South Africa’s Elusive Negawatts

Terri Hathaway
Monday, March 2, 2009

Since 2006, South Africa’s energy crisis has dealt a serious blow to Africa’s largest economy, cutting off big industries and energy-importing neighbors, and derailing planned investments. At times, the shortage has plunged the country into darkness. The shortage will be a reality for the next five years, if not longer, according to government sources. South Africa must urgently find 3,000 MW to stabilize its electricity supply system just to tackle the current shortage.

One organization says they know where the cheapest power can be found. “South Africa could save 3,000 MW in the next four years by making the existing system more efficient,” says Mark Borchers, Director of Sustainable Energy Africa (SEA), a Cape Town group working to raise capacity on clean energy at the local and national level. According to Borchers, filling the gap through energy efficiency could cost less than a fifth the price tag for new coal-fired power plants.

An upcoming report by SEA paints a clear path for South Africa to embrace energy efficiency. “Not only is it possible, it can save us money,” says Borchers. “Ignoring it is going to be a very costly choice for the country.”

According to SEA’s report, efficiency is the cheapest, quickest way to relieve the current electricity shortage. A new coal-fired station costs about US$1.6 million per megawatt (MW), not including decommissioning or externality costs. Efficiency measures would cost on the order of 15-20% of such “new build” options, resulting in $343,000 saved per MW.

Direct savings are not the only benefit, according to SEA. Energy efficiency helps create new jobs and maintain existing ones in both the energy sector and the greater economy, because money saved on reduced energy consumption can be spent elsewhere. The SEA report cites an Australian study’s findings that energy efficiency would support as much as eight times the number of direct jobs per unit of energy compared with coal mining and power generation. In South Africa,1,000 youths have already been trained in energy efficiency jobs through a joint government-NGO initiative. Programs to train energy auditors and contractors (to install insulation, low-flow shower heads, lighting and solar water heating) can and should be intensified, SEA says.

What’s the hold up?

South Africa has made some strides toward energy efficiency. They implemented a national energy efficiency strategy in 2005 and established a national agency in 2006. South Africa’s power utility, Eskom, has for years touted its Demand Side Management (DSM) program, which includes energy efficiency.

But SEA believes much more must be done, and soon. In the last fiscal year, Eskom committed just $56 million to DSM. “Even at its best, Eskom’s commitment to DSM programs is less than 1% of its annual new-build budget,” says Borchers. SEA’s report found that South Africa demand has achieved only a 2% reduction since load-shedding began, not the 10% reduction needed to stabilize the situation. “Given the economic case for energy efficiency, the technical and management options readily available, the seriousness of the power crisis we face, and the amount of time the national energy efficiency strategy and Eskom’s DSM program have been in existence, this is a significant under-achievement,” concludes the report.

Eskom says it plans to spend over $33.5 billion over the next five years on new and upgraded power supply projects. Some analysts believe this cost could easily escalate by $10 billion or more in the difficult global credit market. South Africa’s treasury recently agreed to provide guarantees for World Bank and African Development Bank loans to Eskom, which have approved loans in the unprecedented amounts of $5 billion and up to $1.5 billion, respectively. While specific projects have not yet been targeted, the loans will likely support multiple coal and other new power stations outlined in Eskom’s five-year program. It’s not clear whether any funds could be used to expand Eskom’s DSM program, which has historically received just a fraction of the utility’s “new build” budget over the past few years.

Eskom represents nearly half of Africa’s electricity market and 80% of southern Africa’s. Effects of the country’s energy decisions ripple beyond its borders, paving the way for new dams and other power plants. But many energy activists in the region hope to leverage the current energy crisis as an opportunity to introduce more progressive, national- and utility-level energy decisions that strive to make energy consumption more efficient.

Eskom aside, the South African government may be starting to pay attention. In its latest budget released in February, allocations for energy efficiency programs and institutions were significantly increased. Borchers is optimistic that energy efficiency is gaining momentum and national priority. “We are really pleased with the attention energy efficiency received in the current budget, especially because much of it will go directly to local municipalities to implement.” Companies that have installed equipment to improve their energy efficiency can recover up to 15% of their costs. A new tax on incandescent lighting is being introduced in an attempt to encourage consumers to switch to energy-efficient bulbs.

Where to start?

SEA’s report identifies eight recommendations for the country to embrace energy efficiency. The first is raising the price of South Africa’s ultra-cheap electricity. Even after a 13% tariff increase last year, South Africa still sells some of the world’s cheapest electricity, giving industries and households little reason to turn off the lights. “We have to send the right price signals to consumers to make efficiency measures work,” says Borchers. “We want tariffs that hit heavy industrial and household users, not the poor. So the tariff structure has to be smart enough to low-income users, but make inefficiency by heavy users hit their pocketbooks.”

Pricing should also be restructured to separate Eskom’s ability to make money from the amount of electricity that it sells. This process, known as "decoupling," may require very small rate increases to offset the reduced sale of electricity. In the US, decoupling has not resulted in any significant rate increases, and has led to more stable electricity prices.

"We recognize that for utilities such as Eskom, the financial bottom line will remain the dominant influence in their decision-making, so from their perspecive the resistance to reducing electricity sales through efficiency initiatives may be understandable," Borchers says. "But through carefully designed mechanisms such as decoupling, it can actually be more financially beneficial for them to invest in efficiency rather than new build. So it's a win-win -- the utility preserves their bottom line and the country has implemented an economically sensible efficiency program."

Other recommendations include increased budgets for existing energy efficiency programs, developing training programs for new jobs and retrofitting public buildings. Government officials said in December they had already retrofitted 4,000 buildings, at a savings of $5.6 million a year in electricity costs. The more daunting, institutional reforms round out the list, including: building institutional leadership, changing incentive structures, building consumer education and communication programs, and improving data collection and transparency.

SEA is cautiously optimistic that the times are indeed changing. "Although achievements have to date been small compared to what's needed, there is no doubt that government has started to take the need for efficiency seriously, and it's reasonable to expect the next few years to deliver much greater gains than we've seen to date," says Borchers. "In an energy sector characterized by lack of capacity in some key local and national government departments, strong vested interests and fragmented governance, government will need to be strong to achieve this. May we be up to the challenge!"