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15 September 2008

In times like this when there are all too many matters diverting attention away from the requirements of every-day governance it is doubly important that we do not lose sight of key challenges facing the economy and the society. Until about two years ago South Africans took electricity for granted - turning on the lights was a common place event. This has nearly changed.

I say nearly because although we were all very angry and inconvenienced by the blackouts in the early part of the year a degree of complacency has crept back in. However, the electricity challenge and indeed the wider energy challenge remain with us and will do so for some years to come.

It would be all too easy to become embroiled in argument and recrimination on why we had the blackouts - consumers are angry with good cause. Government have already accepted responsibility for not beginning the build programme at least two years earlier. However, these immediate challenges and energy shortages have brought a much larger matter into sharp focus. Electricity, indeed energy more generally - be it petrol, gas or coal - is essential for economic growth and facilitates virtually every activity that we think of as marking an ordinary day.

However, the truth that we have to face is that the supply of such energy within economies cannot be taken for granted and neither can we continue to use energy in the manner we have become used to, particularly as is our wont in South Africa.

We need to stand back and take a sober look at our energy position as it is by no means a simple issue. What is interesting is that the energy problem has hit many economies at about the same time - very important from the policy point of view but cold comfort from the consumer's viewpoint in South Africa.

The Global Challenges
Why has energy come to the forefront of global economic thinking in such a short period of time? I would argue that three related macro trends have converged and have presented the global economy with immense challenges.

The Energy System
The first of these relates to the complexity of energy systems. A moment of thought will confirm this if we think of the size and intricacy of the electricity system. But the same applies to the supply and delivery systems of petroleum and gas. These energy systems require massive infrastructure and they have to respond to continuous changes in the level of demand during the course of a day, week and year.

In electricity systems there has to be different types of technology and capacity to supply base load power continuously and other capacity that meets surges in demand. Efficient transmission and distribution systems have to be built and maintained and a large grid like ours in South Africa is under constant management and rearrangement of electricity flows.

With high rates of economic growth over the last decades energy demand has surged. However, global energy systems have not in general expanded to match this demand. This stems from the complex problem of maintaining the correct level of investment in these large complex systems. The amount of capital required for construction is massive and if those assets are stranded through a downturn in demand the losses are massive.

This means that the market is an imperfect mechanism for determining the correct level of investment. Economies are re evaluating and reconfiguring their energy systems. In most cases various permutations of public and private sector involvement obtain but it is no simple matter.

Global warming
Science has now firmly established the link between our use of energy and climate change. The emissions from various fossil fuels exacerbate the greenhouse gas effect. So we have to reduce the emissions but we also have to reduce the proportion of our future energy needs that comes from such primary energy sources. The impact of this reality is profound and structural.

Three imperatives emerge:
* We have to become more conscious of how we use energy. This means behavioural change and the introduction of energy efficient and energy saving technologies.
* We have to reconfigure our systems away from the reliance on massive coal based systems such as ours in South Africa and introduce various renewable technologies at the appropriate site and level of use.
* We have to turn to low emission base-load technologies and here virtually all major economies are turning back to nuclear energy.

Scarcity and Cost
Energy is structurally changing its cost and that relative cost is rising. This has a number of implications for all economies. Those economies with primary energy resources are in a stronger economic position but are not immune to the rising relative cost of energy. Economies without self sufficiency in primary energy are moving to secure their supply lines creating new economic relations which are not without their problems. However, primary energy sources are changing and this will have an impact on the scarcity value of primary energy. In South Africa, apart from water for hydropower, we are remarkably we endowed with energy resources provided that we exercise prudent custodianship over those resources.

However, it is not only the price of primary energy that is rising but also the cost of equipment and of new technology. This places massive new economic burdens on economies, especially developing economies, and we face the same problems in South Africa. The rising cost of energy will impact on the processes of uneven development that characterise globalisation in many complex ways and it is those economies that stabilise their energy systems that will do the best.

South Africa's Response
In formulating our response to the current situation we need to ensure that it also addresses the larger global challenges that I have tried to define in brief. We have to accept that whilst the basic capacity of the South African electricity system is robust there were emerging weaknesses and we got some things wrong.

There is little doubt that we kept the cost of electricity too low for too long. This was not because it was subsidised but because we were not factoring in the new energy capacity we would have to build. This also made the timing an effectiveness of our attempt to introduce the private sector into generation problematic and we lost those vital two years. The current structure of our electricity system is an excellent platform upon which to regain our strong energy position of old.

Essentially we are using Eskom to lead the long term investment programme. This is no small challenge requiring some R340 billion in investments over the next five years. However, with the increase in the price of electricity it is now possible and essential to bring in the private sector and to diversify the forms of supply. We have to develop an overall system that will sustain investment even though demand and supply will not always match. A balance toward more supply than demand is essential but again it cannot be too much.

The key areas of activity and the challenges we face in our future energy system are much as elsewhere in the world. However, it is how we address them that will decisively determine our growth process and the well-being of our society. Let me briefly address these challenges. We just have to become energy efficient and we will have to spend to become more efficient.
* The investment programme must proceed and we will have to accept that the price of electricity will have to double over the next few years. This will also allow more Independent Power Producers to come into the system.
* We need to begin diversifying toward low emission technologies. In South Africa we will have to follow the lead of other economies and move toward nuclear energy. We are planning to use two technologies Pressurised Water Reactor (PWR) and Pebble Bed Modular Reactor (PBMR). The latter takes us into the next generation of technology.
* We need to procure and secure our primary energy sources.
* We need to industrialise and invest in energy efficiency technology and Rand D.

What are we doing?
RTS Camden 8x 200MW all around now
* Grootvlei 6x200-200 soon and 1000 MW between now and 2010
* Komati 4x125 and 5x100–I unit in 2008 and rest through to 2011
* Total 3650 MW

Coal Medupi 4764
Kusile 4800

Pump Storage Ingula and Lima some 2850 MW
Nuclear–PWR and PBMR
Transmission
Save, save and save

Issued by: Department of Public Enterprises
15 September 2008
Source: Department of Public Enterprises (http://www.dpe.gov.za)