ across the grid, and responsiveness
• Industrial policy objectives – upstream and downstream linkages
• Nationally Determined Contribution (NDC) commitments whereby SA commits to reduce its carbon output (electricity is he key sector as it inlfuences the carbon output of many other sectors) in return for concessional finance to fund energy investments and just transition costs

Table 1 South Africa’s Integrated Resource Plan 2019

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Restructured Eskom

Easing Regulations to allow own generation of up to 100MW

• It is estimated that this reform, as part of the ERRP, will bring 2500 MW to 5000 MW of self-generation capacity within the next 18 - 24 months.
• This will ease loss shedding costs
• Save existing jobs
• Create new investment and new jobs linked to these investments on mines, shopping centres, factories, etc

Conclusions

• Outcome of SA’s energy transition hangs in the balance and will be determined by whether the state can play a developmental and guiding role in the years ahead
• A real test for the post-State Capture, ‘developmental state’ is to marshall a number of key instruments in order to achieve the country’s overall investment, growth and employment objectives:
• Integrated Resources Plan
• Restructuring of Eskom
• Expanded private sector investment
• Smart and modernized regulation
• Industrial policy linkages

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Question for Further Discussion

• ‘What could be the broader economic benefits, and costs, of implementing initiatives towards a just energy transition in South Africa?’

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Reading List

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• Bischof-Niemz, T. ‘If there are more jobs in renewables, why are coal miners so unhappy?’, Engineering News, March 2019

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• Bischof-Niemz, T. ‘Are Renewable IPP’s destroying Eskom?’, Engineering News, September 2019

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• Creamer, K. “Energy and the Green Economy”, Presentation to Colloquium organised by CBPEP, June 2021

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• Creamer, K. “The Energy Transaction and a new economic growth model for SA”, accepted for publication, 2021

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• Meridian Economics, Cutting through red tape: a shortcut to solving SA’s power crisis”, November 2020

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• Meridian Economics, “The Just Energy Transaction: A Developing Country Coal Retirement Mechanism”, September 2021

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• United Nations Inter-Governmental Panel on Climate Change Report Climate Chang 2021, The Physical Science Basis

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