News in South Africa 27th July:

1. Ramaphosa’s Eskom solutions:

Eskom will on an urgent basis in the next three months accelerate efforts to add new generation capacity to its faltering grid.

Ramaphosa's Eskom solutions
Image taken by: Pok Rie

The intervention was among a raft of energy security plans for the country announced by president Cyril Ramaphosa during an address to the nation on Monday evening.

They come after the country has in the past five weeks experienced hours-long intermittent electricity outages as the power utility was unable to meet demand due to various challenges.

The president said: “As an immediate measure, surplus capacity will be bought from existing independent power producers. These are power plants which built more capacity than was required and can now supply this excess power to Eskom.”

As part of addressing the shortage of megawatts, Eskom will purchase additional energy from existing private generators such as mines, paper mills, shopping centres and other private entities that have surplus power.

“A number of our neighbouring countries in Southern Africa, such as Botswana and Zambia, have more electricity capacity than they require. Eskom will now import power from these countries through the Southern African Power Pool arrangement.

“Eskom will also use interim power solutions, such as mobile generators, to supplement current generation capacity for a limited period. Eskom will implement a programme that encourages efficient energy use by consumers to reduce demand at peak times.”

The set of additional actions the president announced are aimed at improving the performance of Eskom’s existing fleet of power stations.

Secondly, he said, the actions would accelerate the procurement of new generation capacity.

“Thirdly, [they] are intended to massively increase private investment in generation capacity. Fourthly, [they] are designed to enable businesses and households to invest in rooftop solar; and, finally, [they] are directed at fundamentally transforming the electricity sector and positioning it for future sustainability,” he said.

5-point energy plan:

1. Improving the performance Eskom’s existing fleet of power stations

This will be achieved by increasing the budget that Eskom has to perform much-needed maintenance as well as procurement of skills from the private sector.

This is a key requirement – although new private sector generation will replace Eskom’s ageing coal fire powerplant over a 15 to 25-year time horizon, the country is still very much dependent on the output from the Eskom fleet.

2. Accelerate the procurement of new generation capacity:

By doubling Bid Window 5 of the Renewable Energy Independent Power Producer’s Programme, an additional 2 600MW can be connected to the grid within the next 18 to 24 months.

Also, by reviewing the mix of energy sources, timing and volume as outlined in the current version Integrated Resource Plan, new procurement can be expedited substantially.

3. Increase private investment in generation capacity

About a year ago, Pres Ramaphosa announced that the licensing requirement for independent power producers would be lifted from 1MW to 100MW. This was seen as a big step forward, but many market commentators asked why the 100MW cap was even needed.

If the private sector could put a large-scale project together and raise the funding for it, why not allow more than 100MW? And it was exactly what was announced – there would be no licensing requirement, regardless of the size of the project.

Although projects will still need a host of permits, it was also announced that these permitting requirements will be streamlined in order to reduce waiting times.

4. Enable businesses and households to invest in rooftop solar

This is quite a substantial change. Effectively, Eskom will establish a ‘Feed-in-Tariff’ scheme so that individuals or entities that have installed solar panels or other energy generation facilities would be able to sell excess energy into the national grid.

This should incentivise many small-scale private solar projects to be completed. This will reduce the strain on the Eskom grid and provide additional energy to the grid.

5. Finally, fundamentally transforming the electricity sector and positioning it for future sustainability

Here the president alluded to the restructuring of Eskom into three separate legal entities and the fact that a solution for Eskom’s balance sheet woes would be announced at the mid-term Budget speech in October.

After many decades of Eskom being the sole producer, transmission entity and distributor of energy, we will see a fundamental transformation of these role players, with more private sector participation and a competitive energy market.

2. Food retailers lessen inflation strain:

South Africa’s major JSE-listed food retailers are continuing to play a part in trying to shield already compromised consumers from spiking food costs by keeping internal food inflation levels low.

Shoprite Group, Pick n Pay and Woolworths, in trading updates released on Tuesday, reported maintaining internal selling price movements below the recorded consumer price index (CPI) food inflation rate, which came in at 8.6% for June.

For Pick n Pay, internal selling price inflation for the 18-week period ended 3 July was maintained at 5% in its South African operations.

Competitor Woolworths says it managed to keep its price movement steady at 3.5% and its underlying product inflation at 3.9% for the 52 weeks ended 26 June.

Africa’s largest food retailer Shoprite reported maintaining internal selling price inflation for the 52-week period ended 3 July at 3.9%, despite seeing an acceleration in the fourth quarter that saw inflation in the second half of the period nearing 5%.

But this may not last long

The consumer in South Africa has in the last few months had to battle increasing price pressures fuelled largely by Russia’s ongoing invasion of Ukraine, which sparked a global rise in fuel prices and supply chain disruptions.

Sasfin equity analyst Alec Abraham warns that should the inflationary environment continue on its current trajectory, the country’s grocers may lose the ability to shield the consumer from future price shocks.

“The longer these elevated prices go on, the more difficult it becomes for both the retailer and the producer. At some point, if the high inflation goes on for a prolonged period, you are going to start to see more of the price increases being pushed to customers.”

In the meantime, Abraham says that to feel the retailer’s pricing protection, consumers are going to have to start paying greater attention to their baskets by making cheaper, more affordable choices.

As he says, retailers are offering much of the price value in bulk products – which give customers greater value per kilogram – and in-house brands, which retailers often buy at a cheaper negotiated cost from producers.

“You’ve got to be an astute shopper to identify the value that they [retailers] are providing. It won’t be entirely obvious, for customers who just go in and buy what they always buy, to see that retailers are cutting them some slack,” he adds.

3. Air travel chaos continues:

Airline delays and disruptions amid the current post-pandemic travel surge could last for as long as another 18 months, according to the CEO of one of Europe’s busiest airport.

“This is not going to be a quick fix,” Heathrow Airport CEO John Holland-Kaye told Bloomberg’s Christopher Jasper in a report published Tuesday. 

Holland-Kaye told the outlet that airlines still need to hire more staff to handle the swell in travel demand and that the daily passenger limit imposed by Heathrow could stick around until next summer.

“It’s absolutely possible that we could have another summer with a cap still in place. It’s going to take 12 to 18 months, and not just at Heathrow,” Holland-Kaye said, per Bloomberg.

A deluge of flight cancellations, lost luggage incidents, and disruptions have become a global nightmare for an aviation industry still recovering from waves of pandemic layoffs.

Airlines and airports have scrambled to explain the delays, sometimes blaming each other or even the color of suitcases and people working from home.

To cope with the chaos, Heathrow, on July 12, introduced a cap of 100,000 daily passengers flying from the airport. In the announcement, Holland-Kaye also asked airlines to stop selling summer tickets to “limit the impact on passengers.”

He told Bloomberg that airlines are responsible for hiring ground staff such as baggage handlers, air bridge operators, and personnel to process check-ins.

Heathrow has estimated that most airline ground handlers only have around 70% of the personnel they need to deal with passenger traffic on par with pre-pandemic levels. 

Before the pandemic, Heathrow had been Europe’s busiest airport for years, handling up to 80 million passengers annually. In a June investor report, it said it expects to handle 54.4 million passengers this year.

4. SA banks at risk:

SA’s largest banks are at “high risk” of falling foul of money laundering, terrorism and proliferation financing activity, according to a new report by the Prudential Authority (PA), a division of the Reserve Bank that regulates financial institutions.

The PA released its second banking sector risk assessment on Tuesday. It surveyed 34 lenders active in SA, including five large banks, nine medium to small locally controlled banks, 17 foreign-controlled banks and branches of foreign banks, and three mutual banks. The assessment focused on the money laundering, terrorist financing and proliferation financing risks identified in the banking sector between October 2018 and December 2020.

South Africa is already at risk of being placed on the global “grey list”, which could see the country excluded from international finance markets.

5. Wage increase demands lowered:

Public sector unions have lowered their demand for wage increases from 10% to 6.5%. This was in response to the government’s counter-offer of 4.5% to the initial demand.

Unions representing 1.3 million public servants are hoping to reach an agreement with the government after negotiations deadlocked. The state says it simply cannot afford double-digit increases.

While strike action has been threatened, negotiations are uncharacteristically calm.

All information sourced from articles posted by: BusinessTech, Moneyweb, Business Insider, Daily Maverick, and BusinessLive.

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