The draft Review of Electricity Pricing Policy (EPP), which has been published for public comment, seeks to provide guidelines to the National Energy Regulator of South Africa (Nersa) for a standardised, non-discriminatory approach to electricity pricing in a context of an electricity supply industry “rapidly transitioning” away from its monopoly structure to one that is market based.

The document, the release of which was approved by Cabinet last week, was Gazetted by Mineral Resources and Energy Minister Gwede Mantashe on February 10, with a 30-day comment period.

It has been published against the backdrop of a steep increase in electricity prices over the past 15 years, as well as the prospect of yet another double-digit hike from April, raising serious affordability concerns for households and businesses alike.

After approving its release, Cabinet said the revised EPP sought to strike a balance between providing affordable electricity tariffs for low-income consumers and a cost-reflective electricity tariff for all other consumers.

The theme of cost-reflectivity is, in fact, emphasised throughout the 124-page document, which states that tariffs should become cost-reflective in five years from adoption, even though the three-year timeframe outlined in the original EPP of 2008 was not met.

“All tariffs should become cost-reflective over the next five years, except for specific cross subsidies as provided for,” the review states.

The cross subsidies should address certain socioeconomic and environmental needs and the draft EPP proposes that the Department of Minerals Resource and Energy (DMRE), together with Nersa, finalise a national subsidy framework to guide the application of such subsidies and to ensure transparency.

The document also offer a detailed exposition of the difference between energy, capacity and ancillary service charge and how this should be applied.

It also makes the case for the implementation of time of use tariffs and states that “net-energy billing” should be allowed, subject to any licensing or registration required by law and in compliance with Nersa rules.

Also included is a position stating that Nersa “shall provide a framework to guide the standardisation of existing electricity distributors’ tariff structures”.

The EPP was Gazetted simultaneously with the Electricity Regulation Amendment Bill, which provides for a shift to a competitive multimarket electricity supply industry.

The Bill also caters for the establishment of a Transmission System Operator (TSO), which will be responsible for operation and expansion of the physical transmission network, as well as that of the role of system and market operator.

The preamble to the Bill states that the proposed legislation seeks to establish a national regulatory framework for the electricity supply industry, make Nersa the custodian and enforcer of that regulatory framework and to cater for the establishment of the TSO, to provide a competitive multimarket structure.

As is the case with the EPP, interested and affected parties have 30 days to submit written comments to the DMRE.

Business organisation Business Leadership South Africa (BLSA) CEO Busi Mavuso says business was hoping for a greater sense of urgency and stronger commitment from President Cyril Ramaphosa’s State of the Nation Address (SoNA) to accelerating both the reform agenda and infrastructure rollout.

“Overall, BLSA believes the President could have done more to address blockages to the efficient implementation of already agreed policy and didn’t go far enough to build confidence that 2022 would be the year of delivery.

“Business was hoping for another ‘big bang’ announcement of a way to break out of the inertia that seems to be bogging down both the infrastructure rollout and reforms to the energy sector,” Mavuso posits.

However, the organisation welcomes Ramaphosa’s focus on the small business sector, including a redesigned loan scheme for small businesses, which will involve development finance institutions.

“He also provided an important update on the drive to build a capable State, saying government would soon be finalising a framework for the professionalisation of the public service,” Mavuso highlights, emphasising that improving the capacity of the public sector is vital to long-term development.

Mavuso asserts that, in some areas, there were some positive elements, but also some missed opportunities.

She posits that extending the R350 a month social relief of distress grant to end-March 2023 rather than going for a “big bang” introduction of a permanent basic income grant was the sensible option.

“There is an obvious need for more extensive social welfare support. This is an area that needs careful research into the repercussions that higher tax rates and possibly increased debt levels will have on the rest of the economy,” she cautions.

Mavuso mentions infrastructure development as a disappointing aspect of the SoNA.

“No recognition was given to the core problems that are delaying the rollout of infrastructure projects. Research commissioned by BSLA found that there is still not enough expertise in the field of large infrastructure projects in the correct areas of government while its systems and approval processes are cumbersome and unnecessarily complicated because they require input from numerous different government departments,” she says.

She also points out that Ramaphosa did not mention anything new in terms of the disbursement of the $8.5-billion pledged at COP26 towards the country’s just energy transition, instead repeating the announcement of the appointment of former Absa CEO Daniel Mminele as head of the Presidential Climate Finance Task Team.

Further, she describes Ramaphosa’s response to the expert panel’s report into the unrest in July last year as strong, as it promised changes in key positions within the security cluster and that 12 000 new police personnel would be recruited.

Moreover, she says the promise that those implicated in the Zondo reports into State capture will be prosecuted is important.

Ramaphosa also announced that government was conducting a detailed review of all applicable legislation and a comparative study of other jurisdictions to strengthen whistle-blower protection.

However, Mavuso says not much was said about the structures recommended by Judge Raymond Zondo to prevent corruption in future, such as the anti-corruption agency and measures designed to prevent tender fraud, besides others.

She does, however, acknowledge Ramaphosa’s strong stance on the Special Investigating Unit’s final report on its investigation into Covid-related contracts, wherein he noted that 45 cases, with a combined value of R2.1-billion, had been enrolled with the Special Tribunal.

BLSA also welcomes the President’s establishment of multi-disciplinary units to address economic sabotage, extortion at construction sites and vandalism of infrastructure.

“We will wait to see what the President has in mind with his 100-day target to achieve ‘a new consensus to deal with poverty, unemployment and inequality’. In BLS...

The market structure section inserted into the Electricity Regulation Amendment Bill provides for a shift to a competitive multimarket electricity supply industry, which represents a significant departure from South Africa’s long-standing vertically integrated model monopolised by Eskom.

Published for comment this week by Mineral Resources and Energy Minister Gwede Mantashe, the new market structure is outlined in Section 32 of the Bill, which is proposed for insertion into the Electricity Regulation Act of 2006.

The multimarket structure would cater for three kinds of transactions, including:

market transactions, whereby a nondiscriminatory trading platform would allow willing buyers and willing sellers to trade with each other on an hourly and daily basis;

physical bilateral transactions, where licensed and registered generators enter into physical bilateral contracts for energy production with customers and traders; and

regulated transactions, which involve the conclusion, through a central purchasing agency, of power purchase agreements with generators to meet demand and the procurement of ancillary services as required by the system operator.

The Bill also inserts Section 30 to cater for the establishment of a Transmission System Operator (TSO) and Section 31, which details the functions of the TSO.

The TSO functions, as outline in the proposed legislation, would include the operation and expansion of the physical transmission network, as well as that of the role of system and market operator.

The Bill dovetails with the vertical separation efforts currently under way at Eskom, which will result in the company being divided into three independent businesses, under Eskom Holdings, of generation, transmission and distribution.

In December, the National Transmission Company South Africa (NTCSA) was registered with the Companies Intellectual Property Commission and the Eskom transmission business transferred to it as a going concern.

However, the NTCSA would be operationalised only once it had secured creditor consent, obtained a licence from the National Energy Regulator of South Africa (Nersa) and signed an intercompany loan agreement.

Eskom has stressed on several occasions that existing debt facilities, including its bonds, will remain on its balance sheet following the transfer of the transmission division to NTCSA.

In his State of the Nation Address, President Cyril Ramaphosa said Eskom was on track to complete its unbundling of NTCSA by December 2022.

He also described the amendments to the Electricity Regulation Act as “far-reaching” and said they would enable a competitive market for electricity generation.

This is underlined in the preamble to the Bill, which states that the proposed legislation seeks to establish a national regulatory framework for the electricity supply industry, make Nersa the custodian and enforcer of that regulatory framework and to cater for the establishment of the TSO, to provide a competitive multimarket structure.

The amendment Bill was published for comment on February 10 and interested and affected parties have 30 days to submit written comments to the Department of Mineral Resources and Energy.

Creamer Media's Chanel de Bruyn speaks to Engineering News Editor Terence Creamer about President Cyril Ramaphosa's State of the Nation Address, his emphasis of the role of the private sector in the economy and the reaction of some business sections.

President Cyril Ramaphosa signalled his intention to reignite the underperforming Economic Reconstruction and Recovery Plan (ERRP) through a “comprehensive social compact” that he said labour, business and government would negotiate in the coming 100 days.

Delivering his State of the Nation Address at the Cape Town City Hall, owing to the extensive damage caused to the Parliamentary buildings in January as a result of a fire that was deliberately lit, Ramaphosa said a “new consensus” was needed to address the immediate crisis facing the country, as well as to create conditions for long lasting stability and development.

“There are moments in the life of a nation when old certainties are unsettled, and new possibilities emerge. In these moments, there is both the prospect of great progress and the risk of reversal,” the President reflected, while adding that there was broad agreement that the current situation of deep poverty, unemployment and inequality was unacceptable and unsustainable.

The ERRP would remain “our common programme to rebuild the economy” but discussions on what trade-offs were needed and what contribution each social partner should make were also required.

The role of the private sector in the recovery was emphasised throughout, with Ramaphosa asserting that the new consensus should recognise that “the State must create an environment in which the private sector can invest and unleash the dynamism of the economy”.

This sentiment found support from the leader of the official opposition, the Democratic Alliance’s John Steenhuisen.

Steenhuisen said he was “delighted” that an ANC President had acknowledged for the first time that a “statist approach” would not deliver growth and that the private sector should drive job creation.

However, Economic Freedom Fighters leader Julius Malema said the President’s emphasis on the role of the private sector in creating jobs was akin to “outsourcing” and Ramaphosa “passing a motion of no confidence in himself” given previous commitments to leveraging public sector resources to create “millions of jobs”.

The President did not outline any new economic priorities, but reiterated those included in his 2021 address, including a massive rollout of infrastructure, the expansion of electricity generation and the auctioning of broadband spectrum.

Speaking only days after Eskom declared the first round of load-shedding for the year, having implemented more cuts in 2021 than in any year since rotational shedding was introduced some 15 years ago, Ramaphosa acknowledged that the country had a 4 000 MW supply shortfall.

RISK MITIGATION PROJECTS TRIMMED

He listed several actions that were being taken to add more capacity but also announced that only 800 MW of the 2 000 MW in projects selected under the controversial Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP) were ready to proceed.

Given that three Karpowership projects comprised about 1 200 MW of the RMIPPPP allocation, there was immediate speculation that the projects, which face legal, environmental and gas-pricing uncertainty, were among those that were not ready to proceed.

Other capacity mentioned included over 500 MW still to enter into commercial operation from Bid Window 4 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP); 2 600 MW from REIPPPP Bid Window 5, for which the preferred bidders were announced last year; another 2 600 MW from Bid Window 6, bidding for which would “open soon”; as well as 3 000 MW of gas power and 500 MW of battery storage, for which requests for proposals would be released later this year.

The President also estimated that 4 000 MW of embedded generation capacity in the mining sector could also move ahead as a result of a recent reform allowing sub-100 MW projects to proceed without a licence, while another 1 400 MW could be procured by municipalities.

“In addition to closing the energy supply shortfall, we are implementing fundamental ch...

Shell and BP South African Petroleum Refineries (Sapref) announced on February 10 that it would freeze spending and pause refinery operations by the end of March.

Established in 1963, Sapref is the largest crude oil refinery in South Africa, providing 35% of the country’s refining capacity.

The decision to pause operations and freeze spending, made by joint venture (JV) co-owners BP Southern Africa and Shell Downstream South Africa, followed consultations with government, unions and employees.

In a joint statement, Shell and BP said the halt would be for an indefinite period but that a restart might be possible in the future, including in the event of any future sale.

“The decision has been taken to allow an informed finalisation on the various options available to the shareholders, a sale option being the most preferred,” the statement said.

Until decisions about the future of the Sapref plant have been made – including a possible change of ownership – Shell and BP said they would not be able to commit to further investment in the refinery.

They said the decision to pause refinery operations would have no impact on full-time employees and that safety remained a primary consideration.

Moving forward, the two shareholders would use other existing assets and trading arrangements to ensure ongoing security of fuel supply to South Africa and to consumers.

“Over the many decades since its establishment, Sapref has made immense economic contributions at both a local and national scale.

"For this reason, we continue to pursue the sale of our share in the refinery so that it can continue to advance its legacy as a reliable, safe and productive asset,” BP Southern Africa CEO Taelo Mojapelo said.

He added that the owners had put contingencies in place to ensure the shutdown of the refinery did not impact customer-facing businesses in South Africa or fuel supply obligations.

“We remain committed to South Africa through our demonstrated transformation initiatives in the value chain and continue to work with our strategic partners to strengthen our differentiated convenience offers,” he said.

Meanwhile, Shell Downstream South Africa country chair Hloniphizwe Mtolo said the decision to pause the refinery was a “difficult” one for both shareholders.

“Shell remains committed to security of supply to our customers over this production pause. South Africa continues to be a key location for Shell as we progress our growth agenda as an energy provider,” he said.

South Africa's oldest crude oil refinery Engen is, meanwhile, set to be converted into a terminal for importing cleaner fuels in 2023.

The country's refineries require billions of rands of investment to upgrade to enable them to produce cleaner fuels.

Steel producer ArcelorMittal South Africa (AMSA) has reported its best financial performance since 2008, with headline earnings surging to R6.86-billion in 2021 from a R2-billion loss in 2020.

No dividend was declared, however.

CEO Kobus Verster explained that, following years of losses, the immediate focus was to reduce debt further and to assess some of the investment opportunities that were arising, including those that could support the decarbonisation of its operations.

AMSA would publish a decarbonisation road map in the third quarter of this year, but was already preparing to move on some “no regret” investments, including the procurement of up to 200 MW of renewable energy.

None of the individual projects would exceed the 100 MW threshold catered for in a recent electricity market reform, which allows distributed plants below 100 MW to proceed without a licence and to wheel electricity across the grid and sell to third parties.

AMSA is also assessing a shift to lower-carbon scrap-based steel manufacturing at both Newcastle and its mothballed Saldanha Works, where producing zero-carbon direct-reduced iron for export, using green hydrogen as an input, is being assessed as part of a longer-term revival strategy.

The 2021 turnaround was also overshadowed by six workplace fatalities during the year, as well as a rise in workplace injuries and a deterioration in its lost-time injury frequency rate.

Verster reported that safety efforts were being intensified to eliminate fatalities, with the support of external advisers as well as from within the ArcelorMittal Group, including operators from Brazil.

Three of the deaths occurred in February last year with a portion of a 90 m stack at one of the Vanderbijlpark Works’ coke batteries failing and falling onto the control room in which the employees were working.

HIGHER SALES & PRODUCTION

Besides the price tailwind, the 2021 financial recovery was also attributed to higher sales and production, as well as a strong recovery in prices, with the group’s overall realised steel price in dollars increasing by 62% and by 47% in rand terms.

The JSE-listed group’s crude steel production increased by 34%, or 769 000 t, from 2.2-million tonnes in 2020 to 3-million tonnes, and the company’s average capacity utilisation increased from 42% in 2020 to 60% in 2021.

Verster reported that capacity utilisation was currently at 79%, following a ramping up of production and the restoration of stability after the restart of operations in late 2020 and early 2021.

Capacity utilisation of above 80% is being targeted and improved over time, together with de-bottlenecking projects to increase capacity at the mills incrementally.

“A return to stable, reliable production is key to our commitment to improving our customers’ service experience after a difficult 2020 and early-2021,” Verster said, reporting that the Vanderbijlpark and Newcastle operations completed successful maintenance programmes on their blast furnaces in November and December.

The group’s sales volumes increased by 13%, or 284 000 t, to 2.5-million tonnes, underpinned by a 16% rise in domestic sales to 2.2-million tonnes. Exports decreased by 5% to 302 000 t.

MORE IMPORTS

Imports also played a larger role in meeting demand last year, with apparent steel consumption in South Africa having increased by 25% to 4.5-million tonnes, driven by the recovery of construction, mining and manufacturing.

Imports of primarily hot rolled coil, galvanised sheet and tinplate increased by 47% to 1.4-million tonnes and constituted some 30% of South Africa’s steel consumption for the year, up from 25% in 2020.

Ongoing trade protection has been heavily criticised by domestic consumers, particularly during periods of serious steel shortages in 2020 and 2021.

Nevertheless, AMSA said that it would continue to support actions that target unfair trade practices, but noted that the safeguard duties it enjoyed on some products were not extended beyond August 10, 202...

South Africa’s Department of Mineral Resources and Energy (DMRE) is seeking to appoint a service provider to develop a framework for the procurement of 2 500 MW of new nuclear capacity.

The department has published a terms of reference document for such a service provider and a compulsory briefing session will be held virtually on February 16 for potential bidders. The actual tender will close on February 25.

The successful bidder will have 12 weeks to develop a framework that is in line with national legislative prescripts and international best practice.

It should also take account of Eskom’s unbundling process and address the suspensive conditions set out by the National Energy Regulator of South Africa’s (Nersa’s) concurrence for the procurement of 2 500 MW of new nuclear generating capacity.

Nersa’s concurrence, provided in August, has been questioned, owing to the fact that no new nuclear is provided for in the Integrated Resource Plan of 2019 (IRP 2019), which covers the period to 2030.

The document does, however, include an allocation to extend the operating life of Koeberg in the Western Cape, beyond its current licence term of July 21, 2024. Eskom is seeking a licence for the extension from the National Nuclear Regulator and has already initiated works to replace the steam generators at both Koeberg units, which will result in the power station operating at half its capacity for most of 2022.

The Nersa concurrence for the procurement of new nuclear capacity is subject to several suspensive conditions, including establishing, through a demand and generation profile analysis, the rationality of adding 2 500 MW of nuclear post-2030.

In addition, the regulator wants Decision 8 of the IRP 2019, which requires that any nuclear build programme be implemented at a pace and scale that the country can afford, to be satisfied, and for technological developments in the nuclear space to be considered.

Nersa also stipulates that the new nuclear power should be procured based on the engineering, procurement and construction contract principles, rather than through fragmented contracts and that the generator of the electricity be Eskom Holdings, or any other organ of State, or in partnership with any other juristic person.

The service provider would be expected to produce a “coherent

report” that includes an analysis of a recent request for information process that tested the market for conventional nuclear plants and small modular reactors.

Besides making recommendations on a procurement approach, it should also include recommendations on how localisation and industrialisation could be maximised.

The tender release follows a recent Fin24 report in which Minerals Resources and Energy Minister Gwede Mantashe is quoted as saying that there were compelling reasons to update the IRP to include more gas and accelerate the nuclear build programme.

Several technoeconomic studies have indicated that a least-cost IRP for South Africa would not include any new nuclear capacity.

Although South Africa has been easing into what is increasingly coalition rule at local government level since the elections held in November 2021, coalition governments have not become institutionalised and remain without a proper guideline, the South African Local Government Association (Salga) has said.

The organisation highlighted during its five-year provincial conference hosted on February 8 that there were no rules in the Constitution or legislation that define the principles, rules, procedures or sanctions that apply to the political parties and independent councillors that attempt to govern together.

This has resulted in coalition agreements often being vague, often not translating into a programme for the incoming government, often not being tailored to that municipality and its community and often being undermined by coalition parties in practice.

Presenting Salga’s concerns on the matter, Salga National Executive Committee representative Xola Pakati mentioned that Salga had drafted a coalition government framework, in collaboration with members of executive councils and tertiary institutions in November 2021, which would hopefully make its way to promulgation.

The 2021 local government elections resulted in 66 hung councils, meaning they were left without outright majority party rule and required the formation of a coalition. This was more than double the number of hung councils in the 2016 local government elections.

Pakati mentioned that the low voter turnout in the 2021 local government elections was a concern for the organisation. Only 12-million voters turned up at the ballots, out of 26-million registered voters, to elect representation in South Africa’s eight metropolitan, 44 district and 226 local municipalities.

Some of the many challenges municipalities experienced in the fourth term – the five years from 2016 to 2021 – were the continued struggle to deliver clean audits, high senior management level vacancies and budget constraints as a result of the civil unrest experienced in July last year, particularly in the Gauteng municipalities.

Gauteng municipalities struggled to deliver clean audits in the fourth government term.

Outgoing Salga provincial chairperson Aletta Mashigo said many Gauteng municipalities were left with income gaps, racial divides, lower property prices and the realisation of failed security systems following the unrest.

She added that Covid-19 had impacted on municipalities’ service delivery, owing to redirected monies for infection mitigation, and the period saw an increase in unlawful occupations, and in turn higher costs for municipalities.

A continued challenge for municipalities had been Eskom’s tariff increases, resulting in municipalities having to offer unaffordable packages to its communities, and not having an opportunity to take part in tariff negotiations between the State-owned power utility and the National Energy Regulator of South Africa.

Mashigo assured that Salga would continue lobbying for lower tariffs.

Another electricity challenge Pakati discussed was that of Eskom supplying electricity to customers directly, sidestepping the municipalities. In 2019, municipalities lost out on about R162-billion of revenue owing to this dual electricity distribution system.

To this end, Salga was seeking a High Court order to declare that municipalities have an exclusive executive authority to reticulate electricity within their jurisdictions.

Eskom and some private distributors were opposing the Salga application.

Should Salga’s legal bid be successful, the municipalities would not necessarily take over the distribution in the Eskom areas, but may levy a surcharge on Eskom tariffs.

Additionally, Eskom would be required to obtain a service delivery agreement with each municipality in which it directly supplied customers.

TRANSPORT CONCERNS

Pakati noted that there were certain Constitutional problems with the National Land Transport Amendment Bill, which almost made its way int...

Pulp and paper manufacturer Sappi has outperformed on guidance provided for the first quarter of its 2022 financial year.

Earnings before interest, taxes, depreciation and amortisation (Ebitda) increased by 36% quarter-on-quarter to $240-million and more than doubled compared with the same quarter in the prior financial year.

Profit in the reporting quarter amounted to $123-million, against a loss of $17-million posted in the corresponding quarter of the 2021 financial year.

CEO Steve Binnie attributes the improved performance to robust market demand in all product segments, combined with implementation of high sales prices, which helped to offset rising input costs and happened despite logistical bottlenecks.

He expects more earnings growth in the second quarter.

MARKET FEATURES

Global logistical challenges continued unabated and posed headwinds for Sappi’s export sales and raw material procurement in all regions.

Substantial energy, raw material and delivery cost inflation in the quarter was offset by selling price increases in the paper business.

Pulp sales volumes increased by 48% compared with the preceding quarter, as the company secured more shipping capacity, albeit at a higher cost, for its South African exports.

The hardwood dissolving pulp (DP) market price decreased to $905/t on the back of weakening viscose staple fibre (VSF) demand and pricing in China.

VSF prices rebounded towards the end of the quarter, however, which stabilised DP pricing.

Sappi’s three DP mills were fully sold in the quarter under review.

Binnie says markets for packaging and speciality papers continued to be robust across all regions, with sales volumes up 26% on a year ago.

“The successful implementation of price increases, combined with product mix optimisation, led to further progress in profitability for the segment,” he explains.

Buoyant demand for graphic papers boosted sales volumes by 20% compared with last year and provided support for price increases, which were necessary to offset significant cost inflation and restore Ebitda margins for the segment.

Notably, all assets ran at full operating capacity during the reporting quarter.

Renewed strong demand in domestic and export markets supported price increases across all paper grades and facilitated the return of the European business to profitability.

An unprecedented surge in energy prices for gas, power and coal forced Sappi to implement an energy surcharge on all European products. This extraordinary measure was a key component of Sappi’s strategy to offset the escalating energy costs and restore margins in the European business.

The North American region delivered a record first-quarter Ebitda of $89-million, which was more than triple the prior year. This achievement was despite significantly higher costs.

The year-on-year profitability of the South African business was positively impacted on by improved sales volumes and pricing in all segments.

Binnie confirms that Ebitda from South Africa was 46% higher than the prior quarter despite significant cost increases and logistical challenges.

Meanwhile, he notes that demand for DP continues to be strong and that VSF pricing and operating rates improved in January – which stabilised DP market prices at $905/t ahead of the Chinese New Year.

“An extremely high differential between cotton and VSF prices should support fibre substitution in future quarters which would be positive for DP demand and pricing. Additionally, the addition of breakbulk shipping is expected to aid in the reduction of the DP sales backlog.”

Sappi reports that the recovery of sales for graphic papers across all regions, combined with industry capacity closures, has tightened the market balance.

Additionally, the underlying demand in the packaging and speciality papers segment remains robust.

“The stronger markets for all our paper products should support price increase realisation, which is necessary to offset extraordinarily high input costs.

“Global logisti...