and 5 400 MW Kusile power stations. The mothballed Camden, Grootvlei and Komati power stations with a combined capacity of 3 800 MW have been returned to service. Coal is said to be
‘king’ the South African primary energy supply. However, its production and use result in environmental damage and costs that are discussed in later sections of this study.
4.2.2 South African electricity supply industry and policy developments
This section gives a historical perspective on the development of the electricity supply industry in South Africa up to its current structure. The South African electricity supply industry is dominated by Eskom. According to the National Energy Regulator of South Africa (NERSA) which regulates the industry, Eskom produces more
than 95% of the electricity generated in South Africa, with approximately 41 000 Megawatts installed generating capacity. South Africa generates two-thirds of Africa's electricity. Slightly more than 3% is produced by Independent Power Producers (IPP), and ~1% is produced by municipalities. Nuclear as an energy source accounts for 5.1%. Hydro, pumped storage and emergency gas turbines make up the remaining 7.6% of electricity generation (DME, 2006a; NERSA, 2006).
Eskom was established through the Electricity Act, No 42 of 1922. It was created as the Electricity Supply Commission (Escom). The Electricity Act provided for the establishment of the Electricity Control Board (ECB) to regulate electricity supply undertakings. Under that Act, Escom was not allowed to make a profit or a loss and was exempt from corporate income tax (NER, 2002a; Eberhard, 2003).
Capital shortage and the lack of adequate capital markets in South Africa led the Electricity Act to be amended in 1971 (Eberhard, 2003). According to Eberhard, “…this accorded Escom rights to retain earnings to build up a Capital Development Fund, subject to the governments’ approval. In general, this fund was meant to finance capacity expansion” (Eberhard, 2003:6). He argues further that this arrangement led to price increments that discomforted consumers. The De Villiers Commission of Enquiry was setup in 1983 to investigate the matter. The De Villiers commission made critical findings against Escom’s corporate and governance structures, electricity forecasts and investment decisions. This led to changes in the Electricity Acts in 1985 and 1987; Escom was then renamed Eskom. A new corporate and governance structure was put in place, with a full-time executive management board. Eskom reported to an Electricity Council comprising representatives of major electricity consumers, municipal distributors and government representatives (Eberhard, 2003).
The consequence of the De Villiers commission in response to electricity prices was that “…the principle of operating at neither a profit or a loss was replaced by the need to provide the system by which the electricity needs of the consumer may be satisfied in the most cost-effective manner, subject to resource constraints and the national interest” Eberhard (2003:7). Expansion in economic growth in the 1970s and 1980s needed to be propelled by electricity investments. Through government guarantees, more power stations were built in South Africa (NER, 2002b; Eberhard, 2003). Over-investment in electricity generation capacity in the 1970s and 1980s created substantial surpluses in capacity, which artificially suppressed the cost of electricity in South Africa. Relatively low prices encouraged the development of large, energy-intensive industries (van Horen, 1996). After the 1994 first democratic elections, the new government introduced a policy of restructuring state-owned enterprises and limiting the role of the state in the economy through direct ownership. The Electricity Act of 1987 was repealed by the Eskom Conversion Act, Act 13 of 2001. The Eskom Conversion Act provided for the conversion of Eskom into a public company, Eskom Holdings Limited (Figure 20). Eskom is now a tax paying entity, with the national government as the sole shareholder.
Prior to 2004, the electricity supply industry was regulated by the National Electricity Regulator (NER). In 2004, its structure was reformed and its mandate expanded with the formation of the National Energy Regulator of South Africa (NERSA).
NERSA was established in terms of the National Energy Regulator Act (Act No. 40 of 2004) with the
the Petroleum Pipelines Regulatory Authority as set out in the Petroleum Pipelines Act (Act No. 60 of 2003);
and (iii) the Electricity Regulator as set out in the Electricity Act (Act No. 41 of 1987) (DME, 1987, 2001, 2003a, 2004). Further aspects of NERSA’s mandate are derived from written government policies, as well as regulations issued by the Minister of Minerals and Energy (NERSA, 2007).
Eskom Transmission EPP Wires SO Trader Eskom
Generation Clusters
Customers
Eskom Distribution
Municipal Distributors
Eskom Enterprises Eskom Holdings
Figure 20: Eskom corporate structure created in 2001 Source: NER, 2002b
The Electricity Act (Act No. 41 of 1987) as amended in the Electricity Amendment Acts (Act No. 46 of 1994 and Act No. 60 of 1995) mandates the NERSA to play a role in the electricity supply industry as an economic regulator (DME, 1987, 1994, 1995). Economic regulation includes regulation of price and non-price economic activities. Price issues in the context of regulation include determining the rate of return, price cap regulation and benchmarking. Non-price issues include service provision in relation to quality of supply, health, safety, responsiveness to complaints, and environmental regulation (NER, 2002a; NER, 2002b).
Since the late 1990s, the South African government indicated its intention to reform and liberalise the industry by expanding the role of private sector, by bringing independent power producers into the generation sector. To address the fragmented electricity distribution industry, government set about reforming the sector by merging all municipal distributors into six Regional Electricity Distributors (REDs). After several years of negotiations, this strategy was abandoned in 2011 in the face of steadfast refusal of local authorities to give up their profit share from the resale of electricity to end users. There is now a policy vacuum with respect to electricity distribution reforms in South Africa. Issues still to be attended to include the market structure, prices, household energy efficiency and universal access to electricity services. Transmission is a natural monopoly; the plan was to leave it within the state in order to ensure third part access. Not all the intended reforms have developed further and Eskom is still the supplier of last resort.
While the electricity industry has been regulated since the 1990s, the piped-gas and petroleum pipeline industries in South Africa were regulated for the first time with the establishment of NERSA. The Gas and
Petroleum Pipelines Acts were passed to regulate development and operations of the piped-gas and petroleum pipelines industries. The next section discusses in detail the development of the South African oil industry.
4.3 South African oil industry and policy developments
South Africa’s oil consumption in relation to demand in Africa is presented in Figure 21. In 2007, the whole of Africa consumed 2.96 Mbbl/d, Egypt leading with a consumption of 651 000 bbl/d, followed by South Africa with consumption of 549 000 bbl/d (Figure 21). Third was Algeria, which consumed 270 000 bbl/d. The rest of other African countries consumed 1.49 Mbbl/d.
0 200 400 600 800 1000 1200 1400 1600 1800
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Oil consumption in Africa ('000 bbl/d)
Year
Egypt South Africa Algeria Other Africa
Figure 21: Oil consumption in South Africa relative to other African countries (1965-2010) Source: BP, 2008
The oil industry tends to vertically and horizontally integrated and can be divided into upstream and downstream activities. The upstream activities consist of oil exploration and refining. The downstream activities consist of marketing and distribution (Joskow, 1998). Most of the big oil companies are horizontally and vertically integrated, whether viewed within the boundaries of South Africa or internationally. Oil companies are involved in the refining of petroleum products in the upstream market as well as in the distribution and marketing of liquid fuels. Of importance to note about the South African oil industry is that it is “…highly regulated with price control and import control being the cornerstones of the regulatory dispensation” (Competition Tribunal of South Africa6, 2003:1). South Africa is not well endowed with oil.
The country’s proven petroleum reserves, located along its western and southern coastline (as of January 2005) were estimated at only about 16 million barrels (PetroSA, 2006).
In 1997 South Africa imported slightly more than 80% of its crude oil requirements from the Middle East, 12% from West Africa and the balance from its own crude production and other regions. Iran accounted
6 The Competition Tribunal of South Africa is an independent statutory body that has jurisdiction and adjudicates competition matters in accordance with the Competition Act (Act 89 of 1998). It reviews decisions made by the Competition Commission in respect of merger and market investigation references
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for 50%, Kuwait 14% and Saudi Arabia 10% (Table 9). The supply profile by country of origin had changed drastically by 2008, with the supply from Iran having declined by half and supplies from Angola increased from 1% of the total supply in 1997 to 18% in 2008. Supplies from Nigeria also increased from 5% in 1997 to 15% in 2008. The other notable increase in oil supply is from Saudi Arabia, which increased its supply from 10% in 1997 to 29% in 2008 (Sapia, 2009). In 2008, the South African oil supply market was still highly concentrated, concentrated, with only four countries accounting for 86% of the supply: Angola (18%), Iran (24%), Nigeria (15%) and Saudi Arabia (29%) (Table 9).
Table 9: South Africa’s oil supply by country of origin in 1997 and 2008 (thousand metric tons per year) calculated using the Herfindahl Hirshman Index (HHI) (Investopedia, 2012). The HHI is a general measure of market concentration that can be used in this case as an indicator of oil import dependence per source of percentage); and N is the number of oil exporters supplying a particular country. The HHI number can range from close to zero to 10 000; for a total monopoly in which a single supplier has 100% of the market, the HHI value is 10 000. For a highly competitive open market, say with 1 000 competitors each with an equal market