By Jason Mann and Victoria Barr Recent

As the electricity supply deficit that led to load-shedding a few years ago is rapidly replaced by an excess of generation capacity, economists Jason Mann and Victoria Barr contend that the situation can be mitigated by increasing electricity sales to South Africa's neighbours in the Southern African Development Community region.

Recent reports have highlighted the many challenges facing State-owned electricity utility Eskom, including difficulties in continuing to service its debt.

Underlying Eskom’s liquidity issues are a number of structural problems with the electricity sector in South Africa: electricity generation in South Africa is carbon intensive and increasingly inefficient, and the supply deficit, which led to load- shedding a few years ago, has been rapidly replaced by an excess of generating capacity. The good news is that two of these problems could be mitigated by increased electricity exports to South Africa’s neighbours. However, significant increases in exports will require improved interconnection and transmission infrastructure in the Southern African Development Community (SADC) region.

The structural reforms needed to resolve the conflict of interest at the heart of Eskom’s efficiency problems are well understood – the 1998 Energy White Paper set out plans for the separation of generation from transmission and distribution, and the introduction of a competitive market in generation. Unfortunately, there is little appetite in the current government for structural reform at Eskom.

Thankfully, however, the other two problems are less intractable and could both be mitigated by increasing electricity exports to neighbouring countries.
South Africa’s surplus of generation capacity is an unusual problem in the region. Many of its neighbours have the opposite problem. Recent droughts left heavily hydropower-dependent countries, such as Zambia and Malawi, with extensive load-shedding. Increased cross-border trade of electricity could be a win-win solution for South Africa and its neighbours, generating revenue for Eskom and alleviating power shortages elsewhere.

Thinking optimistically, it could relieve price pressure on South African consumers and encourage Eskom to connect renewable independent power producers to the grid, greening the country’s energy mix.

South Africa is currently connected to the Southern African Power Pool (SAPP) by 7 GW of interconnector capacity to Namibia, Botswana, Mozambique, Lesotho and Swaziland. While sales of electricity to domestic customers declined by 1% in the year to March, Eskom’s international sales increased by 12%. Unfortunately, the relative size of domestic versus international sales meant that overall sales still fell – by 0.1%.

Significant increases in exports are therefore needed, and this will require new cross-border transmission infrastructure, or interconnectors. Of the 2.8-million megawatt hours of matched trades between members of the SAPP in 2016/17, only one-million megawatt hours – or 37% – was actually completed, largely owing to constraints in the transmission infrastructure.

There are currently nine SAPP transmission projects at the feasibility/project preparation stage and a further seven at the prefeasibility stage. These include plans to connect the three members of the SAPP that are not currently connected to the pool, namely Angola, Malawi and Tanzania, as well as projects to strengthen interconnection between South Africa and Botswana, and between South Africa, Mozambique and Zimbabwe.

Government investment has been the dominant model for interconnectors in Africa, either with government-owned companies, each financing its side of the transmission line or through the creation of a special-purpose vehicle. Motraco, which connects South Africa, Mozambique and Swaziland, is a special-purpose vehicle owned by the three countries’ State-owned utilities: Eskom, Mozambique’s EDM and Swaziland’s SEC.

Interconnectors can also be privately financed. There are a number of different private-finance models, but the most common for interconnectors is ‘merchant investment’, where a private investor builds and operates the asset and generates revenue by arbitraging the price differential between the two markets it connects. The key to making these projects bankable is ensuring the right commercial and regulatory arrangements are in place to allocate risks appropriately.

There is no single ‘best’ solution – interconnectors have been successfully developed under a range of different investment models, both public and private. But increasing investment in interconnection and transmission in the SADC region should be an urgent priority for South Africa.

Jason Mann is senior MD with FTI Consulting in the Economic Consulting division and a global specialist on energy economics and electricity regulation, while Victoria Barr, a regulatory economist specialising in the energy and healthcare sectors, is a senior director with FTI Consulting South Africa.