DA Energy Policy: Powering the economy for growth
December 2013
Contents
1.
Introduction .................................................................................................................................... 3
2.
Energy planning and energy challenges in South Africa ................................................................. 3
3.
Overhauling the institutional framework governing the energy sector ......................................... 6
4.
Getting the energy mix right ........................................................................................................... 8
5.
A sustainable pricing path ............................................................................................................. 10
6.
Up-scaling renewable energy in South Africa ............................................................................... 12
7.
Ensuring security of supply in the liquid fuels sector ................................................................... 13
8.
Building 21st century electricity distribution networks in South Africa ........................................ 15
9.
Tapping into the potential of the region’s energy resources ....................................................... 18
10.
A household energy strategy .................................................................................................... 20
11.
Up-scaling energy efficiency ..................................................................................................... 22
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1. Introduction
The energy sector plays a dual role in growing economies. It contributes to growth and creates jobs
through the activities involved in extracting and distributing energy to the economy, and it
underpins growth in the rest of the economy as a key input in nearly all goods and services1.
In fact, since the industrial revolution, economic growth in countries around the world has been
closely correlated with an increase in the utilisation of energy.
“Energy is the lifeblood of the global economy – a crucial input to nearly all of the goods
and services of the modern world. Stable, reasonably priced energy supplies are central
to maintaining and improving the living standards of billions of people.”
(World Economic Forum, 2012)
In South Africa, the development of our economy has historically been driven by what is termed a
Minerals-Energy complex, where cheap electricity has facilitated the exploitation of our country’s
vast mineral reserves. Cheap electricity was in fact one of South Africa’s major competitive
advantages in the past and as a result we have built up an extremely energy intensive economy.
Historic underinvestment in energy infrastructure has both (i) undermined the affordability of
electricity in South Africa, and (ii) created a situation where our economic expansion is constrained
by insufficient and unreliable electricity supply.
In addition to these challenges, the energy sector is overly reliant on coal for its primary feedstock.
This has devastating consequences on our local and global environment. South Africa’s greenhouse
gas emissions are on par with that of highly developed economies and our per capita emissions are
amongst the highest in the world. In addition, our current overreliance on coal has led to a number
of local environmental problems such as Acid Mine Drainage (AMD) and local air and water
pollution.
South Africa is thus in a situation where it simultaneously needs to:
 Contain escalating energy prices;
 Expand energy generating capacity; and
 Reduce our reliance on coal, which has historically allowed for the generation of relatively cheap
electricity in South Africa.
2. Energy planning and energy challenges in South Africa
Integrated Resource Plan for Electricity, 2010
South Africa’s 20-year energy plan as encapsulated in the Integrated Resource Plan for Electricity
2010 (IRP 2010) does not sufficiently alter our energy trajectory. According to the Plan, 42% of new
energy generation is supposed to come from renewable energy sources, however our current
1
World Economic Forum. 2012. Energy for Economic Growth – Energy Vision Update 2012. Available. [Online]:
http://www.weforum.org/reports/energy-economic-growth-energy-vision-update-2012 (May 2013).
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trajectory suggests that by 2030 only 9% of total generated electricity will come from renewable
energy sources.
The DA believes that this will not be sufficient to build the required economies of scale to enable us
to establish a manufacturing base in green energy industries.
Other concerns around South Africa’s energy policy as encapsulated in IRP 2010 include the
following:
 The plan requires a estimated R1 trillion potential investment in new nuclear energy capacity,
which could bankrupt the South African economy.
 The plan does not adequately factor in gas as a potential major contributor to our energy mix,
despite the abundance of this resource in the Southern African region.
 It puts far too little emphasis on energy efficiency. A potential saving of 3 200MW is mentioned.
Eskom itself has stated that it could be possible to save between 10 000 and 12 000MW through
energy efficiency measures over the next 20 years.
Eskom and rising electricity prices
Currently 98% of South Africa’s electricity is generated by Eskom. Inefficiencies at Eskom and a
sustained lack of investment in critical energy infrastructure are now driving up the price of
electricity in South Africa.
Independent Power Producers
Although a commitment was made by the government over a decade ago to source 30% of our
electricity from Independent Power Producers (IPP), they still account for only 2% of our energy
supply. This is, in part, due to the stranglehold that Eskom enjoys over our energy sector where it
has an almost complete monopoly on generation, is the sole owner of the transmission grid and
distributes electricity to 48% of households in South Africa. It is therefore clear that the institutional
framework governing the electricity sector in South Africa needs to be overhauled in a way that can
facilitate far more competition and drive efficiencies.
Thinking differently about distribution
In terms of electricity distribution, the situation is equally dire. A maintenance backlog of over R35
billion has been allowed to accrue, with many distribution networks in municipalities around the
country being unable to adequately supply reliable electricity to the households and businesses that
depend on it.
To address growing demand it will, however, not be sufficient to maintain old distribution networks.
Network expansion must be based on a vision of how to handle the demand of a 21st century energy
sector and must look to innovative solutions, including the use of smart meters and allowing
households to feed power directly back into the grid.
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Access to electricity and the need for a household energy strategy
It is also a sad reality that 3.4 million households in South Africa, accounting for 26 % of the
population, still do not have access to electricity2. This is despite a commitment by government that
there would be universal access to electricity by 2014.
Unfortunately this has become a moving target, with government constantly having to revise the
final date because of its failure to meet its energy objectives. Households without access to
electricity have to rely on other energy sources such as firewood, paraffin and dirty coal for their
thermal and cooking needs.
This has devastating health consequences, with respiratory conditions due to indoor air pollution
being responsible for a devastating number of deaths in South Africa every year3. Many poor
households who have been connected to the electricity grid still rely on other energy sources for
their thermal and cooking requirements as the price of electricity has become prohibitively high.
We therefore need a household energy strategy that can identify the most appropriate energy
sources for particular needs and concomitant policies to ensure that those energy sources are
utilised.
Liquid fuels
In the liquid fuels sector it is clear that our energy security is threatened by the fact that current
refining capacity is inadequate to meet the growing needs of our transport sector.
“South Africa has now run out of refining capacity and must import a share of the
country’s refined fuel needs.”
(National Planning Commission, 20114)
Refining production is in the main owned by the private sector. Conflicting policy signals from
government has, however, discouraged the private sector from investing in major upgrades to its
production facilities.
It is clear that policy certainty is needed in order for major investment to take place in South Africa’s
refining capacity.
2
South African Institute of Race Relations. 2012. South Africa Survey: 2012. Johannesburg: SAIRR. P 650.
According to the World Health Organisation (WHO), indoor air pollution from solid fuel use globally accounts for 1.6 million deaths per
year [WHO. nd. Indoor Air Pollution, Health and the Burden of Disease. Available: [Online]:
http://www.who.int/indoorair/info/briefing2.pdf (May 2013).] In South Africa, an estimated 2 489 people (including 1 400 children less
than five years old) per year die of respiratory problems related to indoor air pollution (Barnes, B. et al. 2009. ‘Household energy, indoor
air pollution and child respiratory health in South Africa’ in Journal of Energy in Southern Africa. 20(1):4-13.)
4
National Planning Commission. 2011. Other fuels – Liquid fuels. Available. [Online]: http://www.npconline.co.za/pebble.asp?relid=180
(May 2013).
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The way forward
To ensure that the energy sector can play its role in supporting the economic growth we need to
create jobs and address South Africa’s development challenges, the DA proposes an energy policy
based on the following principles:
 The institutional framework for the energy sector must allow for greater participation by
independent power producers.
 The energy mix must be cognisant of the true cost of externalities related to different energy
sources and the comparative cost of energy efficiency measures.
 There is a need to liberalise the energy market and develop energy pricing mechanisms that do
not place disproportionate price demands on consumers.
 South Africa must commit itself to significantly increasing the use of renewable energy sources
over time.
 Security of supply in the liquid fuels sector must be promoted through policy certainty in the
local liquid fuels sector and greater regional integration of liquid fuel markets and supply.
 There is a need for substantial investment in South Africa’s electricity distribution networks.
 Regional energy sources must be harnessed more effectively.
 The household energy strategy must be devised to promote universal access and to improve
affordability of safe energy services.
 Energy efficiency measures can be utilised as a potential cost-effective alternative to capacity
expansion.
These principles and its practical implications for policy are discussed in more detail below.
3. Overhauling the institutional framework governing the energy sector
The first step that needs to be taken in addressing our current energy crisis is to overhaul the
institutional framework underpinning the energy sector.
As stated previously, the energy sector, particularly in electricity, is characterized by a monopolistic
stranglehold that makes it extremely difficult for South African businesses and households to
become part of the energy solution.
Eskom currently accounts for 98% of all electricity generated in South Africa, with Independent
Power Producers contributing only 2%.
To unlock the energy potential in our country, this ratio must change radically.
The DA believes that this can be achieved through the following:
 Create a Transmission Service Operator who owns the grid and is entrusted with energy
modelling and procurement of energy from both Eskom and IPP’s.
 Allow for Wheeling through the grid so as to allow companies to procure electricity directly from
Independent Power Producers.
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Transmission Service Operator
To radically alter the institutional framework of energy provision in South Africa, the DA would fasttrack the creation of a Transmission Service Operator (TSO).
We propose that the management and ownership of the grid (including ownership of the asset)
should be transferred to this new entity in its entirety. This will ensure that Eskom is no longer able
to lock out IPPs from selling electricity to the grid.
Key operating principles of the TSO will include the following:
 The TSO will take responsibility for the modelling of the energy needs of the country and for the
procurement of electricity into the national grid.
 The Minister of Energy and the Department of Energy would still set certain parameters that
would need to be fed into the energy modelling process, but institutional capacity for modelling
will be built up within the TSO.
 The TSO will decide on the proportion of energy procured from Eskom and from IPPs. At the
moment, the Minister of Energy can decide on these matters and IPPs are not allowed to build
new generating capacity unless the Minister makes a determination in support thereof.
Eskom’s management of the national grid and the Energy Minister’s control over the expansion of
generation capacity by IPPs have constrained the capacity of IPPs to provide solutions to our energy
crisis.
In the process Eskom has been shielded from any potential competition with devastating
consequences for the efficiency of its new build programme.
The Medupi power station is a good case in point. Medupi’s initial R90 billion price tag was already
three times the price per megawatt of most new coal fired power stations being built in the world.
The building programme remains behind schedule and the final price tag with financing costs looks
set to come in at around R150 billion. This will probably make it one of the most expensive coal fired
power stations ever built in the world.
Expensive and poorly managed new build programmes place massive upward pressure on our
electricity price path with devastating consequences for our economic growth.
IPPs can, in contrast, build power stations at a smaller scale and have greater incentives and
generally more capacity for innovation to decrease costs per megawatt over time.
To enable participation in the energy market by IPPs, the playing field must be levelled and decisions
about generation capacity cannot be subject to the whims of the Minister of Energy.
Wheeling through the grid
In the current energy policy environment, all South Africans are being forced to pay for a massive
new build programme which will mainly supply a few energy intensive companies. The major risk in
this scenario is that if the electricity comes on line at a cost that is deemed unaffordable by the
major users they could choose to expand their operations elsewhere in the world.
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South Africans would therefore be paying for new power stations that will become extremely
expensive white elephants5.
The DA therefore believes that wheeling through the grid has to be permitted.
Wheeling occurs when an IPP builds a power station in one part of the country and is then allowed,
at a certain fixed cost, to wheel that energy through the grid so that it can be consumed by a
company elsewhere.
This provision would allow energy intensive companies to directly procure their energy from an IPP,
thereby providing that company with the comfort of a secure supply of electricity to power its
operations at a cost that it can negotiate privately.
To prevent continued over-reliance on coal by IPPs, wheeling can be made subject to commitments
by companies to procure a certain percentage of its energy from renewable sources.
The “privatisation” of supply risks through direct contracts facilitated by wheeling is beneficial for
large energy users, who gain reliable energy supply at agreed prices, and for South African
households, who are relieved of the responsibility to co-fund energy expansion from which they will
not necessarily benefit directly.
4. Getting the energy mix right
It is crucial that South Africa’s 20-year energy plan delivers the most appropriate quantity and mix of
energy sources to power our country’s economic growth.
Getting South Africa’s energy equation right in the context of a rapidly evolving global energy sector
is certainly one of the most important challenges facing our country. The stakes are extremely high
on all sides and getting it wrong could prove disastrous for the long term prospects of our economy.
On the one hand, we need to ensure that we have sufficient energy to power a growing economy
over the next 20 years, and that this energy is provided at a rate that is competitive with the rest of
the world.
On the other hand though, we must avoid making the mistakes of the past. We cannot afford to
invest precious financial resources in large power stations only to find that the projected electricity
demand does not materialize.
The DA believes that we need an energy policy that provides security of supply while at the same
time being flexible enough to respond to changing conditions.
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This is precisely what happened in the early 1990s where the expected electricity demand did not increase as projected and Eskom was
forced to mothball a number of coal fired power stations at great expense to the State.
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We believe that this can be achieved by a commitment to the following:
 Producing an Integrated Energy Plan along with a comprehensive externalities of energy study;
 Reviewing the current IRP to factor in the rapidly changing price structure of new energy
technologies; and
 Developing a more flexible 20-year energy plan that puts greater emphasis on smaller scale
generation that avoids lock-in.
The Integrated Energy Plan and energy efficiency
The 20-year energy plan contained in the government’s Integrated Resource Plan (IRP) only makes
provision for 3 200 MW of energy savings over the next 20 years.
The difference between this projected saving and the estimated 10 000 to 12 000MW savings that
Eskom has indicated can be realistically achieved, is almost equivalent to the 9 600MW generation
capacity of the government’s proposed nuclear build programme.
The need for a nuclear build programme estimated to cost the country close to R1 trillion could thus
potentially be negated through investment in efficiency gains.
Internationally, IRP’s will specifically calculate the cost of implementing energy efficiency measures
as a way of comparing them with the cost of expanding generation capacity.
In the South African IRP, the national energy efficiency targets have not been incorporated in
forecast modelling and the low estimate for gains from energy efficiency is not suitably justified6
(and appears to be a convenient thumb suck to justify a massive expansion in generation capacity).
The DA therefore believes that our 20-year energy plan must be revised to include a thorough
modelling of energy efficiency and the comparative cost of being more ambitious about our present
targets.
The Integrated Energy Plan and expected demand
A further risk contained in current IRP is that the projected demand for energy could come in at a
figure far lower than that which is currently projected. In fact current Eskom grid data is showing a
decline in energy demand over the last two years as opposed to the steady demand growth
projected in the current IRP.
Given the continued escalation in electricity prices both households and businesses are strongly
incentivised to reduce their energy consumption.
In the case of energy intensive companies, a decision could be made to expand their operations
elsewhere in the world if they believe that the comparative costs of energy are cheaper in other
countries. This could in turn lead to catastrophic runaway electricity prices that would constantly
have to be increased to fund new generating capacity that could stand idle. This scenario must be
avoided.
6
Fischer, R. & Maguire, G. 2013. ‘Energy: Choices made in government’s IRP2010 need to be revisited’, in Mail & Guardian. Available.
[Online]: http://mg.co.za/article/2013-05-02-ndp-irp2010-energy-eskom (May 2013).
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In addition to the wheeling through the grid discussed above, major lock-in to a specific energy
future can be avoided by a more flexible energy plan. Greater flexibility can be achieved by focussing
on establishing smaller scale power stations that will take significantly less time to be brought on
line, that reduce lead times in developing generating capacity and thus allow the supply of electricity
to be more closely aligned with the energy demands of the country. The IRP must be revised with
this in mind.
The Integrated Energy Plan and externalised costs
A further factor that must inform our 20-year energy plan is that of the externalised costs that our
economy will have to shoulder as a result of certain energy generation technologies.
The National Energy Act (2008) specifically calls for an Integrated Energy Plan that will compare the
externalised costs of different energy sources. This could include negative externalities such as water
and air pollution as well as the positive externalities such as job creation and industrial formation.
The IRP does not currently include an analysis of externalities and no study has been commissioned
by government to quantify the externalised costs associated with different energy sources.
The DA will invest in research on the externalised costs related to different energy sources in South
Africa and will utilise the findings from this research in developing an integrated energy plan with
realistic comparative cost models.
5. A sustainable pricing path
Poor planning and low levels of investment, coupled with an inefficient state monopoly in the form
of Eskom, has created a situation where electricity supply is simultaneously insecure and increasingly
expensive.
On the one hand, businesses are reluctant to make further investments and expand their operations
because they fear further electricity supply disruptions. On the other hand, money is being taken out
of consumer’s pockets (in the form of exorbitant tariff hikes) to fund infrastructure upgrades that
the state should have completed years ago. Both issues impose constraints on economic growth and
job creation.
Between 2010 and 2012, South Africans were subjected to electricity price increases of 24.8%, 25.3%
and 16.09%. In 2012/13, Eskom applied to the National Energy Regulator (Nersa) for a further 16%
increase in electricity prices in each of the five years in the third multi-year price determination. This
was intended to fund the full cost of planned capital expenditure for new electricity generation
capacity even though the parasitic parastatal recorded a R13.2 billion profit in the year to March
2012 (a 60% increase on the previous year)7.
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Following public hearings on the proposed tariffs and considering approximately 200 written and 162 oral representations, Nersa granted
Eskom an 8% increase per annum over the five-year term of the third multi-year price determination (SAPA. 2013. ‘Nersa gives Eskom
annual 8% tariff increase’, Mail & Guardian. Available. [Online]: http://mg.co.za/article/2013-02-28-nersa-rejects-eskoms-16-tariff-bid
(May 2013).
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Electricity is a critical input for small and medium sized businesses – the most labour-intensive sector
in South Africa. Making electricity unaffordable therefore directly kills jobs and leaches disposable
income from already-stretched households. South Africa’s electricity crisis will not be solved by
placing a further financial burden on small businesses and ordinary consumers.
In a fully competitive energy market, energy prices will be determined by demand and the primary
priority in containing energy prices must be to dismantle Eskom’s monopoly.
Whilst Eskom retains control of generation, transmission and distribution, the DA believes that
electricity tariff increases must as far as possible be inflation-related.
Eskom tariff hikes can be contained through the following:
 Eskom should issue energy and infrastructure bonds on international capital markets. In this
way, we can harness the dynamism of the market through state-guaranteed bonds and avoid
the negative externalities associated with the current methodology of price determination.
 A reconsidering of the Modern Equivalent Asset (MEA) methodology that allows Eskom to inflate
the purported cost of the replacement of assets.
 Taking a more realistic view on the return on equity that the government can expect on its
investment in Eskom. In its 2012/13 application to Nersa, Eskom worked on the assumption that
it should deliver a 7.8% return on assets to the government, its shareholder. Nersa indicated
that a much lower return (3%) is justified for an investment of this nature in the current
economic climate.
 Administered prices for electricity are a matter of collective governance. The Treasury should
therefore be integrally involved in deliberations on price determinations. Energy policy should
therefore make institutional provision for the coordination necessary between departments to
ensure fair electricity pricing for all South Africans.
The price hikes that Nersa are permitted to allow are governed by the National Energy Regulator and
Electricity Regulation Acts. Amendments are currently under consideration to these acts, but they
fail to remove a particularly senseless clause in paragraph 15 (a) of tge Electricity Regulation Second
Amendment Bill, which determines that “The Regulator, in setting and approving tariffs… must
enable an efficient licensee to recover the full cost of its licensed activities”.
The regulator itself has agreed that this clause is especially damaging, given that Eskom’s ‘full cost’ is
predicated on a dubitable pricing technique. The DA believes that amendments to the Electricity
Regulation Act are required to change the requirements in paragraph 15(a) to read that the tariffs –
“may enable an efficient licensee to recover the partial cost of its licensed activities.”
In summary, the DA makes the following commitments in terms of electricity pricing:
 We will build a pricing model that is inherently inflation-related, producing certainty for
investors and burden alleviation for consumers over a five-year period. This will be achieved
through alternative costing and funding models for Eskom, which will predominantly involve the
issuance of government-backed bonds on international capital markets.
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We will build an institutional structure to ensure departmental co-ordination between Energy
and the Treasury for determining the price model and evaluating its impact on consumers.
The DA would build in legislative constraints on Eskom’s legitimate claim on consumers and
prevent the perverse incentives they currently have to overstate their costs.
6. Up-scaling renewable energy in South Africa
It is often stated that coal and uranium are South Africa’s most abundant energy resources and that
we should therefore be relying on them for our energy generation needs.
In reality, renewable energy sources (such as wind, solar and wave energy) are by far the most
abundant energy resources in South Africa.
 The potential wind resource in South Africa is sufficient to provide for about 12 000MW,
equivalent to more than 25% of our current total electricity capacity.
 Wave energy, although it is still in the experimental phase could ultimately add a further 6
000MW to the grid.
 The potential solar energy resource in South Africa dwarfs all other energy sources’ theoretical
ability to provide for all our current energy needs many times over (particularly on the
centralised generation level). In fact some places in South Africa currently have the highest levels
of solar radiation found anywhere in the world.
While the potential to generate renewable energy in South Africa is vast, we have thus far failed
dismally at tapping into this potential.
The high costs of harnessing these energy resources efficiently, along with the availability of
historically cheap coal-fired electricity in South Africa, has muted the development of the alternative
energy industry in the past. This is rapidly changing.
According to the Department of Public Enterprises’ own estimates, wind power is now able to
effectively compete on price with the cost of new coal fired power generation.
The cost of photovoltaic panels is also rapidly coming down, as China has achieved economies of
scale that comes from the building of massive integrated production plants.
Given its ability to also store its generated energy and provide electricity on a continuous basis, it is
Concentrated Solar Power (CSP) that most likely holds the greatest potential in providing for South
Africa’s baseload energy generation in the future though.
Being a nascent industry, South Africa also has the potential to become world leaders in this new
technology, where we could ultimately manufacture and export this technology to feed the world’s
growing need for clean energy.
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The current 20-year energy plan does – for the first time – accept that renewable energy can provide
for a growing share of our future energy needs. The plan currently envisages 17 800MW of
renewable energy capacity being built over the next 20 years, which means that 9% of South Africa’s
generated energy could come from renewable sources by 2030.
The DA believes, however that we can and must be more ambitious with our renewable energy
targets.
The DA will:
 Set a target of generating 23 000MW from renewable sources by 2030, which we believe would
be sufficient to attract companies to set up manufacturing plants for these technologies in South
Africa.
 Be more aggressive in pursuing the opportunities presented by the South African Renewables
Initiative (SARi) – a partnership with progressive countries to help finance the current
incremental costs of renewable energy roll-out in South Africa. This would include the setting up
of a secretariat for SARi as a matter of urgency and leveraging funds from the partnership to
achieve a far more ambitious renewable energy target.
 Expand the grid to areas of the country that show the greatest potential for large scale
renewable energy generation and increase the amount allocated in the IRP for small scale
renewable energy generation so that communities can start up their own projects and sell the
power back into the grid. This will be coupled with an Integrated National Electrification Plan, in
terms of which small scale solar farms can be set up in a mini-grid network that can feed back
into the national grid once it is expanded into those areas.
 Significantly increase Research and Development budgets for renewable energy, so that we can
start to build up leadership in certain sectors of this burgeoning global industry.
7. Ensuring security of supply in the liquid fuels sector
Liquid fuels policies, regulations and infrastructure in South Africa must be restructured, revitalised
and re-engineered to ensure optimal fuel security while reducing the cost burden on consumers and
ensuring greater flexibility to better absorb and manage price fluctuations of crude oil. Effective and
coordinated supply chain management within a complementary and integrated system must be
established.
Important considerations in determining South Africa’s policy around liquid fuels include the
following:
 South Africa’s existing liquid fuels infrastructure is out-dated and in urgent need of
refurbishment to both increase its capacity and to ensure that cleaner fuel standards can be
achieved.
 Uncertainty around energy policy and public investment in the state’s own Mthombo refinery is
making the refining industry hesitant to make the necessary capital investments, thereby
reducing the private sector’s potential future market share. Profit margins on refining crude oil
are under extreme pressure globally and the private sector is reluctant to invest in capital
upgrades in a context of policy uncertainty.
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The regional market for refined crude oil could either be met by increasing the capacity of South
Africa’s refineries or by building a new refinery in either Angola or Nigeria and importing some of
the refined product.
The expansion in the supply of Liquefied Petroleum Gas (LPG) and Bitumen to the South African
market is an important policy priority. LPG can be effectively and safely applied for home use
and in the generation of electricity. Bitumen is an essential commodity in infrastructure build
programmes, particularly in the expansion of and upgrades to our road network. Currently,
South African infrastructure to facilitate large LPG and Bitumen production, storage, import and
distribution is severely underdeveloped. Anticipating major sub-Saharan economic growth and
infrastructure development programmes, South Africa is strategically placed to become a key
player in the supply of LPG and Bitumen.
Modernisation, infrastructure upgrades and where necessary, infrastructure expansion within
the liquid fuels sector will make liquid fuels cleaner, affordable and secure. It will also generate
job creation, skills development, and stimulate economic growth.
The current fuel pricing structure is an Apartheid relic and must be re-evaluated to (i) do away
with some of the burdensome levies and taxes (ii) be constructed as a reflection of real supply
and demand fundamentals.
The DA seeks to create a reliable and flexible liquid fuel mix built on the import of both crude oil for
refining and refined petroleum product, depending on the relevant applicable international market
factors. This strategy would serve to optimise supply and minimise cost.
In national government, the DA would establish the necessary legislative and regulatory framework
to liberalise the liquid fuels sector and incentivise private investment.
The DA will:
 Establish a task team with the mandate to review liquid fuels energy infrastructure, storage,
refining and distribution network and make recommendations for the improvement and
realignment of the sector with current and future needs. Using built-in monitoring and
evaluation mechanisms, this task team will also establish measurable goals for the sector to
achieve . For instance, depending on viability, 100% capacity by 2020 to deal with sweet crude,
and 40% capacity by 2020 to refine heavy crude.
 Initiate transformation of the liquid fuels sector by bringing it into compliance with Euro
Emission Standards (Euro 5), ensuring cleaner fuels, minimising environmental impact, ensuring
supply and effective cost reduction of fuels.
 Improve and build new infrastructure at Durban, Milnerton and Saldanha to ensure that South
African facilities can handle imports and exports of large volumes of oil products across the value
chain. South Africa is geographically important as a strategic location for not only African
business but global oil trading between the west and the east. The improved infrastructure will
accommodate both the import and export of crude oil and refined product so that international
investment could be attracted to storage and blending facilities.
 Establish a sustainable and secure supply of sweet/light crude oil through building a dynamic
database of what volumes and types of oil are available at any given time. This database will
inform a DA government’s strategy of negotiating futures contracts with suppliers of preference
for the relevant refining capacity available at any given time.
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Establish appropriate incentives to attract capital to diversify refining infrastructure to
accommodate the processing of heavy crude.
Identify and establish a minimum holding stock of crude oil, both as a security measure and a
vent-for-surplus commodity trade internationally.
Review administered prices currently calculated according to a formula adopted in 1954.
Controlled prices reward major multinational companies and penalises small companies, but
stability and certainty as a function of a simple and transparent formula introduce a level of
predictability into the market that is welfare-maximising.
Establish a centralised pool of data to provide real time information on the supply, availability
and distribution of liquid fuels to enable effective supply chain management and prevent
shortages.
Breaking down barriers to entry and liberalising the market to allow emerging stakeholders to
import fuel and compete in a market currently dominated by PetroSA.
Move to privatise SOEs in the liquid fuels sector through share offers which could include
empowerment transactions.
Restructure PetroSA, the Strategic Fuel Fund (SFF) and the Central Energy Fund so that they
concentrate on their core competencies.
Review the Liquid Fuels Charter in partnership with stakeholders defining clear deliverable
objectives to attain diversification, empowerment and development of the industry.
Establish international markets for the export of South African energy products to South
America, Africa and the South Pacific.
Work in partnership with stakeholders and other government departments responsible for
Agriculture, Rural Development and Land Reform to establish programmes for biofuel crops
without compromising food security.
Put in place the necessary infrastructure to import significant quantities of LPG and Bitumen.
8. Building 21st century electricity distribution networks in South Africa
The electricity distribution networks in South Africa are critical in ensuring that households and
businesses have a secure supply of affordable electricity.
Unfortunately this sector has been characterized by a vacuum of leadership where the original vision
of creating Regional Electricity Distributors was dealt a fatal blow by municipalities refusing to give
up their constitutional mandate for electricity distribution within their municipal jurisdiction.
Since this failure in 2010, there has been no guiding vision for the sector and the backlog in the
maintenance of these networks has continued to grow. Currently the backlog for maintenance on
these distribution networks is estimated to be in the region of R35 billion and it continues to grow by
about R2 billion each year.
This backlog has led to distribution networks failing in many municipalities around the country, with
some municipalities experiencing localised blackouts as a result. Some municipalities have also been
unable to connect new businesses to the grid as a result of inadequacies in their current networks,
with disastrous impacts on our country’s job creation ambitions.
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Historically many municipalities have also levied a surcharge on their electricity sales and have used
the revenue to fund other municipal services that they provide. This has exacerbated the situation of
maintenance backlogs and has also put additional pressure on electricity prices.
Eskom is also currently distributing electricity to about 48% of households in South Africa, mainly in
poorer townships and rural areas. Despite being forced to by law, Eskom has failed to sign Service
Delivery Agreements (SDA) with many municipalities in which they distribute electricity at
sometimes significantly lower costs than that of the municipality.
These Service Delivery Agreements should deal with this discrepancy in tariffs by forcing Eskom to
also cover the costs of non-tariff services such as street lights which are put up in their areas by the
municipality.
The distribution sector is characterized by an inadequate level of skills, to the extent that many
municipalities simply do not have the capacity to maintain their networks or in some cases, do not
know the true asset value of their networks.
This is an untenable situation. We need a national vision complete with a timeline of implementable
actions to arrest the further deterioration of these networks.
In addition, the DA maintains that we should not only be focusing on repairing these networks, but
on bringing them up to a standard whereby they can respond to the changing energy demands of
the 21st century.
This would require distribution networks that can facilitate households and businesses installing
their own generation capacity and selling their excess electricity back to the grid. Smart metering
technologies must also be installed that can institute time of use tariffs so that consumers have a
monetary incentive to change their peak demand usage. These grids should also be able to facilitate
the introduction of electric vehicles that can interact with the grid and automatically either buy or
sell energy depending on the needs at a specific time.
Ultimately we should be striving for electricity distribution networks in our cities and towns that are
interactive and are able to respond seamlessly to the dynamic energy needs of our people.
In order to achieve this vision, the DA proposes the following long and short term measures.
Our approach would firstly differentiate between three sets of municipalities, namely metros and
large cities; medium sized municipalities; and rural municipalities.
Metros and Large Municipalities
In the case of metros and large cities that have a track record of being able to viably manage their
distribution networks a process will be set in place that will see some of these municipalities take
over those areas in their jurisdiction that are currently being supplied by Eskom. Alternatively, the
DA would ensure that Eskom is forced to sign Service Delivery Agreements with these municipalities
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so that Eskom can pay their fair share of the non-tariff electricity services. This will also go some way
in reducing the current differentiated electricity tariffs between Eskom and municipalities.
Municipalities must also be encouraged to phase out the surcharge on electricity, which is currently
used to subsidise the other services that they provide. In order to do this, however, the national
funding model for local government needs to be overhauled so that municipalities will no longer be
dependent on the revenue currently generated through electricity sales.
These municipalities should also be required to ring-fence a certain portion of their budget for
maintenance and refurbishment of their distribution networks so as to avoid these backlogs from
accruing in the future.
Finally, these municipalities must consider ways of reinventing their electricity departments so that
they are no longer simply sellers of electricity but rather offer innovative solutions for households
and businesses to become more energy independent through for instance the selling of PV panels
that can generate electricity for the grid.
Medium Size Municipalities
Those municipalities that can still operate viable electricity distribution networks can be offered low
interest loans from a dedicated fund operated by the Development Bank of Southern Africa to
refurbish their networks. These loans should be offered on a twenty year repayment period, but
only if these municipalities put forward a comprehensive proposal to address the backlogs in
maintenance within a ten-year period. These municipalities would also have to show how they
intend building up the technical capacity to constantly maintain their networks.
Rural Municipalities
Many rural municipalities are simply not able to run and maintain viable electricity distribution
networks from both a technical and a financial perspective. The DA would therefore seek to change
the current legislation governing NERSA so as to make it possible for the regulator to revoke
distributing licences when municipalities are not able to live up to their responsibilities.
These municipalities would then be able to choose one of two options. (i) They can group their
distribution networks into a larger entity such as that pioneered by CENTLEC in the Free State,
whereby the technical and financial skills are centralized so as to ensure that the distribution
networks are managed responsibly, or (ii) they can invite Eskom to take over the distribution
function in these municipalities.
Long term vision
The above approach would go some way in addressing the R35 billion maintenance backlog that has
accrued on our country’s distribution network.
Ultimately though, the DA is also arguing for a forward looking vision for this sector whereby
investments are made into transforming our networks so as to deliver on our 21st century energy
challenges.
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This would entail a harmonization of standards on transformers, switchgears, transmission lines and
importantly metering technology. A signal should be sent to the market that would enable
manufacturers to build up industrial capacity in these areas so that these components can be built in
South Africa.
Concurrently, appropriate skills must be identified and nurtured by all entities to ensure that we
build an appropriate skills pipeline to deliver on this vision.
The DA will:
 Follow a differentiated approach that supports municipalities that are able to run viable
distribution networks and groups together those municipalities that are not and outsources the
function to another entity.
 Ensure that Eskom signs Service Delivery Agreements with municipalities.
 Institute a new national funding model for municipalities that reduces their dependence on
revenue from electricity sales.
 Set up a dedicated fund in the DBSA that can provide 20 year loans for refurbishment and
maintenance on provision of detailed implementation plans for addressing the backlogs in 10
years.
 Harmonise standards and build up industrial capacity to provide the technology for modern
electricity distribution networks.
9. Tapping into the potential of the region’s energy resources
The Southern African region has been endowed with a wealth of energy resources, both renewable
and non-renewable and it is imperative that South Africa’s energy policy incorporates a strategy to
tap into some of these resources.
In terms of renewable energy resources, it is clear that there is large potential in terms of solar
energy, wind energy, biomass and probably most promising of all large hydropower.
Although South Africa has a limited amount of hydropower resources within its borders, the
Southern African region, which includes the Democratic Republic of Congo (DRC) has great potential
in this regard. For example, the Inga Falls in the DRC has the potential to generate 40 000MW from a
run-of-river scheme, which is equal to the entire current installed capacity in South Africa. The entire
Congo basin is furthermore estimated to have a hydropower potential of 100 000MW.
In terms of 2008 figures, only about 5% of Africa’s economically viable hydro-power potential was
being exploited and this situation needs to drastically change. Work has already started on this
though, and on the Zambezi alone there are already two upgrading projects that have been started
and three new hydro-power projects are commencing in the Lower Kafue, Mpanda Ncua and Itezhi
Tezhi8 (Trademark Southern Africa website).
8
Trademark Southern Africa website.
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In terms of non-renewable resources, oil and gas resources are the most promising and we should
be putting in place the needed infrastructure in order to utilise these resources.
Angola has proven gas reserves of 10Tcf, Namibia 2Tcf, while recent finds in East Africa have seen
Mozambique’s potential reserves jump to 30Tcf and Tanzania’s move to 4.9Tcf (Trademark Southern
Africa website). Botswana has also made a recent discovery of close on 12Tcf of coal bed methane
that could be used to generate electricity. These natural gas reserves provide South Africa with an
exciting opportunity to augment our electricity capacity through utilising the gas in closed cycle gas
turbines.
In order to fully capitalize on these resources though, two major obstacles will need to be overcome.
The first is the institutional and political barriers and the second is the physical infrastructure that
needs to be put in place in order to ensure that South Africa and the region as a whole can benefit
from its energy sources.
Institutional and political barriers
Many countries in Southern and East Africa currently use less than 1 Gigawatt of energy, which
means that their national demand does not justify building power plants large enough to exploit
their energy generation potential.
It is therefore vital that a regional market for electricity is firmly entrenched so that investments into
these power plants can be economically justified.
In the Southern African Power Pool, only 10% of total consumption came from regionally traded
electricity and this figure has dropped considerably due to South Africa’s shortage of capacity.
According to Trademark Southern Africa, a number of principles need to be adhered to in order to
allow for a fully functioning regional market for electricity. These include the following:
 sector unbundling within countries (similar to the DA’s proposals for South Africa);
 establishing open access to transmission;
 a free choice of supplier;
 a harmonisation of regulation and market structures;
 tariff rebalancing that deals with significant cross-subsidisation; and
 harmonisation of administrative procedures and on the infrastructure side high capacity
intersystem tie lines.
According to Trademark Southern Africa’s figures, pooling the region’s energy resources would
generate savings of between 5 and 6% on annualised power system operating costs and the
additional capital investments will yield a return of 167%.
It is therefore clear that South Africa should be pushing these initiatives as a way of both
augmenting our own power supply needs and in ensuring that the region can benefit from the
unlocking of the vast energy resources contained within it.
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In terms of natural gas, South Africa should be incentivising Independent Power Producers to set up
closed cycle gas turbines along the coast through incentives and guaranteed tariffs.
In addition we should be establishing regassing plants at the ports in Saldanha, Mossel Bay and
Richards Bay, which can then buy Liquified Natural Gas from the region.
Pipelines for natural gas should also be explored, both from Mozambique and from Botswana, in
order to ensure a captive market for some of the natural gas contained there. Natural gas has a
number of advantages as a potential energy source. Gas turbines can be procured off the shelf and
installed relatively quickly as and when the electricity demand requires it. Gas turbines can also be
powered up quickly, therefore providing for both peak power demand and for smoothing out the
intermittency of renewable energy generation.
Natural gas should therefore play a far greater role in our 20 year energy plan. In order for this to
happen, the necessary infrastructure must be put in place and contracts for the off-take of gas must
be secured with the relevant countries.
The DA will:
 Speed up the institutional process of harmonizing electricity sectors in the Southern African
region.
 Prioritise planning for infrastructure upgrades in the region to facilitate greater trading of
electricity that can also lead to more energy generation capacity being built in other countries.
 Devise a detailed plan for the necessary infrastructure investments that need to be made in
South Africa in order for us to import natural gas from the region.
 Create incentives for Independent Power Producers to build closed cycle gas turbines that can
generate electricity and thereby create a market for natural gas in South Africa.
10.A household energy strategy
The DA believes that it is vitally important to have an energy strategy that confronts the challenges
that many households experience in their energy usage.
At present it is estimated that poor households spend as much as 28% of their income on energy. As
electricity prices are set to increase exponentially over the next decade this figure could continue to
rise.
Even households that have access to electricity often resort to other energy carriers like paraffin,
coal and wood for their cooking and space heating needs. Resorting to these energy sources though,
impose a huge health benefit on both households and the country’s economy as a whole.
A 2003 study by the National Treasury found that the externality cost of paraffin could be as high as
50 times more than the annual turnover value of paraffin and that the costs to the economy as a
whole is around R104 billion. It is not just the economic costs that is concerning, but also the tragedy
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that is wrought on poor people through shack fires, paraffin ingestion by children and the deadly
respiratory conditions brought about through indoor air pollution.
Although the government has extended a lifeline of 50kwh a month of free basic electricity to poor
households, it is clear that this amount is not adequate to meet the energy needs of poor
households, many of whom live in overcrowded conditions.
A household study by Philip Lloyd showed that poor households utilise about 1000MJ of energy a
month which is equivalent to 280kwh a month and that this figure can quadruple in the Highveld
due to the higher need for more space heating.
In devising a household energy strategy it is important to identify the most appropriate energy
source for a particular household activity and then implement policies that can lead to its adoption.
In addition it is also vital that whatever energy source is utilised by a household conforms to certain
safety standards. Energy efficiency measures are also vitally important so as to ensure that poor
households do not waste valuable income on energy that they do not need.
Ultimately households should be utilising electricity for lighting and for running their electrical
appliances like televisions and computers. Other energy sources such as paraffin, coal or liquefied
petroleum gas should, however, be utilised for purposes of cooking and space heating.
Solar water heaters or heat pumps should be utilised for generating hot water in the household.
In terms of paraffin, the DA would pass regulations to give effect to the safety standards that have
already been passed. We would ensure that refineries package their paraffin for retail purposes in
child-proof sealable bottles and that no retailer would be able to sell paraffin to the public in any
other form. In terms of safe stoves for cooking, we are currently in the situation where potential
manufacturers are unable to compete on price with the current array of unsafe cooking stoves that
are on the market. The DA would therefore firstly ensure that any local manufacturer of unsafe
stoves is prosecuted and that illegal imports are prevented from entering the local market. The DA
would then also make it easier and cheaper for local manufacturers to license their safe stoves
through the South African Bureau of Standards.
The DA firmly believes that the entire paraffin value chain must be made as safe as possible so that
households that do choose to utilise this energy source do so in a manner that does not lead to the
current problems that are experienced.
The same principle would apply to stoves that utilise coal as their energy source. Currently clean
burning stoves that were developed in South Africa are being rolled out in Mongolia. The DA would
explore the possibility of rolling out such stoves in the communities that are currently utilising coal
for cooking and space heating.
The DA does maintain, however, that ultimately liquefied petroleum gas is a more desirable fuel for
cooking and space heating.
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The DA would therefore consider the possibility of providing poor households with a package of a
gas hotplate, a 6kg gas cylinder and one free gas fill. This package could help households overcome
the high upfront costs associated with this fuel source. Households would then be given a real choice
to utilise gas, paraffin or coal depending on the fluctuating prices of these energy sources.
Finally, the DA believes that Free Basic Electricity should be increased to 100kwh a month and that
municipalities must be compensated through the national fiscus for providing free basic electricity.
The DA will:
 Pass regulations to ensure that refineries sell paraffin in child-proof bottles and make sure that
regulations banning unsafe paraffin cooking stoves are enforced.
 Roll-out clean burning coal stoves in those communities that utilise coal for cooking and space
heating.
 Roll-out a package of a gas cylinder and stove to facilitate the uptake of gas as an alternative
fuel.
 Double the amount of Free Basic Electricity and also include free basic energy sources.
11.Up-scaling energy efficiency
Energy Efficiency should be one of our nation’s greatest priorities given that it is the cheapest and
quickest means to alleviate our present energy crisis.
Research shows that it can be up to five times cheaper to pursue energy efficiency than to build
capacity for an equivalent amount of new energy generation. The present 20-year energy plan only
models for energy efficiency savings of 3 420MW whereas according to Eskom’s own figures savings
of between 10 000 to 12 000MW can be made over the next 20 years.
The DA believes, however, that it is imperative that a comprehensive study is commissioned by the
Department of Energy that can accurately assess the true potential of energy efficiency and the costs
associated with implementing these measures across our economy. The outcomes of this study must
then inform the multi-year price determination so as to ensure that energy efficiency initiatives are
properly budgeted for.
It is also important that we differentiate between demand side measures that are implemented by
Eskom and longer term energy efficiency interventions that will continue to be driven even when the
present energy crisis has been resolved.
Energy efficiency measures must be evaluated based on their ability to not only reduce demand, but
also importantly what is called peak demand. This is an important distinction because our energy
system has to have enough installed capacity to supply the peak demand of the country and not the
average demand.
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Our demand peaks by as much as 2 000MW in winter and a 1 000MW in summer, which is mostly
driven by the behaviour of residential customers.
The value of electricity as a commodity is therefore determined by the time during which it is
utilised. It is therefor important that our energy system must incorporate this element to the extent
that household consumers are charged differential tariffs based on their time of usage. To enable
such fee structure, time of use meters must be rolled out across the country. This will enable
consumers to plan their energy usage to reduce their peak demand. This is an important first step at
driving energy efficiency.
Solar Water Heaters are also an important mechanism to reduce energy demand. As with most
energy efficiency technologies, however, the major obstacle is not an economic one but a financing
one.
Even though a solar water heater can effectively pay for itself in energy savings in around three to
five years, most households cannot afford the upfront costs of installing one.
The City of Cape Town is seeking to address this challenge through a centralised fund that can pay
for the upfront costs of solar water heaters. The repayment of the loan will be funded through its
billing system as household energy savings are funnelled back. This should enable the City of Cape
Town to roll-out 300 000 solar water heaters within the next few years thereby significantly reducing
the demand for energy. Schemes like this could be replicated throughout the country.
The DA will:
 Enforce the Regulations requiring all new buildings to source 50% of their hot water from a
renewable energy resource, thereby growing the market for high pressure solar water heaters
and heat pumps.
 Initiate innovative financing schemes to cover the upfront costs of energy efficient technologies.
 Set up a dedicated agency that is properly resourced to conduct a comprehensive study on
energy efficiency and drive interventions across the economy.
 Install Time-of-Use meters so that households can adapt their energy usage patterns.
 Increase the DORA amounts for energy efficiency in municipalities so that interventions such as
energy efficient street lights and traffic lights and innovations like installing ceilings in low cost
houses can be comprehensively rolled-out.
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