Intelligent Power

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Published in Cape Times 7 April 2010

In the life of any nation there are rare moments of historic opportunity when great decisions can be taken that will shape the future for generations to come. We are going through one of those moments now, but it all ends in April at a crucial meeting of the Board of the World Bank. Will South Africans let the future be decided in that Boardroom?


The South African Government wants the World Bank to approve a loan to finance what will be the fourth largest coal-fired power station in the world. Key strategic thinkers in the World Bank want this to happen because this finally gives them what they have never had before – a firm grip on the SA economy and, above all, their drug of choice – policy influence. Environmental groups, trade unions and key Western Governments don’t think the World Bank should be financing coal-fired power stations in a country which is the 12th highest CO2 emitter in the world and where we already emit more CO2 per unit of GDP than any other country in the world.

But this reading of the debate is far too simple. The key question is this: why has the South African Government and the World Bank decided (with no public debate) that it makes economic sense to invest in an energy source that will steadily get more expensive over the next 30 years rather than in renewable energy sources that will get cheaper over the next 30 years? Why invest in coal-fired power stations when the CoalTech study into our coal reserves is not complete and in any case is more than likely going to show (if they don’t torture the data too badly) that we have much less of the stuff than we think? By contrast we have some of the best solar radiation resources in the world, sufficient to drive large Concentrated Solar Power (CSP) plants that can generate sufficient base-load at a lower cost than coal over a 30 year life-cycle.

Key Ministers are making hasty decisions based on analysis generated largely by ESKOM without adequate public debate. They need to be challenged to a public televised debate to justify why this historic moment should not be used to catapult South Africa into the forefront of a techno-industrial revolution that will be as profound as the information technology revolution. Hopefully PM Gordon Brown repeated to President Zuma during the latter’s recent State Visit what he wrote in Newsweek on 28 September 2009:

“There can be little doubt that the economy of the 21st century will be low-carbon. What has become clear is that the push toward decarbonisation will be one of the major drivers of global and national economic growth over the next decade. And the economies that embrace the green revolution earliest will reap the greatest economic rewards. … Just as the revolution in information and communication technologies provided a major motor of growth over the past 30 years, the transformation to low-carbon technologies will do so over the next. It is unsurprising, therefore, that over the past year governments across the world have made green investment a major part of their economic stimulus packages. They have recognised the vital role that spending on energy efficiency and infrastructure can have on demand and employment in the short term, while also laying the foundations for future growth.”

This is a truly remarkable statement because unlike our Minister of Finance, this statement identifies the demand for decarbonisation not as a constraint but as an opportunity for growth. The Minister for Economic Development, Ebrahim Patel, echoed this perspective in his budget vote speech in Parliament on Tuesday 23rd March. Similarly, Section 12.2 of the Industrial Policy Action Plan unveiled by the Minister of Trade and Industry only a few weeks ago acknowledged that our energy intensive growth path is unviable.

However, our Minister of Energy uses the lame argument that the political agreement reached at the Copenhagen Summit in December 2009 allows developing countries space to build coal fired power stations. This is a bit like standing up in the early 1980s and saying “yes, we know the information technology revolution is underway, but we have decided to wait another decade before we install our computers.” By the time the Minister of Energy wakes up, China, South Korea, Japan, Europe (and possibly the USA) will have completed their green revolutions and in the process created the patented technologies and know how that we will need to buy in order to catch up.

In short, read Minister Hogan’s justification for a World Bank loan for financing coal-fired power stations as a call to fall behind the rest of the world thus forcing us to take another loan in a decade or so to buy someone else’s technologies so that we can catch up. If she understood endogenous growth economics, she would realise that the World Bank loan will suppress the need for innovation thus destroying what really drives growth and job creation. South Africans have never understood this way of thinking, but why the World Bank ignores it while punting it elsewhere is most puzzling indeed.

So how have we arrived at this incredibly stupid conclusion that our best interests lie in going in the opposite direction to the rest of the world? Why are the Ministers in charge of energy and public enterprises working so hard on projects that contradict what Ministers Patel and Davies are saying? To answer this, we need to consider three trends.

The first is the strange (and largely untold) story of our contested electricity prices. Since 1996, ESKOM has been squeezed between two titanic economic dynamics that run in diametrically opposed directions. The first has been the commitment to export-led growth. For this to work, South African raw materials and manufactured goods needed to be cheap enough to break into international markets. Given the strength of the trade unions, forcing down wages was not an option, and so resource prices needed to be kept low, in particular energy prices. The second dynamic, however, was the determination to use parastatals to leverage black empowerment deals, and in this case to create opportunities for building privately owned power stations owned by BEE companies. But for this to work, energy prices needed to be high enough to make this profitable – much much higher, that is, than what National Treasury thought was good for exports. We now have the worst of both worlds: energy prices that threaten competitiveness and jobs, but which are still not high enough to make major BEE investments in private power stations profitable. Solution? For some, a World Bank loan (which, by the way, must be repaid in dollars earned from exports that will only work if resource prices and/or wages are kept low enough to make exports viable).

The second is that the Cabinet has bought the Minister of Energy’s mistaken view that South Africa has ‘carbon space’ to invest in coal-fired power stations (this, despite the fact that South Africans emit 9.8 tons of CO2 per capita per annum, the same as the UK). From a carbon perspective, the numbers do not support the conclusion that we are a developing country. In reality, however, this decision should not be about carbon or the environment at all, but should be a purely economic decision, i.e. what will best incentivise innovation, job creation, investments and global competitiveness? Investing in mature capital intensive technologies creates less jobs than investments in new decentralised technologies that are not captured by monopolistic value chains. South Africa needs to harness its entrepreneurial energies to drive returns on innovation and not just rely on the same old SA story – cheap resources and labour exploitation. Countries with the most diversified economies in the world are also the countries with the most expensive energy. Why? Because as energy prices go up, innovation for diversification follows. ESKOM has never understood this simple fact, hence the crazy idea of providing its biggest customers with the cheapest electricity.

Finally, the World Bank has since before 1994 wanted to be seen as a major player in the biggest African economy. This is its chance, exploiting this precious historic moment to pursue a narrow strategic interest thus contradicting its own policy commitments to finance solutions to global warming. To be sure it has concocted for itself an eminently believable story: that by agreeing to the loan for ESKOM on condition some of the funds are used for renewable energy it is forcing ESKOM into doing what no-one else has been able to get ESKOM to do – yes, of course, build solar and wind power plants! Ok, fine, but why can’t the World Bank loan be used to catapult South Africa into global leadership of CSP technology by providing funds exclusively for CSP plants (which, by the way, will also generate carbon finance)?

So, in short, if you mix together these three stories – contested electricity prices, the Minister of Energy’s misguided ‘carbon space’ argument to justify our delayed participation in the global green revolution, and the World Bank’s belief that it can drag ESKOM kicking and screaming into the c.21st – it becomes possible to figure out why are fate is about to be sealed in a World Bank boardroom. But in a decade from now (as we transfer another chunk of carbon taxes into the global financial system) we will look back on this precious historic moment and say ‘Why on earth were we so stupid? Why did we miss that key moment of transition from a resource-intensive to an innovation-driven economy? Why did we not debate that choice more thoroughly?’