PETER ATTARD MONTALTO | Great move, Cyril. To make it even better, sack Mantashe

The announcement that the National Energy Regulator of SA (Nersa) electricity licencing threshold for companies will rise to 100MW is a very positive surprise. In theory, it means more than 15GW of projects are available now to come onto the grid in the medium term.

Maybe about 1GW to 2GW would be available in the near future, in about 18 to 24 months.

However, solving the energy crisis will take time. There is still a two-year gap in supply and demand and we are facing a long period of intense load-shedding.

Eskom also faces other medium-term problems, such as staff leaving and a need for its debt solution to be swiftly deployed.

Ramaphosa’s announcement is a major win for Operation Vulindlela as an institutional framework and will be able to unblock political blockages. True, this only happened because of an energy crisis and ongoing load-shedding but the president has directly overruled minister Gwede Mantashe (there is blood on the floor). This is the key sign on the political front. As the energy system liberalises, this reinforces the need for a new energy minister.

What just happened?

• The president announced that the licencing threshold for electricity generation for own use by companies will be raised from 1MW to 100MW, much more than business had formally proposed (50MW was the target). Projects will need to register in the usual way.
• There will also be a liberalisation of the framework for wheeling electricity for own use across the grid. 
• There is still uncertainty over third party sales rules and this does not remove licencing requirements for IPPs selling to Eskom.

In his surprise announcement, based on a shift in policy, we think the president has had a “sod it” moment and shifted the dial — amid level 4 load-shedding — on energy liberalisation. This was the key of the “big three” reforms that everyone has been watching for (alongside spectrum auctions and visas) — and the most impactful on growth in the short to medium term of the three. 

There has been a build-up of pressure on this issue over the past two years and Mantashe had become increasingly stuck in the mud — even announcing that the threshold would only rise to 10MW, while public consultation was ongoing. Would this have happened without the pressure from load-shedding and health minister Zweli Mkhize going on leave? Likely not — or certainly not without more delay. But as ever in SA, progress is made only by shocks. 

However there is a broader underlying shift that has made this happen:

• Operation Vulindlela has been reinforced as an institutional framework that can override political blockages. This may create some shifts in expectations on spectrum and visas for instance, though each of these is less pressing than the energy crisis. 
• This success is due to evidence-based policymaking. 
• This was the president directly overruling a minister close to him. There was clear frustration on the part of Ramaphosa with Mantashe on Thursday at the press conference. This is a major signal and has rarely happened under this administration so far. 

This liberalisation is expected to add about 15GW to the electricity system (our estimates are based on organised business surveys) over the next five to sevenyears — this would total around R100bn of first-order impact investment.

The key impact however, will be on sentiment from this key reform. This said, we must be cognisant that the timelines here —  to gazette the amendment, for people to register, for projects to be built and come on grid — will take about two years minimum.

Though load-shedding will continue and intensify at first through this period, the path out has become a lot clearer. This also allows more medium run flexibility for the collapse of the Risk Mitigation IPP Procurement Programme (RMIPPPP), if Karpowership falls out. Medium run risks also rise for Eskom as more companies defect.

Other risks still remain:

• That DMRE plays stuck in the mud and delays things. The gazetting should happen in 30 days, not 60.
• That Nersa can’t handle the influx (it needs to move swiftly from the manual process to an online case management system for registration and licencing). 
• That localisation targets and other requirements are put in place. This move is the perfect opportunity to establish demand pipelines (15GW is huge) and for sustainable localisation and capacity building onshore to occur, but it cannot be rushed. 
• There is no clarity yet on third party sales.

There is still some way to go but key signals were sent on Thursday.

We have always said that a shock political moment on policy was key to shifting the narrative and this may well be it. It is large, impactful, long-lasting and has excellent multiplier effects. 

The president also highlighted the need for the Integrated Resource Plan to change and adapt (something DMRE has refused to do), as well as the forthcoming grid code and connection requirements to prevent cries of “chaos” coming from DMRE on a licencing threshold above 10MW.

All this underlines the importance of having a progressive, transparent, plain-speaking minister of energy. Mantashe is not, as was evident on Thursday. The shift here doesn’t remove the need for him to be fired but reinforces it yet more strongly as the energy system starts to liberalise.

Peter Attard Montalto is an analyst and head of Capital Markets Research at Intellidex.