Investments seek demand requirements to be met

Given the current dampened state of national economic growth – with gross domestic product (GDP) growing at 1.9% in 2013, compared with government’s long-term target of 4% to 5% – and industry’s rising focus on energy efficiency, the future of electricity demand in South Africa is anything but certain, says consulting firm Frost & Sullivan.

Already, lower-than-expected GDP growth and price-elastic demand behaviour have led to significant adjustments in consumer demand. The Integrated Resource Plan update wisely advocates that “commitments to long-range, large-scale investment decisions should be avoided” to ensure “decisions of least regret”.

If the construction of six new nuclear reactors is implemented – 1 600 MW each – and the projects take about nine to ten years to complete (the current global industry average), it will do little to ease South Africa’s near-term energy shortages.

If significant investments are made in a nuclear build programme, but demand requirements fail to reach projected levels, while industry begins to devise alternative solutions that can be more quickly implemented, there is a risk of commissioning a ‘white elephant’ in the energy sector in 2025, which will leave the country with a few thousand megawatts of excess baseload capacity.

Given the drive to expand the regional distribution of electricity, however, there is the potential that, if such excess capacity were to materialise, electricity could be exported and sold to members of the Southern African Power Pool.

However, initiatives such as the largest proposed hydropower scheme, the Grand Inga hydropower scheme, in the Democratic Republic of the Congo, also need to be considered by policymakers in the planning of scenarios.

This project, which is set to add 40 000 MW of power to the sub- Saharan Africa grid, recently received grant approval from the World Bank.

The power generated will be exported out of Central Africa and could meet the demand needs of various countries – possibly limiting South Africa’s electricity export potential, as well as the need for extensive internal generation capacity additions.

Therefore, energy policymakers should realistically reflect on such national and regional risks, given that, at some level of excess capacity, industry participants may struggle to achieve the required return on investment.

Consideration should also be given to credit ratings and the cost of servicing debt. State-owned power utility Eskom is already struggling to meet its costly debt obligations and should be looking to implement projects with the lowest possible risk profiles.

The cost of debt is, to a large degree, determined by the associated risk of Eskom’s asset, liability and earnings portfolio, which is assessed by the various credit rating agencies.

The ‘World Nuclear Industry Status Report 2013’ states that “rating agencies consider nuclear investment risky and the abandoning of nuclear projects explicitly credit positive”, and reports that 67% of nuclear utilities assessed between 2008 and 2013 had been downgraded.

However, these recent credit rating downgrades have most likely not yet factored in the risk of a confirmed nuclear build programme.