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Energy Indaba Newsletter March 2011 – Outcomes Report

March 25, 2011

Thank you for your participation at the Energy Indaba Conference & Exhibition 2011 held at Sandton Convention Centre from March 1 to 3. The following executive report outlines the outcomes and conclusions of the event, as well as giving feedback from various stakeholders.

Now in its third year, Energy Indaba has earned a reputation as Africa’s premier energy event, bringing together the leading decision-makers in the energy sector the world over, including business, government, NGOs and academics.

Programme and Content Overview

Challenges and Themes
The strongest message emerging from speakers, stakeholders, delegates and visitors to this year’s conference is that Africa must lead, not follow other developed and developing nations, in meeting its own energy requirements to address poverty and underdevelopment and ensure a secure energy future for Africa

The theme of this year’s Energy Indaba was Bridging the Energy Gap in Africa, in recognition of the fact that Africa accounts for over half of the 1.5bn people worldwide who lack access to commercial energy – and that this is a significant factor in ongoing poverty and underdevelopment on the continent.

However, Energy Indaba also took place this year in the context of increasing global uncertainty about the energy future. Climate change dominates the debate on our global energy future – even more so than the politics around oil, which also play a significant role in the move away from fossil fuels towards renewable and other alternative sources of energy. Solutions to bridging the energy gap in Africa must consider the context of global challenges around the future of energy in light of climate change and political unrest.

For Africa, the burning question remains whether we can afford as a continent, or an African nation or region, to prioritise climate change concerns ahead of energy poverty and socio-economic development. Secretary-General of the World Energy Council (WEC), Dr Christoph Frei, who delivered the closing keynote address, said a study by WEC showed that 90% of developing countries and 75% of developed countries agreed that Africa should prioritise energy poverty over the climate agenda, or at least link the two. Frei said access to energy and energy security were immediate priorities for Africa and that the continent’s energy needs could be likened to a Maslow’s hierarchy rather than a trade-off.

Another significant theme of this year’s event was the prominent role played by China – primarily as exhibitors – in light of South Africa’s recent accession to BRICS and our position as the gateway to mineral-and-resource-rich Africa for Chinese trade and investment. Companies from China, many of which were showcasing solar solutions, accounted for 75% of exhibitors

A major theme of the conference seemed to be the concept of a “mix” of solutions to meeting Africa’s energy needs, including:

A primary energy mix of coal, nuclear power, natural gas, oil, hydroelectric power, renewable energy alternatives (wind, solar, geothermal, biomass);

Various grid models of reticulation, transmission and distribution – from micro solutions for rural villages to interconnected grids supplying industrial zones and cities’;

A funding mix, including government, the private sector, development agencies, foreign investment and mechanisms like feed-in tariffs and subsidies;

A stakeholder mix including public-private partnerships (PPPs) and local communities, government and SOEs, NGOs and development agencies, big business and SMEs working together.

The meeting concluded that South Africa most needs strong leadership to end uncertainty with regard to both the short-term and long-term policy and regulatory framework for the energy sector; the uncertainty which is hampering trade and investment and affecting our economic growth potential.

Energy and South Africa
The opening keynote address was delivered by the Deputy Minister of Energy, Barbara Thompson, who highlighted energy priorities for South Africa. She said South Africa must urgently transform its electricity distribution infrastructure to support growth targets and hedge against further infrastructure deterioration.

The Deputy Minister said South Africa faces a maintenance and refurbishment backlog which currently stands at R30-bn and which is growing at R2.5-bn per annum. She said the Department of Energy would take over the electricity distribution industry restructuring process from April, following the closure of EDI Holdings at the end of March this year.

Thompson said this would ensure holistic asset management that would be centrally driven and locally executed, and would follow a phased approach governed by strict programme and project management processes.

Electricity generation and distribution infrastructure had come under tremendous strain over the past several years of economic growth and the Department of Energy would work with Treasury to identify an appropriate funding mechanism to address infrastructure challenges.

The Deputy Minister said that while South Africa remained a coal-based economy, Government recognised the need to ensure energy security and environmentally benign solutions through diversification of energy sources and the energy mix.

She said energy efficiency, demand side management and renewable energy options would form part of the policy framework in this regard and that the Department had embarked on developing the Integrated Energy Plan to test various long-term alternatives for the energy sector.

There was also an urgent need to review South Africa’s strategic fuel stock to secure reserves that will ensure we weather “future oil challenges” in light of rising oil prices.

Negawatts and smart grids
The concept of “negawatts” also came into play as the catchphrase of electricity conservation and demand-side management efforts that will play an important role in avoiding power outages and load shedding in the next few years, as South Africa grapples with what speaker Jayendra Naidoo, Executive Chairman of J&J Group, described as a “frightening” electricity gap that he said will require a new compact between Government, business and Eskom working together to mitigate the economic impact.

Naidoo said this would require both consumers and business to change their electricity behaviour in order to avoid waste and maximise efficient use of energy. He said electricity conservation measures were being put in place to close the short-term electricity gap and pre-empt load shedding, which would negatively impact both consumers and energy-intensive businesses.

However, he said there were also many positive factors influencing Africa’s energy future, but that we would have to change our energy behaviour along with the rest of the world given that the notion of cheap and abundant power was a thing of the past.

Naidoo said that externalities in pricing such as carbon emissions were coming to the fore and that in future smart grids would replace the large, low-intelligence power grids of the past to mediate supply and demand.

He said there was an exciting future for energy on the continent that would see new “winners” emerge and that there was room for companies to become risk-takers in terms of investment, rather than waiting for the policy environment to create the opportunities.

However he called on Government to ensure that policy and regulatory instruments and incentives were finely tuned to encourage business and consumers to change their energy behaviour towards clean, energy efficient alternatives. He said this behaviour change was unlikely to take place as long as the model of one electricity utility was maintained.

Naidoo said energy landscape was changing so fundamentally that petrol vehicles could become museum pieces, while smart distribution could offer consumers the option to buy a tailor-made mix of brown and green energy.

Quantifying the Challenges
Bankability and bureaucracy emerged as two of the key challenges for investment in energy infrastructure, especially in relation to South Africa’s renewable energy targets, which depend largely on access to development funding and the implementation of Renewable Energy Feed-In Tariffs (REFIT) to come to fruition.

Christoph Frei said key hurdles included a lack of specific meso-financing mechanisms, local skills for project initiation, sustainable local ownership models and adequate policy frameworks, while key requirements were financing vehicles for clean rural infrastructure development and skills development for project initiation.

Unlocking the funding for rural electrification and renewable energy projects is a challenge. The numbers seem to add up and innovative financing models are being developed. Plus, poor people are already paying a premium for the energy they can access (diesel, paraffin, LPG etc.) But these projects are still not commercially bankable on the whole and rely on CSI and development funding to happen at all.

Business and development institutions cited red tape at regional, national and municipal level as obstacles to implementing rural infrastructure and development projects. They said stop-start approaches by the authorities, and delays in signing agreements and obtaining licenses undermined the confidence and buy-in of local communities, who sometimes waited years for projects to get off the ground.

Free market guru Dr Leon Louw, executive director of the Free Market Foundation, said South Africa would pay the price for inefficient energy policy in continued poverty, unemployment and low economic growth rates. Louw said uncertainty in energy policy and supply had already cost South Africa R120-bn or 5% of GDP.

He added that it was essential for government to quantify the outcomes of energy and policy alternatives as accurately as possible by adopting thorough cost-benefit analyses (CBAs) and risk impact assessments (RIAs). These should be independent, actuarial assessments signed off by all government departments and should measure direct and indirect costs and assess the risk of unintended consequences.

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