Article by: Liesel Kassier, Head of Sustainable Manufacturing, Toyota Wessels Institute for Manufacturing Studies (TWIMS)
No South African has been left unscathed by the blight of load shedding, nor needs reminding of the precarious state in which the economy has been left as a result. With its need for an uninterrupted power supply to sustain 24-hour operations, the manufacturing sector has been especially hard hit by this wicked problem. Startling statistics indicate that from the beginning of the year until mid-May 2023, load shedding has been implemented for a total of 134 days. To put this into perspective, there was only one day in the fourth week of March when load shedding was not implemented, exacerbating the difficulties faced by the manufacturing sector. This problem has forced businesses to pivot and take on energy portfolios within their operational structures, adding costs and taking away time from core functions. Considering the situation’s indications, the current status quo will prevail for a while longer. To remain operational and resilient, businesses must find innovative solutions to ride out the storm.
Current State of Play - Generation and Grid Capacity Shortage
The ongoing load-shedding crisis is fundamentally driven by a lack of sufficient and reliable generation capacity, resulting in a power system starved of electrons. In recent years, 1.5 GW per year of capacity was built and connected to the grid. In comparison, 3.5 GW was lost due to decreasing performance and the necessary decommissioning of existing coal plants. This loss has resulted in the current structural shortfall of 4 to 6 GW in power generation capacity, which drives the necessity to load shed.
To address the generation shortage, South Africa needs to add 4-6 GW of generation capacity per year, reaching a total of 53 GW by the 2030s. However, there is a need for expediting the procurement of new generation capacity and reducing the severe limitations in transmission grid capacity.
The limitations in the grid have become a significant obstacle that hampers South Africa’s attempts to bridge the current supply gap and propel the country’s energy transition forward. The most recent Transmission Development Plan (TDP) presented by Eskom emphasises the need to install 14,218 km of new high voltage transmission lines, 106 GVA of transformer capacity, 40 capacitors, and 52 reactors from 2023 to 2031. The estimated investment required for these upgrades totals R72.2 billion by 2027, with similar investments anticipated between 2027 and 2031.
The latest TDP raises concerns voiced by Eskom regarding its ability to execute the proposed projects. They anticipate liquidity constraints and potential tariff determinations by NERSA (National Energy Regulator of South Africa) to affect their implementation. The acquisition of servitudes and the necessary resource capacity to execute the plan across the engineering, procurement, and construction value chain also pose additional implementation risks. The financial constraints faced by Eskom have underscored the urgency of finding alternative approaches to fund and execute crucial transmission infrastructure projects. Without adequate access to capital, Eskom has struggled to keep pace with the grid’s growing demand for upgrades and expansions.
These limitations have impeded South Africa’s progress in achieving a reliable and efficient transmission system necessary for its energy goals. The combination of generation and grid capacity constraints highlights that time will be needed to restore the South African power system fully, reiterating the need for businesses to have a plan.
The Silent Revolution
According to recent statistics released by the South African Photovoltaic Industry Association (SAPVIA), 2021 witnessed the installation of approximately 3.9-4.3 GW of solar PV capacity in the commercial and industrial, and residential market segments. This remarkable growth can be attributed to significant cost reductions and improvements in technology learning rates, making solar installations an increasingly attractive choice for businesses.
Notably, the declining costs of battery and storage technologies also contribute to the rise of onsite energy autonomy for companies. The distributed generation market is also experiencing growth, driven by the potential for energy trading and aggregation. These innovative solutions allow customers to benefit from diverse technology options, minimising the risks associated with long term power purchase agreements with a single energy provider. One could argue that there is an opportunity where responsibility has been abdicated, and therefore businesses should be engaging with the energy question through the following three lenses:
What solutions and innovations can provide me with energy security and the most cost-effective rates? (Prioritise a mix of hybrid onsite generation technologies)
Are there cost-hedging opportunities or new revenue streams to be developed from diversifying my energy supply mix?
Can the current energy crisis be used to decarbonise my energy source and allow me to deal with the coming net zero legislative pressures?
Energy security of supply, future electricity cost hedging and the CO2 intensity of energy supply are all critical factors that manufacturers should be strategising for, to allow them to remain competitive locally and globally.
Regarding C02 legislation, it is evident that the European Union (EU) is moving faster than initially expected. On 16 May 2023, the Carbon Border Adjustment Mechanism (CBAM) was fully legislated and is set to enter into force in October 2023. This will require exporters to the EU to account for the GHGs embedded in their processes across Scope 1-3 of their emissions. This account includes the emissions that result from the electricity used in manufacturing processes. Manufacturers tied to the South African grid, which is still 80% coal-based, will therefore face significant CO2 tax implications.
The iron, steel, and aluminium sectors will feel the initial impact of the tax, as they are among the first industries to be affected. However, the tax is expected to soon be extended to other sectors, with the expansion plans already in progress. Trade & Industrial Policy Strategies (TIPS) 2022 indicates that South African manufacturing exports have a carbon content of around 2250 tCO2e per $1m, while most countries sit between 300 and 1,100 tCO2e per $1m.
The current European carbon pricing tax is around €85 per ton. The proposed timeline for implementing this legislation is from October 2023-2026. For this period, the burden will primarily be administrative, whereby firms will need to start accounting for their emissions, but from January 2027, the penalties will be financial. South Africa’s electricity grid will not be decarbonised by 2027.
Therefore, alternative energy generation solutions need to be sought by manufacturers as it is predicted that the United Kingdom, United States, Canada, and Japan are the following regions that will be implementing similar CBAMs as they have published CBAM regulations for consultation.
A Pathway to Energy Resilience
Resilience in the academic world is often defined as a system’s latent ability to endure, despite adversity and to recover and maintain its existing structure after a shock.
The properties of stability and flexibility are essential to achieving resilient systems. This combination of flexibility and strength allows firms to bounce back as they are good at anticipating, absorbing, and adjusting to changes. We are all facing a highly adverse energy crisis that needs innovations to help us endure. It will be those that maintain stability but also introduce flexibility through alternate energy supply technologies that will survive. Seek an opportunity where responsibility has been abdicated.
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