Energy Planning in South Africa

This transcript is from a CSIS podcast published on January 22, 2024. Listen to the podcast here.

André de Ruyter: More and more governments all over the world are realizing that adding more grid capacity is critical, not only because of the deployment of new generation capacity in areas where renewable resources are located, but also because of the variability of renewable energy generation.

Lisa Hyland: Hello and welcome to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I'm your host, Lisa Hyland. 

This week, André de Ruyter, former CEO of Eskom, the national power utility in South Africa, joins my colleagues Cy McGeady and Gracelin Baskaran to discuss South Africa’s energy sector and its energy transition plans. In the discussion, Andre draws on his time at Eskom to emphasize the importance of long-term planning and policy decisions for electricity sector in South Africa

They also discuss the need for investment in grid infrastructure to support the deployment of renewable energy and the potential for South Africa to leverage its energy resources for greater economic development. The conversation highlights the need for financing mechanisms, such as voluntary carbon markets and market-based solutions, to support an energy transition in Africa.

Here’s Gracelin to lead the conversation.

Gracelin Baskaran: I'm joined today by Andre de Reuter and Cy McGeady and I'm so thrilled to be here with both of you today. Thank you for joining me.

André de Ruyter: Hi Gracelin.

Cy McGeady: Thank you for having us.

Gracelin Baskaran: Andre, I want to get started. Can you tell me a little bit about yourself?

André de Ruyter: Yeah, so as you can probably tell from my accent, I'm from South Africa, as the name suggests, is in the south of the African continent. I have been in the energy business now for about 30 odd years. Worked for a long time in petrochemicals, coal, oil and gas. Spent some time in China in Germany, studied in the Netherlands, but I've always come back to South Africa and southern Africa, which is what I regard as my home. I was part of a project team that built an 865 kilometer transmission pipeline, gas pipeline from Mozambique to South Africa. So I've always had this interest in unlocking energy opportunities across the subcontinent because I believe energy is really critically important as an enabler to growth, but also to human development. That path eventually led me in 2020 to become the chief executive of Eskom, which is the South African national bow utility, and that's a position that I held for three years until I resigned at the end of February of this year.

Gracelin Baskaran: Tell me a little bit about what you accomplished during your time at Eskom.

André de Ruyter: Eskom is an organization that has become fraught with corruption. That is one of the major issues, beveling performance at the utility. But not only does it have a legacy of so-called state capture, which is the abuse of state institutions for essentially corrupt and criminal purposes, but it also has a legacy of old generation facilities that have been particularly poorly maintained and as such are very unreliable. But the tale of woe unfortunately doesn't end there. It also extends to the fact that for many years, Eskom was not awarded appropriate tariff increases by the national energy regulator of South Africa or NERSA for short. And that led to a position where Eskom had to borrow in order to pay its operating costs and eventually its debt situation grew to the point where in order to avoid a debt default, it had to rely on significant capital injections from the South African government in order to remain solvent.

So those were the challenges. What I did to try and resolve them, I managed to first of all do something that's unpopular in South Africa, which is to reduce the headcount. It was about 46,000 when I started brought it down to about 39,000 by the time that I left without losing time to industrial action as a consequence of the reduction in headcount. So that was a minor victory in a country that's heavily unionized. The debt was difficult to work down, obviously given our lack of adequate revenue, but through various cost savings opportunities, we did manage to bring that down by about 20, 30 billion rand divide by 20 to get to U.S. dollars just to make it easy. But I think the most important contribution that I made was to devise a strategy to take Eskom into 2035 and what that strategy entailed after some extremely rigorous analysis covering net present value calculations, covering systems stability analysis, covering environmental issues as being a particularly heavy reliant on coal for its generation.

And as a consequence of that, we devised this pathway. We could start on the journey to achieving net zero by 2050, but also to unbundle the organization into three parts, generation, transmission, and distribution with the intention that we would set up an independent transmission system and market operator and that would form the backbone of the future Eskom with new generation capacity being attracted to an electricity market, operated on a willing buy willing seller basis with tariffs set by the market rather than by a regulator and with Eskom’s old coal fired generation being retired and therefore reducing our carbon footprint over a period of about 15 years by about a hundred million metric tons of CO2 per annum. So that was in a nutshell, the strategy which was eventually adopted by the board and then implemented.

Cy McGeady: Andre, I think the biggest story in South Africa is, or the most pressing story as it relates to energy is the blackouts or I think what's described as load shedding. Can you just characterize, well, what is load shedding and characterize the load shedding the scale of load shedding in South Africa for us as it sets the groundwork for all of what you've just described.

André de Ruyter: Back in 1993, government published an energy white paper and that white paper was intended to set the scene for the continued supply of electricity to South Africa, also to some of our neighbors at affordable tariffs. So the competitiveness of our electricity supply from a cost perspective was critically important, but also the of the supply and government at the time identified attraction of private sector investment to the electricity generation business as the key to unlocking this. And Eskom was therefore told though thou shalt not build more new generation capacity, we protested at the time my predecessors and said, this is a really bad idea. We need to start building new power stations now, otherwise we'll run out of capacity government. And its wisdom said, no, don't worry about that. Don't build, we'll solve this. But of course government didn't solve it. They didn't open up the market.

And lo and behold, within a couple of months of what Eskom had predicted that falling off the cliff would be in terms of running out of capacity effectively happened. And since around about 2007, we've had a continuous shortfall in generation capacity. Now how do we solve that shortfall of generation capacity in order to maintain a stable grid? The South African grid runs at 50 hertz now that 50 hertz is alternating current, so that's the heartbeat of the grid. If you lose your frequency, you have a system blackout, which is catastrophic, it will take you weeks to recover from that. So you want to avoid that at all costs. So we had to find an orderly way in which we could manage demand and this tool was termed load shedding. So on a rotational basis we cut the supply of electricity to our customers as a net result of that. People in South Africa experience, depending on the performance of the generation plant as well as demand between two and eight hours of no electricity every day, this is what load shedding is. It's been a huge strain on investor confidence on the daily life of South Africans. And I think that it's been way overdue to being resolved, but for a variety of reasons we've not been able to do so successfully.

Gracelin Baskaran: To jump in there, I'm American, but I spent seven years living in South Africa. So in a way it became home for me when I arrived in 2014, I think there was about one or two hours of load shutting most days, but when I left in 2023, it was up to about eight hours a day, which meant I couldn't run my blow dryer because you can't run a blow dryer on a generator, which was very hard for me in the morning some days. But I think there was a few observations from that is first it put a huge strain on businesses. We've now calculated that most businesses have lost thousands of hours of being able to run, which has massive implications on the economy. The South African Central Bank when looking at economic growth, which hasn't topped 3% in over a decade, has cited load shutting as the biggest inhibitor of growth.

So much so that earlier this year they put the cost of load shedding at 51 million U.S. dollars per day, right? So in that context, growth is nearly impossible I guess with one thing. And I think on a more comical point, I mean it's driven every day innovation. A lot of us when we were there took our phone calls from our cars because if you had gas in your car, you could keep your phone charged. But otherwise, when you have load shedding, the cell phone signal often also goes out. So it ends up being that you're not using your Wi-Fi and you're not using your cell phone data and you're driving into somewhere. But we have to remember that that's a privilege of income and South Africa is the most unequal country in the world, so you can imagine the differentiation between the top 1% and everyone else.

And if you fly into Cape Town, which if you haven't, you should go, it's beautiful. All of the houses have solar panels on top of them, but that's a privilege of the wealthy. So for the majority of South Africa, they just live in the dark because you can't afford that. So I would say when I look at load shedding in my personal life, it was an inconvenient, but for the majority of South Africa it was slow growth, it was poverty, it was divestment. To turn that trajectory around is impossible to do without addressing the energy crisis. And it's a tragedy because I think as Andre said, I mean it's been going on now for 16 years.

Cy McGeady: Yeah, I mean I also, just for further context, just think in the U.S. we've had winter storm Elliot and winter Storm Yuri in recent years in Texas and across the eastern interconnection in the case of winter Storm Elliot. And we had several hours of a load shedding event in winter Storm Elliot. It was a couple hours over two days in very specific parts of the southeastern part, the grid and Duke TVA in the Carolinas. And that was a huge political event, a huge policy event. The entire sector is kind of had coming to terms with this. NERC is releasing reports, FERC is doing investigations. This was a big deal that was a single storm for a couple of hours over a couple of days. And meanwhile South Africa's dealing with this on a decade plus basis. And so, the scale of the challenge is really significant. Andre, what is the role of renewables in this? And I guess in particular, what is the role of the renewable independent power procurement program? There's a lot of P'S in that that's sort of attracted a lot of attention as a model for deploying renewable resources and renewable power, but also in your view, is that an important way forward in terms of filling the gap? The generation gap.

André de Ruyter: South Africa ran probably the most successful procurement program for independent power producers, and the majority of the capacity created in that way was renewable energy capacity. It was a very successful program at the time. Costs were still high, costs were high for a couple of reasons. The environment was uncertain. The regulatory environment was uncertain. Technology was more expensive. But as we know, rights curve applies to renewable energy technologies and we've seen this precipitate drop in the cost of renewable energy, which has made it incredibly competitive. That program contributed significantly to the speedy addition of new capacity, bearing in mind that it takes about 24 months to deploy a utility scale solar farm and about six months longer to do a wind farm. Compare that to a coal fired power station. South Africa is still finalizing the construction of its coal-fired power stations that it started building in 2008.

They still haven't been finished. Nuclear, as we all know, will probably take longer than that. So against that backdrop, renewable energy has played a significant role in quickly addressing the shortfall in generation capacity. Of course, it is problematic because the wind doesn't always blow and the sun doesn't always shine to state the very, very obvious. And as a consequence, you need to have backup storage, you need to have pumped hydro storage, battery storage. But what did happen was that the so-called REIPPP program because we got tired of saying so many Ps eventually ground to a halt and it ground to a halt because the chief executive of Eskom at the time who was subsequently implicated in an investigation in so-called state capture, which was the use of state resources to further the interests of certain individuals, he refused to sign the power purchase agreement that would allow this program to continue.

And that was in 2015. And since then we've really not added new capacity in the past week. As a matter of fact, the first new capacity was added a hundred megawatts of PV generation coupled with battery storage. But that was the first in eight years that got added. The real world didn't wait on government to make up its mind as to how it wanted to do this. So private citizens install about four gigs of capacity, solar capacity on a rooftop basis every year, which is huge. That is the capacity of a very large coal fired power station. Similarly, what we find is that more and more companies now that certain regulatory restrictions have been removed are investing on a merchant basis where they conclude power purchase agreements with private customers, typically large industries that have a desire, a for the availability of electricity, but also very importantly for access to lower carbon electricity. With the advent of the carbon border adjustment mechanism that the European Union, one of South Africa's major trading partners, is now implementing, there is a huge drive by manufacturing companies, by mining companies, even farmers, to lower the carbon content of the exported product. So in that space, in that vacuum created by regulatory and government inaction as well as by the fact that Eskom essentially brought this whole program to a halt, the private sector has stepped in a major way and has enabled the addition of significant new capacity, the vast majority of it being renewables.

Gracelin Baskaran: So South Africa is facing a debt challenge. I don't know if to tell you that. And part of that is because it keeps absorbing some of Eskom’s debt. It's bailing out state owned enterprises. So in light of a constrained public finance situation, do you think South Africa is going to be able to mobilize the private capital at the scale needed in the years to come to address the energy challenges?

André de Ruyter: Gracelin, I think it depends on how we structure those agreements. If the private investors conclude power purchase agreements with private sector counterparts, then of course the government's not involved at all. But if the construct is for Eskom to act as the buyer, nobody likes to sell to a single customer. So your market risk is binary, it's on or off. And we as Eskom have a checkered history as far as that is concerned, but then also a customer that faces real questions on its ability to pay. If Eskom is the single buyer of electricity, then clearly government guarantees have been and will be required to underpin those power purchase agreements, and that is simply no longer affordable to the fiscals. So if we can leverage the borrowing power of private sector balance sheets and have private sector companies sign those long-term power purchase agreements, and of course their credit ratings are significantly better than Eskom's, then we will be in a position to address the shortfall in generation capacity without having to have recourse to more sovereign borrowing, which I think is unaffordable at this point.

Cy McGeady: I'm curious what you think. So, the private sector is interested, there's interest, there's capital flowing in. There's these bilateral contracts are competitive. You've got buyers finding sellers that sounds good, except that of course there's something in between that's the grid. And so, Eskom still owns and operates the grid. Is the grid sufficient? Is the transmission system sufficient to enable this deployment of wind and solar and insofar as more transmission is needed, how should South Africa think about financing that, building that?

André de Ruyter: So, the shorter answer is no, the grid is not sufficient, and I think that's true across the world. I think more and more governments all over the world are realizing that adding more grid capacity is critical, not only because of the deployment of new generation capacity in areas where renewable resources are located, but also because of the variability of renewable energy generation. It requires a stronger grid with more redundancy to cater for the fluctuations in output from those plants. There are however practical solutions that we can implement to find our way around this particular problem. So, the first one is that we are in a very fortunate situation in South Africa in that the areas where our coal reserves are, which is also obviously where our coal fired power generation is, we also have very good solar and wind resources. And the grid being in existence right there means that we can then deploy solar and wind where the grid already is as we phase out coal fired capacity.

So, the energy transition actually enables us to use existing infrastructure that's already been paid for at much lower cost than if we had to build on a greenfield basis. We also have to look at commercial structuring. We have to look at allowing more wind and solar capacity to be built than can be accommodated at a certain point by the grid and curtailing the producer when there is excess wind and solar being produced at the same time. Now this is something that can be statistically modeled and it's a business risk that you can take in advance, but the cost of curtailing renewable energy when it is required, and it's really a very infrequent occurrence cost of doing so is far less than the cost of unserved energy. So by taking a known risk, a deliberate risk, one is able to leverage your grid resources so much better.

But at the end of the day, you need to build more transmission lines to areas where wind and solar resources are located and this is where the state needs to play a catalytic role. If you look at very arid regions of South Africa, semi desert, which is where typically solar resources are based, the transmission infrastructure there is already at full capacity. The problem now is a little bit like building a new six lane highway to a one horse down. There's simply not enough traffic on that six lane highway to justify economically why you want to have such a big facility for so little traffic. And the same applies to that first mover disadvantage. If an investor goes and builds a generation facility and then relies on private investment to build that transmission line or that six lane highway to the market, that simply is not going to happen. So in my view, what we need to do as a country is to use concessional financing to as the government build the infrastructure, the enabling infrastructure pre-invest to create additional capacity, additional grid access points so that we can make more investment in generation capacity in the best renewable areas in the country attractive and feasible that that is not a constraint. And that strategy, I believe is what clearly is the rational and logical thing to do given limited access to concessional financing.

Cy McGeady: Yeah, it's like the infrastructure mobilizes the private capital on the generation side, which I think is, it's like a physical distillation of that sort of theme of private capital mobilization. It's you need to place the infrastructure in place so that the private capital can fill the role on the generation side.

Gracelin Baskaran: It's creating an enabling environment for private capital on the generation side. I think. So that brings me to another question. Andre, you played a very important role in negotiating the eight and a half billion dollars just energy transition facility. That eight and a half billion dollars was something the whole world was looking at to say does the just energy transition framework work? And there have been mixed reviews and there's two components of a just energy transition. There's the energy component and then there's the economic development socioeconomic transition component. In terms of the just energy question, in your opinion, how should the eight and a half billion dollars be used on the energy transition side?

André de Ruyter: The primary use should be to enable your word that you used earlier, the mobilization of private capital. And that means that the bulk of that has to go into grid infrastructure that will unlock private investment in generation capacity. That is the low hanging fruit. The private sector is demonstrated huge appetite to invest in generation capacity. It is very difficult for a private actor to build a new greenfields transmission line. You've got problems around eminent domain, you've got problems around it being a natural monopoly that you don't want to duplicate. You've got problems around tariffs. You've got problems around your financing model given the fact that initially utilization of that line will be very low, so your revenue will have to be subsidized from somewhere else. But if you have a grid company that has access to concessional financing, you can approach this problem in a more sensible way. So using the Jet P as it was called money predominantly for grid rollout, I believe is far and away the most logical decision to make.

Gracelin Baskaran: That's really interesting, especially for me being from the World Bank at the time when a lot of this was negotiated as to how many different ways that people have put forth that money should be used. It seems like a very pragmatic solution to drive more investment and mobilize that capital. So South Africa is one of the biggest economies on the continent, and it also has one of the highest energy access rates on the continent based on South Africa's energy experience. For better or worse, what lessons can we draw for other African countries who are kind of working on scaling up their own energy access now.

André de Ruyter: I think one of the major lessons that we learned in South Africa was that we should have acted earlier when it comes to planning and implementing energy policy. We I think ran into a problem that is common across the world is that politicians have a very short time horizon of which they operate four years in the U.S. maybe as short as two years depending on what the election cycle is. You're asking these elected representatives to make decisions on policies with 20 year consequences. And that mismatch, I think is one which if your elected representatives don't pay attention to the longer term implications of their policy decisions can really lead to a situation where eventually you run out of energy as happened in South Africa. So my respectful and humble advice to other African countries is plan in advance, let the numbers do the talking, let the technocrats do the planning, and then implement with a resolute determination. And don't waiver from creating the not only physical infrastructure, but also the regulatory and policy infrastructure and the predictability in that environment that will enable investment to take place, make the plan, and then stick to it.

Cy McGeady: Thinking about 20 years out, let's say, or that long-term planning horizon in Africa, one of the big themes is minerals and natural critical minerals, natural mining, there's a lot of prospects for developing those resources in Africa to supply the energy transition. What is the relationship between executing on that economic opportunity and African nations moving up the value chain as it relates to those resources and developing the energy sector?

André de Ruyter: Energy is the lifeblood of a modern industrial economy. Without energy and in particular electricity, there is just no way that you can grow and develop an economy. And this is particularly true for energy intensive processes like minerals, beneficiation, and this is where I believe Africa has an opportunity to leverage its low or zero carbon electricity production capabilities, which many instances yet don't exist in a world where, as I've said earlier, you are going to see increasing pressure on the carbon footprint of the products that you export. Even if it's an unprocessed commodity, having access to low carbon electricity is going to be critical. And this decision point, I believe creates this opportunity for African governments to decide unequivocally in favor of low or no carbon electricity generation so that it can future proof its economy and beneficiate minerals in country. Now, I'm not an advocate of a philosophy of autocracy that a country should try and perform beneficiation at subscale, which is inefficient and will make a country less competitive.

But if there are sensible opportunities to add value to exports in country, that makes far more sense. For example, South Africa is one of the biggest manganese producers in the world. It exports the manganese or unprocessed to China where it gets processed and refined and then the manganese is exported back to South Africa. Now to my mind, that doesn't make a whole amount of sense also from a carbon footprint perspective. And I think that these obvious intermediary steps, I'm a long way from suggesting that somehow we need to go all the way down the value chain. But simple basic steps of adding more value to exports by leveraging your resources seems like a very sensible thing to me to do.

Cy McGeady: And pairing that with these opportunities to develop power, those processes with renewables, low carbon footprints, hydro wind, solar, correct. It's sort of like a path forward for the development of the energy sector.

André de Ruyter: And what is very important about what you've just said is that those exports typically are dollar denominated and the loans taken out for the construction of these renewable energy facilities are typically dollar denominated. So you eliminate one of the major risks that have bedeviled the development of renewable energy projects in Africa, in particular with volatile currency markets. Then you can have a baseload customer that pays in dollars, enables you to service your loan if you gear up to 50 or 60% and the rest you can use the rest of your production capacity you can use to service the local market and get rewarded paid in local currency. And that seems to me to make a huge amount of sense from a risk management perspective as well as the perspective of lowering the cost of electricity by getting economies of scale.

Gracelin Baskaran: As an economist, I think the revenue to bring down debt is just so critical at this time and point. I mean, we are seeing countries default left, right, and center on their debt. I have one last question for you and it's looking to the future. So Africa's population now sits about 1.4 billion, and of that 590 million people in Sub-Saharan Africa don't have any access to energy. The continent's going to grow to 2.5 billion in the next 25 years, which means that what one out of every four people in the world are going to be African. I always like to use the example that when you're low income, you don't have access to energy and you don't eat meat. When you become middle income, you eat a lot of meat and you use a lot of energy. And when you become really rich, you're vegan and you use solar panels.

André de Ruyter: And you fly private.

Gracelin Baskaran: Absolutely. I mean, we forget about that part because that's convenient to leave out of my story or it doesn't work. But if you think about the fact that the majority of Africa is moving to eating meat and using energy, but not this top tier of veganism and solar panels, that means that the energy demand of this continent is about to skyrocket, right? Do you think we can do this in a way that is aligned with net zero? And what does it take to ensure that growing energy demand does not undermine global net zero ambitions?

André de Ruyter: The average electricity consumption of an African is less than the electricity consumed by an American refrigerator.

Gracelin Baskaran: That's harsh.

Cy McGeady: But also important too. This is important context.

Gracelin Baskaran: To contextualize. Yeah.

André de Ruyter: Just to get the picture across of how big the gap is. Now imagine if all of Africa had the same impact on the environment as the average American, the planet would simply not be able to sustain it. So it is critical that we enable a development path for Africa that does not hold back the continent. The worst possible thing I think that anybody can do is to tell Africa, well, terribly sorry, we've developed using fossil fuels. We've contaminated and polluted the environment to the point where unfortunately, sorry, Africa, but you've got to take one for the team, so please just don't develop. So we can't be having that debate. We need to enable Africa to develop. And what that means is that we have to enable Africa to finance its electricity expansion. Some of it will be natural gas. I see a definite role for natural gas in this development.

As we know, natural gas is far more efficient. Latest generation of combined cycle gas turbines running at efficiencies of 65, 60 7% modest role for nuclear. But the bulk of it will be renewable energy resources with which Africa fortunately is blessed. It will also enable far more distributed generation to take place, which will allow Africa to, in some ways emulate the rollout of mobile telephony, which allowed Africa to leapfrog fixed line telephony and go straight to mobile. So the time consuming expensive rollout of a transmission grid can in some respects be optimized, not entirely avoided, but that means access to financing. The cost of financing an energy project in Africa is 10 times what it is in the developed world. And in fact, if you look at the correlation between solar resources and cost of financing, the two are very closely correlated, which is quite ironic.

And therefore, what needs to be done is that markets need to come to the fore in order to develop solutions. And this is where I believe a far greater role can be played both by the voluntary carbon market, which at this point is minute. It's 1.9 billion per annum. So really not enough to tackle the big ask that is required here. Also the IMO opportunity in terms of article six, which was negotiated at cop. But again, there African governments need to be wide awake to the risk of being taken for a ride by big emitters. Kenya recently signed an agreement selling its carbon credits to Middle Eastern country for around about $5 per ton, which was a real bargain for the buyer, not so good for the seller. And therefore I think that market-based solutions, rather than just a transfer from the global northern taxpayer to the global south is the way forward. Pretending that it's politically possible to transfer a trillion dollars a year from the global north to the global south to pay for development. Ain't going to happen.

Gracelin Baskaran: There's so many interesting points you raised there. So one is voluntary carbon markets. One of the most distinct moments at COP 28 where we both were was when John Kerry and Ajay Banga talked about how a voluntary carbon market with integrity is imperative to generate the financing needed to reduce the friction between developing countries. Second point, I think energy justice, which is the heart of what you hit, is we can't leave behind Africa. And the energy transition, the growing energy consumption is actually critical for development and not leaving the continent behind it in poverty. And three is the role of natural gas. I mean, we know that natural gas is what about half the emissions of coal. So it becomes a very imperative part. The IEA doesn't have any modeling scenario where we can hit universal energy access in Africa without gas. So I mean, we can't over homogenize fossil fuels and just say we're going to develop without it. So that's actually all we have time for today. If it were up to me, this conversation would not end. I have found it incredibly insightful, interesting. And I actually walk away with more questions and answers, which is a sign of a good conversation. Andre, thank you so much for joining us. It's been such a pleasure. Great. Thank you very much. Thank you.

Lisa Hyland: Thanks to Andre for joining us this week. 

CSIS will soon be publishing some work on challenges and opportunities for the energy transition in Africa, so keep an eye out for that analysis.

You can find more episodes of Energy 360 wherever you listen to podcasts, find us at CSIS.org and follow us on social media for the latest updates from our team. 

Thanks for listening.

 (END.)

André de Ruyter: More and more governments all over the world are realizing that adding more grid capacity is critical, not only because of the deployment of new generation capacity in areas where renewable resources are located, but also because of the variability of renewable energy generation.

Lisa Hyland: Hello and welcome to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I'm your host, Lisa Hyland. 

This week, André de Ruyter, former CEO of Eskom, the national power utility in South Africa, joins my colleagues Cy McGeady and Gracelin Baskaran to discuss South Africa’s energy sector and its energy transition plans. In the discussion, Andre draws on his time at Eskom to emphasize the importance of long-term planning and policy decisions for electricity sector in South Africa

They also discuss the need for investment in grid infrastructure to support the deployment of renewable energy and the potential for South Africa to leverage its energy resources for greater economic development. The conversation highlights the need for financing mechanisms, such as voluntary carbon markets and market-based solutions, to support an energy transition in Africa.

Here’s Gracelin to lead the conversation.

Gracelin Baskaran: I'm joined today by Andre de Reuter and Cy McGeady and I'm so thrilled to be here with both of you today. Thank you for joining me.

André de Ruyter: Hi Gracelin.

Cy McGeady: Thank you for having us.

Gracelin Baskaran: Andre, I want to get started. Can you tell me a little bit about yourself?

André de Ruyter: Yeah, so as you can probably tell from my accent, I'm from South Africa, as the name suggests, is in the south of the African continent. I have been in the energy business now for about 30 odd years. Worked for a long time in petrochemicals, coal, oil and gas. Spent some time in China in Germany, studied in the Netherlands, but I've always come back to South Africa and southern Africa, which is what I regard as my home. I was part of a project team that built an 865 kilometer transmission pipeline, gas pipeline from Mozambique to South Africa. So I've always had this interest in unlocking energy opportunities across the subcontinent because I believe energy is really critically important as an enabler to growth, but also to human development. That path eventually led me in 2020 to become the chief executive of Eskom, which is the South African national bow utility, and that's a position that I held for three years until I resigned at the end of February of this year.

Gracelin Baskaran: Tell me a little bit about what you accomplished during your time at Eskom.

André de Ruyter: Eskom is an organization that has become fraught with corruption. That is one of the major issues, beveling performance at the utility. But not only does it have a legacy of so-called state capture, which is the abuse of state institutions for essentially corrupt and criminal purposes, but it also has a legacy of old generation facilities that have been particularly poorly maintained and as such are very unreliable. But the tale of woe unfortunately doesn't end there. It also extends to the fact that for many years, Eskom was not awarded appropriate tariff increases by the national energy regulator of South Africa or NERSA for short. And that led to a position where Eskom had to borrow in order to pay its operating costs and eventually its debt situation grew to the point where in order to avoid a debt default, it had to rely on significant capital injections from the South African government in order to remain solvent.

So those were the challenges. What I did to try and resolve them, I managed to first of all do something that's unpopular in South Africa, which is to reduce the headcount. It was about 46,000 when I started brought it down to about 39,000 by the time that I left without losing time to industrial action as a consequence of the reduction in headcount. So that was a minor victory in a country that's heavily unionized. The debt was difficult to work down, obviously given our lack of adequate revenue, but through various cost savings opportunities, we did manage to bring that down by about 20, 30 billion rand divide by 20 to get to U.S. dollars just to make it easy. But I think the most important contribution that I made was to devise a strategy to take Eskom into 2035 and what that strategy entailed after some extremely rigorous analysis covering net present value calculations, covering systems stability analysis, covering environmental issues as being a particularly heavy reliant on coal for its generation.

And as a consequence of that, we devised this pathway. We could start on the journey to achieving net zero by 2050, but also to unbundle the organization into three parts, generation, transmission, and distribution with the intention that we would set up an independent transmission system and market operator and that would form the backbone of the future Eskom with new generation capacity being attracted to an electricity market, operated on a willing buy willing seller basis with tariffs set by the market rather than by a regulator and with Eskom’s old coal fired generation being retired and therefore reducing our carbon footprint over a period of about 15 years by about a hundred million metric tons of CO2 per annum. So that was in a nutshell, the strategy which was eventually adopted by the board and then implemented.

Cy McGeady: Andre, I think the biggest story in South Africa is, or the most pressing story as it relates to energy is the blackouts or I think what's described as load shedding. Can you just characterize, well, what is load shedding and characterize the load shedding the scale of load shedding in South Africa for us as it sets the groundwork for all of what you've just described.

André de Ruyter: Back in 1993, government published an energy white paper and that white paper was intended to set the scene for the continued supply of electricity to South Africa, also to some of our neighbors at affordable tariffs. So the competitiveness of our electricity supply from a cost perspective was critically important, but also the of the supply and government at the time identified attraction of private sector investment to the electricity generation business as the key to unlocking this. And Eskom was therefore told though thou shalt not build more new generation capacity, we protested at the time my predecessors and said, this is a really bad idea. We need to start building new power stations now, otherwise we'll run out of capacity government. And its wisdom said, no, don't worry about that. Don't build, we'll solve this. But of course government didn't solve it. They didn't open up the market.

And lo and behold, within a couple of months of what Eskom had predicted that falling off the cliff would be in terms of running out of capacity effectively happened. And since around about 2007, we've had a continuous shortfall in generation capacity. Now how do we solve that shortfall of generation capacity in order to maintain a stable grid? The South African grid runs at 50 hertz now that 50 hertz is alternating current, so that's the heartbeat of the grid. If you lose your frequency, you have a system blackout, which is catastrophic, it will take you weeks to recover from that. So you want to avoid that at all costs. So we had to find an orderly way in which we could manage demand and this tool was termed load shedding. So on a rotational basis we cut the supply of electricity to our customers as a net result of that. People in South Africa experience, depending on the performance of the generation plant as well as demand between two and eight hours of no electricity every day, this is what load shedding is. It's been a huge strain on investor confidence on the daily life of South Africans. And I think that it's been way overdue to being resolved, but for a variety of reasons we've not been able to do so successfully.

Gracelin Baskaran: To jump in there, I'm American, but I spent seven years living in South Africa. So in a way it became home for me when I arrived in 2014, I think there was about one or two hours of load shutting most days, but when I left in 2023, it was up to about eight hours a day, which meant I couldn't run my blow dryer because you can't run a blow dryer on a generator, which was very hard for me in the morning some days. But I think there was a few observations from that is first it put a huge strain on businesses. We've now calculated that most businesses have lost thousands of hours of being able to run, which has massive implications on the economy. The South African Central Bank when looking at economic growth, which hasn't topped 3% in over a decade, has cited load shutting as the biggest inhibitor of growth.

So much so that earlier this year they put the cost of load shedding at 51 million U.S. dollars per day, right? So in that context, growth is nearly impossible I guess with one thing. And I think on a more comical point, I mean it's driven every day innovation. A lot of us when we were there took our phone calls from our cars because if you had gas in your car, you could keep your phone charged. But otherwise, when you have load shedding, the cell phone signal often also goes out. So it ends up being that you're not using your Wi-Fi and you're not using your cell phone data and you're driving into somewhere. But we have to remember that that's a privilege of income and South Africa is the most unequal country in the world, so you can imagine the differentiation between the top 1% and everyone else.

And if you fly into Cape Town, which if you haven't, you should go, it's beautiful. All of the houses have solar panels on top of them, but that's a privilege of the wealthy. So for the majority of South Africa, they just live in the dark because you can't afford that. So I would say when I look at load shedding in my personal life, it was an inconvenient, but for the majority of South Africa it was slow growth, it was poverty, it was divestment. To turn that trajectory around is impossible to do without addressing the energy crisis. And it's a tragedy because I think as Andre said, I mean it's been going on now for 16 years.

Cy McGeady: Yeah, I mean I also, just for further context, just think in the U.S. we've had winter storm Elliot and winter Storm Yuri in recent years in Texas and across the eastern interconnection in the case of winter Storm Elliot. And we had several hours of a load shedding event in winter Storm Elliot. It was a couple hours over two days in very specific parts of the southeastern part, the grid and Duke TVA in the Carolinas. And that was a huge political event, a huge policy event. The entire sector is kind of had coming to terms with this. NERC is releasing reports, FERC is doing investigations. This was a big deal that was a single storm for a couple of hours over a couple of days. And meanwhile South Africa's dealing with this on a decade plus basis. And so, the scale of the challenge is really significant. Andre, what is the role of renewables in this? And I guess in particular, what is the role of the renewable independent power procurement program? There's a lot of P'S in that that's sort of attracted a lot of attention as a model for deploying renewable resources and renewable power, but also in your view, is that an important way forward in terms of filling the gap? The generation gap.

André de Ruyter: South Africa ran probably the most successful procurement program for independent power producers, and the majority of the capacity created in that way was renewable energy capacity. It was a very successful program at the time. Costs were still high, costs were high for a couple of reasons. The environment was uncertain. The regulatory environment was uncertain. Technology was more expensive. But as we know, rights curve applies to renewable energy technologies and we've seen this precipitate drop in the cost of renewable energy, which has made it incredibly competitive. That program contributed significantly to the speedy addition of new capacity, bearing in mind that it takes about 24 months to deploy a utility scale solar farm and about six months longer to do a wind farm. Compare that to a coal fired power station. South Africa is still finalizing the construction of its coal-fired power stations that it started building in 2008.

They still haven't been finished. Nuclear, as we all know, will probably take longer than that. So against that backdrop, renewable energy has played a significant role in quickly addressing the shortfall in generation capacity. Of course, it is problematic because the wind doesn't always blow and the sun doesn't always shine to state the very, very obvious. And as a consequence, you need to have backup storage, you need to have pumped hydro storage, battery storage. But what did happen was that the so-called REIPPP program because we got tired of saying so many Ps eventually ground to a halt and it ground to a halt because the chief executive of Eskom at the time who was subsequently implicated in an investigation in so-called state capture, which was the use of state resources to further the interests of certain individuals, he refused to sign the power purchase agreement that would allow this program to continue.

And that was in 2015. And since then we've really not added new capacity in the past week. As a matter of fact, the first new capacity was added a hundred megawatts of PV generation coupled with battery storage. But that was the first in eight years that got added. The real world didn't wait on government to make up its mind as to how it wanted to do this. So private citizens install about four gigs of capacity, solar capacity on a rooftop basis every year, which is huge. That is the capacity of a very large coal fired power station. Similarly, what we find is that more and more companies now that certain regulatory restrictions have been removed are investing on a merchant basis where they conclude power purchase agreements with private customers, typically large industries that have a desire, a for the availability of electricity, but also very importantly for access to lower carbon electricity. With the advent of the carbon border adjustment mechanism that the European Union, one of South Africa's major trading partners, is now implementing, there is a huge drive by manufacturing companies, by mining companies, even farmers, to lower the carbon content of the exported product. So in that space, in that vacuum created by regulatory and government inaction as well as by the fact that Eskom essentially brought this whole program to a halt, the private sector has stepped in a major way and has enabled the addition of significant new capacity, the vast majority of it being renewables.

Gracelin Baskaran: So South Africa is facing a debt challenge. I don't know if to tell you that. And part of that is because it keeps absorbing some of Eskom’s debt. It's bailing out state owned enterprises. So in light of a constrained public finance situation, do you think South Africa is going to be able to mobilize the private capital at the scale needed in the years to come to address the energy challenges?

André de Ruyter: Gracelin, I think it depends on how we structure those agreements. If the private investors conclude power purchase agreements with private sector counterparts, then of course the government's not involved at all. But if the construct is for Eskom to act as the buyer, nobody likes to sell to a single customer. So your market risk is binary, it's on or off. And we as Eskom have a checkered history as far as that is concerned, but then also a customer that faces real questions on its ability to pay. If Eskom is the single buyer of electricity, then clearly government guarantees have been and will be required to underpin those power purchase agreements, and that is simply no longer affordable to the fiscals. So if we can leverage the borrowing power of private sector balance sheets and have private sector companies sign those long-term power purchase agreements, and of course their credit ratings are significantly better than Eskom's, then we will be in a position to address the shortfall in generation capacity without having to have recourse to more sovereign borrowing, which I think is unaffordable at this point.

Cy McGeady: I'm curious what you think. So, the private sector is interested, there's interest, there's capital flowing in. There's these bilateral contracts are competitive. You've got buyers finding sellers that sounds good, except that of course there's something in between that's the grid. And so, Eskom still owns and operates the grid. Is the grid sufficient? Is the transmission system sufficient to enable this deployment of wind and solar and insofar as more transmission is needed, how should South Africa think about financing that, building that?

André de Ruyter: So, the shorter answer is no, the grid is not sufficient, and I think that's true across the world. I think more and more governments all over the world are realizing that adding more grid capacity is critical, not only because of the deployment of new generation capacity in areas where renewable resources are located, but also because of the variability of renewable energy generation. It requires a stronger grid with more redundancy to cater for the fluctuations in output from those plants. There are however practical solutions that we can implement to find our way around this particular problem. So, the first one is that we are in a very fortunate situation in South Africa in that the areas where our coal reserves are, which is also obviously where our coal fired power generation is, we also have very good solar and wind resources. And the grid being in existence right there means that we can then deploy solar and wind where the grid already is as we phase out coal fired capacity.

So, the energy transition actually enables us to use existing infrastructure that's already been paid for at much lower cost than if we had to build on a greenfield basis. We also have to look at commercial structuring. We have to look at allowing more wind and solar capacity to be built than can be accommodated at a certain point by the grid and curtailing the producer when there is excess wind and solar being produced at the same time. Now this is something that can be statistically modeled and it's a business risk that you can take in advance, but the cost of curtailing renewable energy when it is required, and it's really a very infrequent occurrence cost of doing so is far less than the cost of unserved energy. So by taking a known risk, a deliberate risk, one is able to leverage your grid resources so much better.

But at the end of the day, you need to build more transmission lines to areas where wind and solar resources are located and this is where the state needs to play a catalytic role. If you look at very arid regions of South Africa, semi desert, which is where typically solar resources are based, the transmission infrastructure there is already at full capacity. The problem now is a little bit like building a new six lane highway to a one horse down. There's simply not enough traffic on that six lane highway to justify economically why you want to have such a big facility for so little traffic. And the same applies to that first mover disadvantage. If an investor goes and builds a generation facility and then relies on private investment to build that transmission line or that six lane highway to the market, that simply is not going to happen. So in my view, what we need to do as a country is to use concessional financing to as the government build the infrastructure, the enabling infrastructure pre-invest to create additional capacity, additional grid access points so that we can make more investment in generation capacity in the best renewable areas in the country attractive and feasible that that is not a constraint. And that strategy, I believe is what clearly is the rational and logical thing to do given limited access to concessional financing.

Cy McGeady: Yeah, it's like the infrastructure mobilizes the private capital on the generation side, which I think is, it's like a physical distillation of that sort of theme of private capital mobilization. It's you need to place the infrastructure in place so that the private capital can fill the role on the generation side.

Gracelin Baskaran: It's creating an enabling environment for private capital on the generation side. I think. So that brings me to another question. Andre, you played a very important role in negotiating the eight and a half billion dollars just energy transition facility. That eight and a half billion dollars was something the whole world was looking at to say does the just energy transition framework work? And there have been mixed reviews and there's two components of a just energy transition. There's the energy component and then there's the economic development socioeconomic transition component. In terms of the just energy question, in your opinion, how should the eight and a half billion dollars be used on the energy transition side?

André de Ruyter: The primary use should be to enable your word that you used earlier, the mobilization of private capital. And that means that the bulk of that has to go into grid infrastructure that will unlock private investment in generation capacity. That is the low hanging fruit. The private sector is demonstrated huge appetite to invest in generation capacity. It is very difficult for a private actor to build a new greenfields transmission line. You've got problems around eminent domain, you've got problems around it being a natural monopoly that you don't want to duplicate. You've got problems around tariffs. You've got problems around your financing model given the fact that initially utilization of that line will be very low, so your revenue will have to be subsidized from somewhere else. But if you have a grid company that has access to concessional financing, you can approach this problem in a more sensible way. So using the Jet P as it was called money predominantly for grid rollout, I believe is far and away the most logical decision to make.

Gracelin Baskaran: That's really interesting, especially for me being from the World Bank at the time when a lot of this was negotiated as to how many different ways that people have put forth that money should be used. It seems like a very pragmatic solution to drive more investment and mobilize that capital. So South Africa is one of the biggest economies on the continent, and it also has one of the highest energy access rates on the continent based on South Africa's energy experience. For better or worse, what lessons can we draw for other African countries who are kind of working on scaling up their own energy access now.

André de Ruyter: I think one of the major lessons that we learned in South Africa was that we should have acted earlier when it comes to planning and implementing energy policy. We I think ran into a problem that is common across the world is that politicians have a very short time horizon of which they operate four years in the U.S. maybe as short as two years depending on what the election cycle is. You're asking these elected representatives to make decisions on policies with 20 year consequences. And that mismatch, I think is one which if your elected representatives don't pay attention to the longer term implications of their policy decisions can really lead to a situation where eventually you run out of energy as happened in South Africa. So my respectful and humble advice to other African countries is plan in advance, let the numbers do the talking, let the technocrats do the planning, and then implement with a resolute determination. And don't waiver from creating the not only physical infrastructure, but also the regulatory and policy infrastructure and the predictability in that environment that will enable investment to take place, make the plan, and then stick to it.

Cy McGeady: Thinking about 20 years out, let's say, or that long-term planning horizon in Africa, one of the big themes is minerals and natural critical minerals, natural mining, there's a lot of prospects for developing those resources in Africa to supply the energy transition. What is the relationship between executing on that economic opportunity and African nations moving up the value chain as it relates to those resources and developing the energy sector?

André de Ruyter: Energy is the lifeblood of a modern industrial economy. Without energy and in particular electricity, there is just no way that you can grow and develop an economy. And this is particularly true for energy intensive processes like minerals, beneficiation, and this is where I believe Africa has an opportunity to leverage its low or zero carbon electricity production capabilities, which many instances yet don't exist in a world where, as I've said earlier, you are going to see increasing pressure on the carbon footprint of the products that you export. Even if it's an unprocessed commodity, having access to low carbon electricity is going to be critical. And this decision point, I believe creates this opportunity for African governments to decide unequivocally in favor of low or no carbon electricity generation so that it can future proof its economy and beneficiate minerals in country. Now, I'm not an advocate of a philosophy of autocracy that a country should try and perform beneficiation at subscale, which is inefficient and will make a country less competitive.

But if there are sensible opportunities to add value to exports in country, that makes far more sense. For example, South Africa is one of the biggest manganese producers in the world. It exports the manganese or unprocessed to China where it gets processed and refined and then the manganese is exported back to South Africa. Now to my mind, that doesn't make a whole amount of sense also from a carbon footprint perspective. And I think that these obvious intermediary steps, I'm a long way from suggesting that somehow we need to go all the way down the value chain. But simple basic steps of adding more value to exports by leveraging your resources seems like a very sensible thing to me to do.

Cy McGeady: And pairing that with these opportunities to develop power, those processes with renewables, low carbon footprints, hydro wind, solar, correct. It's sort of like a path forward for the development of the energy sector.

André de Ruyter: And what is very important about what you've just said is that those exports typically are dollar denominated and the loans taken out for the construction of these renewable energy facilities are typically dollar denominated. So you eliminate one of the major risks that have bedeviled the development of renewable energy projects in Africa, in particular with volatile currency markets. Then you can have a baseload customer that pays in dollars, enables you to service your loan if you gear up to 50 or 60% and the rest you can use the rest of your production capacity you can use to service the local market and get rewarded paid in local currency. And that seems to me to make a huge amount of sense from a risk management perspective as well as the perspective of lowering the cost of electricity by getting economies of scale.

Gracelin Baskaran: As an economist, I think the revenue to bring down debt is just so critical at this time and point. I mean, we are seeing countries default left, right, and center on their debt. I have one last question for you and it's looking to the future. So Africa's population now sits about 1.4 billion, and of that 590 million people in Sub-Saharan Africa don't have any access to energy. The continent's going to grow to 2.5 billion in the next 25 years, which means that what one out of every four people in the world are going to be African. I always like to use the example that when you're low income, you don't have access to energy and you don't eat meat. When you become middle income, you eat a lot of meat and you use a lot of energy. And when you become really rich, you're vegan and you use solar panels.

André de Ruyter: And you fly private.

Gracelin Baskaran: Absolutely. I mean, we forget about that part because that's convenient to leave out of my story or it doesn't work. But if you think about the fact that the majority of Africa is moving to eating meat and using energy, but not this top tier of veganism and solar panels, that means that the energy demand of this continent is about to skyrocket, right? Do you think we can do this in a way that is aligned with net zero? And what does it take to ensure that growing energy demand does not undermine global net zero ambitions?

André de Ruyter: The average electricity consumption of an African is less than the electricity consumed by an American refrigerator.

Gracelin Baskaran: That's harsh.

Cy McGeady: But also important too. This is important context.

Gracelin Baskaran: To contextualize. Yeah.

André de Ruyter: Just to get the picture across of how big the gap is. Now imagine if all of Africa had the same impact on the environment as the average American, the planet would simply not be able to sustain it. So it is critical that we enable a development path for Africa that does not hold back the continent. The worst possible thing I think that anybody can do is to tell Africa, well, terribly sorry, we've developed using fossil fuels. We've contaminated and polluted the environment to the point where unfortunately, sorry, Africa, but you've got to take one for the team, so please just don't develop. So we can't be having that debate. We need to enable Africa to develop. And what that means is that we have to enable Africa to finance its electricity expansion. Some of it will be natural gas. I see a definite role for natural gas in this development.

As we know, natural gas is far more efficient. Latest generation of combined cycle gas turbines running at efficiencies of 65, 60 7% modest role for nuclear. But the bulk of it will be renewable energy resources with which Africa fortunately is blessed. It will also enable far more distributed generation to take place, which will allow Africa to, in some ways emulate the rollout of mobile telephony, which allowed Africa to leapfrog fixed line telephony and go straight to mobile. So the time consuming expensive rollout of a transmission grid can in some respects be optimized, not entirely avoided, but that means access to financing. The cost of financing an energy project in Africa is 10 times what it is in the developed world. And in fact, if you look at the correlation between solar resources and cost of financing, the two are very closely correlated, which is quite ironic.

And therefore, what needs to be done is that markets need to come to the fore in order to develop solutions. And this is where I believe a far greater role can be played both by the voluntary carbon market, which at this point is minute. It's 1.9 billion per annum. So really not enough to tackle the big ask that is required here. Also the IMO opportunity in terms of article six, which was negotiated at cop. But again, there African governments need to be wide awake to the risk of being taken for a ride by big emitters. Kenya recently signed an agreement selling its carbon credits to Middle Eastern country for around about $5 per ton, which was a real bargain for the buyer, not so good for the seller. And therefore I think that market-based solutions, rather than just a transfer from the global northern taxpayer to the global south is the way forward. Pretending that it's politically possible to transfer a trillion dollars a year from the global north to the global south to pay for development. Ain't going to happen.

Gracelin Baskaran: There's so many interesting points you raised there. So one is voluntary carbon markets. One of the most distinct moments at COP 28 where we both were was when John Kerry and Ajay Banga talked about how a voluntary carbon market with integrity is imperative to generate the financing needed to reduce the friction between developing countries. Second point, I think energy justice, which is the heart of what you hit, is we can't leave behind Africa. And the energy transition, the growing energy consumption is actually critical for development and not leaving the continent behind it in poverty. And three is the role of natural gas. I mean, we know that natural gas is what about half the emissions of coal. So it becomes a very imperative part. The IEA doesn't have any modeling scenario where we can hit universal energy access in Africa without gas. So I mean, we can't over homogenize fossil fuels and just say we're going to develop without it. So that's actually all we have time for today. If it were up to me, this conversation would not end. I have found it incredibly insightful, interesting. And I actually walk away with more questions and answers, which is a sign of a good conversation. Andre, thank you so much for joining us. It's been such a pleasure. Great. Thank you very much. Thank you.

Lisa Hyland: Thanks to Andre for joining us this week. 

CSIS will soon be publishing some work on challenges and opportunities for the energy transition in Africa, so keep an eye out for that analysis.

You can find more episodes of Energy 360 wherever you listen to podcasts, find us at CSIS.org and follow us on social media for the latest updates from our team. 

Thanks for listening.

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