Opinion: A mission-oriented approach needed for South Africa’s energy transition

1st April 2022

Opinion: A mission-oriented approach needed for South Africa’s energy transition

In this extract from an article to be published in a forthcoming edition of the Oxford Review of Economic Policy, Mariana Mazzucato, Antonio Andreoni, Kenneth Creamer and Grové Steyn argue that a mission-oriented approach to South Africa’s energy transition has the potential to drive cross-sectoral transformation of the economy. The authors argued that, by integrating the expansion in renewable energy generation capacity with active industrial policy measures, significant potential exists for accelerating growth, investment, and employment opportunities.

 

Climate change is the most pressing grand challenge of the twenty-first century, perhaps the greatest, truly global challenge humankind has ever faced. Shifting away from an unsustainable energy system centred around non-renewable fossil-fuel resources is key to overcome this global challenge.

A mission-oriented approach can provide such a systemic framework around which megaprojects can be restructured, re-aligned and re-purposed towards tackling major societal challenges such as climate change.  A mission-oriented approach provides a focusing and coordinating device for multiple policy instruments and for crowding in cross-sectoral solutions. By shaping markets and industries, mission-oriented policies can impact the ways in which individual projects are designed, implemented and managed.

Compulsion mechanisms should be coupled with rewards – the so called ‘carrots and sticks’. Attaching conditionalities to policies such as financing and procurement, but also company bailouts, investment attraction schemes, and business restructuring is no longer taboo; international experiences from highly dynamic market economies are testament to the positive impact of public-private conditionalities.

Conditionalities can also be used at the public-public interface, both within nations and across nations.  At the national level, given the cross-sectoral nature of the energy transition, green industrial policies can work only if they are aligned and well-coordinated within packages of interacting measures.  At the global level, public-public conditionalities can be designed in a way to direct international finance to reward certain investments more than others, while leaving developing countries sufficient policy space to implement their transition strategies. They can also be used in reverse to lock developed countries into committing resources towards much needed energy technology transfer.  Such thinking should be applied to the COP-26-linked offer of concessional finance for South Africa’s just energy transition.

South Africa’s energy system is currently at a critical crossroads. The country’s inability to ensure reliable electricity supply to the economy has been a key binding constraint to structural transformation. South Africa’s electricity sector structure is from a bygone era characterised by the pursuit of ever larger economies of scale in coal-fired power generation. The monopoly approach to power supply created many perverse managerial incentives; leaves the scope for innovation in the hands of a few; and enables large-scale rent-seeking behaviour.

An accelerated electricity sector transition is the key to South Africa’s sustained economic recovery. Specifically, several coal-fired power stations which are at the end of their lives can now be replaced by an energy mix including large-scale investment in renewable energy sources, the costs for which continue to fall.

Despite the decentralised nature of technologies being introduced through the energy transition, it is vital to the successful execution of the transition that the State and State-owned utility Eskom have the requisite capacity to manage and guide the various complex and overlapping elements of the transition.  Given the country’s history of corruption and the related weakening of State capacity, the carrying out of interventions to strengthen this capacity is an important precondition for the success of the energy transition project.

The areas where renewed emphasis on State capacity is required include the effective and timely implementation of the country’s Integrated Resources Plan (IRP) – the country’s key electricity investment planning instrument, which should be incrementally and regularly recalibrated and updated, given changing technology costs and changing supply and demand patterns.  Relatedly, the procurement process flowing from the IRP should continue to be executed with a high degree of autonomy by the Independent Power Producers Office. A modernised and updated electricity regulatory framework for the purpose of guiding the energy transition will need to be developed and run under the auspices of the National Energy Regulator of South Africa.  For example, updated regulations are required to provide for ‘wheeling’ tariffs as independent power producers ‘wheel’ electricity across the national grid.

From a mission-oriented perspective, to conceive of the solution to South Africa’s energy crisis as simply “fixing Eskom” is to misdiagnose the problem and to overlook the immense opportunities for climate change mission-driven cross-sectoral transformation of the economy. By integrating the expansion in renewable energy generation capacity with active industrial policy measures, significant potential exists for accelerating growth, investment and employment opportunities.

Local ownership, including specified ownership by black South Africans, of renewable energy megaprojects, could be enhanced by well-conceived localisation requirements. Errors should be avoided where unrealistic early stage localisation requirements slow down the pace of electricity investment resulting in continued electricity shortages and significant resultant losses for the economy. It is imperative that policy “noise” and uncertainty related to South Africa’s roll-out of renewable energy capacity be reduced.

In the longer-run, the fact that South Africa has world-class solar and wind potential means that the shift towards increased solar photovoltaic and wind power has the potential to reduce the rate of electricity price increases and, over time, restore international competitiveness for South Africa’s energy-intensive economy. This would confer a fundamental advantage to the South African economy in exporting low-carbon, electricity-intensive, hydrogen-rich products – including ‘green’ products, such as, ‘green’ aviation fuel, ‘green’ steel and ‘green’ fertilisers and chemicals.

South Africa’s energy transition process is highly contested. Vested interests that accrue rent from the current structure of energy production stand in the way of South Africa adopting policies which will move the economy onto a more inclusive, more dynamic growth path.   As part of the process to overcome resistance to the transition, affected workers, firms and communities will need specific support measures to present them with viable pathways to future economic activity, via retraining and re-skilling, as well as the location, where feasible, of renewable energy projects in coal-producing areas – which have the advantage of being linked to the national grid  – to keep up economic activity and employment in those areas.

In South Africa, energy strategy should be incorporated at the heart of the national industrial, growth and employment strategy. The strategy needs to move away from being an inflexible list of high-performing sectors, towards missions on renewables and the development of innovative industrial ecosystems. Taking on a mission-oriented approach means addressing structural and operational inefficiencies in a manner which catalyses long-term concerted action by both the private and public sectors.

 

The full article appears in the forthcoming Oxford Review of Economic Policy, Summer 2022. It is written by Mariana Mazzucato, University College London Institute for Innovation and Public Purpose; Antonio Andreoni, University College London Institute for Innovation and Public Purpose and South African Research Chair in Industrial Development, University of Johannesburg; Kenneth Creamer, Creamer Media and University of the Witwatersrand; and Grové Steyn, Meridian Economics.