The Rules of the Game
AOP talked to Dave Wright, Secretary General of the South Africa National Energy Association, about the importance of effective policies in attracting investment in the power sector, as well as the rapidly growing role of natural gas in Africa’s power scenario.
What do successful countries do right in terms of formulating an effective energy policy and enforcing legislation that creates a positive environment for developing power projects?
I think the two most crucial issues around policy are:
(1) It needs to be stable. When I say stable, it has to stay the same, with minimum changes over a long period of time. With power, a long period of time is 20 years or more. Investors know that the policy will not change and then they have the security of knowing the rules and how they have to play.
(2) The actual rules of the game are not that important, but the one aspect that is very important is that the policies have to be fair to both players: investors as well as government. It can’t be lopsided toward government and it can’t be lopsided toward the investor.
These are the two critical factors for me — stable policies and balanced positions for both parties involved.
As far as enforcement goes, if it can be completely market driven, that is great, but sometimes governments feel they have to have some control in the game. Importantly, though, there does have to be competition. As soon as you find there is no competition at all, that is when things start going wrong, especially on the enforcement side of things.
In South Africa, we have great policies but the implementation is not monitored because we don’t have the people capable of enforcing the legislation and that is where the critical issue has to be addressed. You must also have good people within the government to do the legislation, and of course it needs to be done in a fair and unbiased fashion, because as soon as you see governments favoring some parties over others, that leads to investors getting concerned that there are favorites in the game. That starts a negative cycle.
If you have fair policy that is implemented in a fair and unbiased manner, everyone knows they are being treated the same and if that is where they want to play, they will work within the rules and play the game as hard as they can.
South Africa has quite successfully invited IPPs in to the South African power market. What can other African countries learn from South Africa in terms of creating an investor-friendly environment for independent power producers?
Unfortunately, South Africa has made a critical error by not keeping the policy stable. Eskom, for example, has said they won’t sign PPAs for the last two rounds and there is a big debate between the government and Eskom. That is a critical error that we are making in South Africa and as a consequence, there has been no interest in IPP investment since that trend has come about. This issue demonstrates the need for stability.
On the positive side, the secret of the success for the IPP program in South Africa was that the government created a one-stop-shop. Investors could go to one place in the government to get all the information they required, and they didn’t have to shop around. It collected all of the knowledge and officials in one area, and investors could make informed decisions about the investment opportunities.
The other important thing — which wasn’t there in the beginning because we did have feed-in tariffs in the first round — but in subsequent rounds it was market driven and really competitive. And that is where you’ve seen the prices come down. That is a consequence of taking away the feed-in tariff and telling people we would take the best bids.
Natural gas is likely to play an important role in power moving forward. How can governments better integrate petroleum legislation with power policy?
In my view, the legislation required to manage petroleum investments and the legislation required to manage power investments are quite different and they need to be kept different because they are dealing with different criteria and different challenges.
The critical thing is the need for a fair price at the transfer point, and you must either allow that to occur as a consequence of the market, or, if there is legislation, the legislation must specify that it is a fair price for both the gas producers to make a return on their investments and the power generators to survive on their side.
I think it all hinges on the transfer price between the two sectors, rather than managing the legislation in an integrated fashion.