For southern Africans living in ‘previously lit areas’, the endless string of jokes pertaining to the South African state-owned electrical utility, Eskom, have been a sardonic reminder that the region’s energy management policy has been found wanting. With a little introspection we may even begin to think that before the rolling black-outs of January 2008, South Africa did not actually have an energy management policy at all. Au contraire!
For many years the National Energy Regulator of South Africa (Nersa) and its predecessors, have successfully kept the country’s electrical energy costs well below the global average. Ironically, it is this very policy that has been partially responsible for the ‘rolling blackouts’ that have swept southern Africa in early 2008. Eskom prefers to use the glorious euphemism, ‘load shedding’.
Competitive advantage
There is no doubt that Eskom has provided South African companies with a significant competitive advantage against their global competition. I question if most South African’s have truly appreciated just how low their energy bills have been.
What is certain is that the free electrical lunches are rapidly running out. There have been significant hidden costs relating to our energy production that we (consumers and industry) will simply have to start paying for.
In February 2008, Professor Patrick Bond of the University of KwaZulu-Natal Centre for Civil Society published a paper entitled, South Africa: In the dark about global warming. In the document he responded to a statement in which Eskom CEO, Jacob Maroga, bragged that “at US$0,03 per kilowatt hour (kWh) for industrial customers after 2007 increases, Eskom’s prices still remained competitive.”
Bond wrote, “That is the understatement of the year, given that US electricity is three times and Danish electricity eight times more expensive than what the average firm here pays.”
Foreign investment
The country’s energy policy also provided an incentive for foreign companies that are heavily electricity-dependent to move their factories to South African shores. On the surface this seems like a fantastic idea... loads of foreign cash arriving on our doorstep. However, critics argue that this has not happened.
The most obvious example of foreign investment attracted by our low electricity pricing is the aluminium smelters owned predominantly by Aussie multinational, BHP Billiton. No-one denies that South Africa’s unbelievably cheap electricity price was the primary reason that BHP built the three enormous aluminium smelters in the sub-continent.
I am certainly not dismissing the cunning agreement that BHP made with the South African government that determined that the price that it was billed for electricity was directly linked to the global price of aluminium. However, even with commodity prices at an all-time high, the value that these smelters bring to the local economy is increasingly being questioned.
Prof. Bond has strongly criticised what he considers to be the parties most to blame for the energy crisis – “the government and crony corporations like BHP Billiton".
He further comments that, “South African households pay more than double the industrial rate; with BHP Billiton trying to take over Rio Tinto, which is taking over Alcan, Eskom’s smelter incentive at Coega will offer even cheaper power, less than $0,02 per kWh.”
Nazmeera Moola, head of macro strategy at Macquarie First South, put it in a layman’s nutshell when she told the Financial Mail, “So SA’s three smelters consume 6,5% of SA’s electricity (2400 MW) – when Eskom is producing at full capacity – and add maybe 0,1% to GDP. This is not a good deal.”
However, just before this article went to press, BHP announced that it had acquiesced to government’s request that it reduce power consumption at its Bayside, Hillside and Mozal to 90% of normal demand. Samancor (another BHP company) is also running at 90%.
Hats off to government for asking and also to BHP for complying with the request.
Non-sustainability
South Africa’s historical attitude to environmental care could be paraphrased as 'Environment? What environment?' By way of illustration, the image is a recent Google Earth aerial photograph zoomed to approximately an 11 km altitude (ie about the same altitude a passenger jet aircraft would view the area from). The charcoal-grey sections are those areas exposed as a result of the strip-mining operation at Optimum Colliery, a mine that feeds amongst others, Eskom’s Hendrina Power Station.
Whilst one must concede that South Africa (including Eskom) has made definite strides towards a cleaner environment, we, like other developing nations, most notably China, have dragged our collective feet along the road to sustainability.
Prof. Bond quantifies our dragging of heels, “...it is not surprising – though something of a secret from the public – that measured by carbon dioxide emissions per unit of per-person economic output, South Africa emits 20 times more carbon dioxide than that Great Climate Satan, the US.”
Rumours about rumours
A functional bureaucracy is an essential part of a healthy democracy. One can just imagine the Eskom management’s frustration at trying to get capital expenditure budgets approved (specifically for new power generation sources). Eskom has been warning of pending power outages for years now. I suggest that we (ie, Joe Public) did not care to listen to many of the warnings.
However, of considerable concern are the rumours circulating that suggest that Eskom directors intentionally created an artificial energy crisis at the beginning of 2008 to manipulate the various governing committees into approving its capital expenditure budgets (sort of a local version of the Enron scandal in the USA). At time of print I had been unable to locate an official Eskom response to these allegations.
I urge the powers that be investigate the rumours and their source without delay.
If the rumours prove to be false, then squash them immediately. They are doing immeasurable harm to business confidence.
However, if the rumours prove to be true, then squash the guilty parties (after having charged them with high treason).
Eskom’s big stick
One unwanted by-product of the recent crisis is that the Eskom Exco has at times deemed itself fit to wave a patronising finger of reprimand at South African industry and consumers. This condescension has not endeared Eskom to its client-base.
However, as much as I may like to remonstrate at the Eskom Exco admonishments, the Exco is correct in its assertions. Our current energy-rich lifestyle must change. What can charitably be described as 'a wasteful use of energy' must come to an end. The writing has been on the wall in neon lights... but sadly, the lights are now out.
Despite Nersa only granting Eskom a measly 14% price increase for 2008, this is the first of many significant increases that are yet to come. In future, the price is not going to come down... it will only go up, and at an ever increasing rate.
European countries have long understood the enormous financial value of energy saving. The average EU household spends approximately 10% of its income on energy. That is a staggering figure when compared with the price that we pay. Do the sums on your own home-budget.
If Eskom is ‘forced’ to apply its stick of discipline to our collective seats of learning, then it will be due in part to our own intransigence to energy saving.
Honeywell’s big carrot
Late in 2007, I was invited to attend a press roundtable discussion that coincided with the Honeywell EMEA User Group Forum, in Salzburg. The key topic under discussion was 'Energy efficiency and carbon reduction strategies'.
What became clear during the discussion is the huge disparity between the energy strategy currently adopted by the EU and that adopted by South Africa. The EU has by-and-large already adopted the ‘obvious’ energy-saving techniques. They are now desperately seeking new ways to save power... and herein lies the pearl... they are doing this to give themselves a significant competitive (economic) advantage... not just to keep the Green Party happy.
Furthermore, as energy price fluctuations become more and more erratic, energy-dependent companies find themselves increasingly exposed to external risk factors. A reduction in energy-dependency means a reduction in exposure to this external factor.
Technology companies such as Honeywell are offering an increasing number of solutions to facilitate a reduction of power consumption. Paul Brice, Honeywell Advanced Control Solutions, sales manager, UK, identified a common problem facing companies wanting to implement energy saving technologies, “Many plant managers find themselves in a Catch-22 situation. They instinctively know that their operations are not running as energy efficiently as possible. But they do not have the skills, resources or financing available to determine if their gut-feeling is correct.
“Usually there are two aspects to a technology investment that will be used to improve efficiencies:
1. There is an infrastructure aspect which has no direct benefit. One needs to know how good/bad things are, before one can decide what path to take to improve efficiencies. Investing in measurement technologies that tell you how inefficient one’s operation is, is not a directly recoverable investment ie, simply measuring an operation is usually not going to improve anything.
2. Then there are the applications that deliver measurable value, based on the results produced by the first stage.”
“And even if they were able to determine their level of energy efficiency, they are restrained from doing anything about it by the same three factors, skills, resources and financing,” added Paul Orzeske, vice president and general manager, Honeywell Process Solutions. “The client wants the solution and they want it now... they just cannot raise the cash.
Honeywell bridging finance
“Honeywell can finance the entire investment for the client. We can tie the repayment terms to performance guarantees that we will provide the client,” Orzeske explained.
“For example the repayment terms of a project can be proportional to the energy savings achieved,” Brice continued, “Honeywell is offering its clients the ability to bundle the two stages of investment together. This means that the client’s investment reflects as a positive net present value with a neutral cash flow – a perfect technological and financial situation for our customers. This is something that any accountant will appreciate.”
To paraphrase Honeywell’s offering, 'no gain, no pay'. Any manufacturer would be foolish to decline such an offer to reduce its energy-dependency, especially when that offer includes guaranteed returns on the investment and when there is no direct impact on cash flow.
As South African energy costs continue to escalate, those local companies that have their eco-ducks in a row will be ready to meet these changes head-on. The companies that do not... well, they probably will not be in business for much longer.
A list of references is available online at www.instrumentation.co.za/honeywell
For more information contact Honeywell Southern Africa, +27 (0)11 695 8000, fax +27 (0)11 315 2199, www.honeywell.co.za, either Michael Eksteen, [email protected], or Nick Meijer [email protected]
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