Market forces assume control in the energy sector

Energy markets the world over are being disrupted by two concurrent and interconnected transitions — a technological “tsunami” associated with the Fourth Industrial Revolution and an ecological crisis related to global warming and climate change. 

This is in the context of the Paris Agreement of 2015, which aimed to limit the global temperature increase to 1.5°C above pre-industrial levels and achieve net-zero carbon emissions by 2050, targets which current trends suggest will be missed. 

Electorates are showing themselves unwilling to confront the sacrifices that achieving such targets will require. South Africa is poorly placed to meet them because of its heavy reliance on coal and oil, coupled with its highly energy-intensive economy. 

These twin transitions are driving a gradual shift in the global economy from the western and northern regions to the eastern and southern regions, which offer more favourable renewable energy resources. This shift is exemplified by the establishment of the Brics grouping. 

Enthusiasm for these local and global transformations should be tempered by an understanding of the immense difficulties associated with transitioning to a new global energy system. Fossil fuels remain the dominant source of primary energy supply in the world as global oil and gas supplies continue to expand. Fossil fuels also dominate in South Africa. 

Technology tsunami and political change

The technology tsunami in the energy sector is most evident in renewable electricity generation and storage technologies. These innovations have disrupted the traditional economies of scale associated with coal and nuclear-based power generation as well as the concentration of ownership within the power-generation sector. 

State-owned power utility Eskom says that more than 6 000 megawatts of renewable power generation capacity has been installed, 3 800MW of that in just 24 months. At times it has supplied 22% of grid demand.

Decentralisation, decarbonisation, democratisation and digitalisation have become the new watchwords for the electricity sector. Emerging technologies are enabling consumers to transition to self-sufficiency, effectively turning them into “prosumers” who can sell excess power to others and disrupt long-established business models. These transformations are beginning to produce significant economic consequences and are contributing to shifts in the political landscape. 

Amid the contestation between sources of primary energy and energy markets, South Africa has to contend with the emergence of a pervasive informal political-economic system, shaped by the intersection of patronage and factionalism, where patronage networks form political factions to gain influence within the state. In the energy sector, this has manifested as the state capture of entities such as Eskom and municipalities, alongside other state institutions.

In recent years, theft of network infrastructure in both the petroleum and electricity sectors and racketeering by coal and construction mafias have jeopardised network industries threatening security of supply. Law enforcement agencies struggle to contain this growing problem.

Energy Policy: Shifting towards market liberalisation

Stable and predictable energy policy and regulation is every investor’s dream. In South Africa, good policy adopted early in the democratic era has been watered down and is often characterised by failed implementation. This has been underpinned by political party cadre deployment and preferential procurement for certain groups.

The inevitable financial problems faced by the state and its companies have compelled the government to reluctantly shift towards market liberalisation and private investment, albeit along a zig-zag path. Will the business and international community have sufficient confidence that there is policy certainty sufficiently robust and long-lasting to justify large investments in South Africa’s energy infrastructure?

Such a policy trajectory has equity implications. Private investors expect a return on their investments, which implies higher costs for customers who pay. Progress in the direction of market reform is likely to result in higher prices. Meanwhile, there has been limited policy development concerning a safety net for the poor.

Despite a noticeable policy shift towards market reform, many electricity customers see it as too little, too late and, weary of waiting for a government-led solution to load-shedding, and are taking matters into their own hands. 

In the space of a few years most of the oil majors have disinvested from their refining assets in South Africa. These include BP, Chevron, Petronas, Shell and TotalEnergies. Some have been replaced by global traders such as Glencore and Vitol. Three refineries have closed. This paints a worrying picture for the petroleum and gas sector. But, in the electricity sector, the opposite appears to be happening in renewable power generation where market liberalisation is becoming more apparent.

The influence of vested interests, combined with the growth of social media and fake news, has made it increasingly difficult to distinguish between facts and misinformation. This is unfortunate, particularly because facts and evidence-based decision-making, such as integrated energy planning, are needed to steer policy along a sensible path. 

Three key imperatives are expected to shape South Africa’s future energy trajectory. First, coal is expected to remain in use for several decades. Second, reduced barriers to entry and the lower cost of renewables are enabling electricity customers to vote with their feet. Third, international pressure, notably access to export markets, is being felt to an increasing extent. 

Transport

Historically, South Africa has followed an import-substitution industrialisation policy, notably in the petroleum products and vehicle manufacturing sectors. But the recent closure of three of the six refineries in the country resulted in about 60% of refined fuel demand being met by imports, rendering petroleum and fuels the most significant imports in terms of value. This situation presents a compelling prima facie case for South Africa to transition to electric vehicles, which could be propelled by local coal, wind and solar resources.

Natural gas

The decline in the natural gas fields in Pande and Temane in Mozambique has led to a “gas cliff” in 2027 for industrial and commercial customers. This huge threat to manufacturing and the economy has focused attention on where the next tranche of natural gas will come from. 

Gas for power generation is required to act as the baseload customer for imported liquefied natural gas which, together with the combined demand of industrial customers, should meet the economies of scale requirements necessary to warrant investment in the infrastructure. 

But gas for power generation is a contentious issue in South Africa. The long-delayed gas master plan, and resulting policy uncertainty, are not assisting. Various parties are looking for solutions but time is running out.

Potential synergies between India and South Africa

India and South Africa share many problems and opportunities in the energy sector, creating potential for synergies between the two nations. Both rely heavily on coal for energy production and face significant pressures to transition toward cleaner energy sources while balancing economic growth and social equity. 

India has experienced significant growth in its renewable energy sector, particularly in solar and wind power, positioning the country as a global leader in clean energy transition. 

Collaboration between India and South Africa could offer both countries valuable lessons as they seek to expand their renewable energy capacity. In addition, India’s focus on decentralised energy solutions, such as rooftop solar, parallels South Africa’s growing “prosumer” movement and offers further opportunities for collaboration.

Moreover, both nations are grappling with energy access and affordability problems. Sharing best practices around policy frameworks that balance private investment with social equity could benefit both countries. 

Joint efforts in studying green hydrogen, enhancing energy-storage solutions and improving grid infrastructure could also accelerate the energy transition in both economies. Through such cooperation, India and South Africa can strengthen their roles in shaping a sustainable energy future for the Global South.

Proponents of a just energy transition are confronting the country’s powerful and vociferous coal lobby and the silent but influential oil and gas lobbies. Amid high levels of unemployment, industrial decline and fractured politics it is reasonable to expect political turmoil and policy zig-zags to continue. 

Nevertheless, there are prospects for a better future. Market reforms are starting to get under way and investor confidence appears to be improving.

Key to governing this tempestuous collection of pressures will be an astute state capable of riding the waves while simultaneously providing policy direction.

Professor Rod Crompton is an adjunct professor and Dr Bruce Young is a senior lecturer at the African Energy Leadership Centre at Wits Business School.The Matla-Urja Energy Conference will take place at Wits Business School from 27 to 29 November. For more information, go to https://www.wbs.ac.za/news/wits-business-school-announces-first-south-africa-india-energy-conference