South African Energy Policy FES Briefing Paper 11| August 2007 Page 7 4. Improving the investment climate in the energy sector Enormous investment requirements along the entire energy chain Prior to 1994 energy policy-making and imple­mentation were non-democratic and often dri­ven by the strategic concerns of a regime under siege. In this environment there was large over­investment leading to huge over-capacity in the electricity generation system and mothballing of both electricity generation and petroleum pro­duct manufacturing plant, much of this the re­sult of state-led over-investment. The new post 1994 economic regime has been fundamentally different from an investment perspective. Just how different can be gauged from the fact that the major energy supply sub­sectors have moved from positions of large extra capacity and mothballed plant to a situation that now can be accurately described as under­capacity and highly-over-stressed supply systems and periodic and increasingly frequent severe system failures. That the policy environment over the past ten years or so has not and is not leading to required investment levels is not under question: the re­sults of the under-investment are plain to see. What is useful to assess, in terms of potential South African cooperation and contribution to implementation G8 energy policy, is how can the obvious high level of agreement in policies and commonalities in interests between South Africa and the G8 lead to promoting and encou­raging the required investments. The investment requirements and commonalities in policy and interest could offer significant potential to sour­ce and guide investments to achieve joint policy goals. Electricity sector It is a stated policy in the SAWPEn that competi­tion be established in the bulk electricity sector through re-structuring processes that have been underway for some time and that were intended to attract investment in power generation and the establishment of Independent Power Produ­cers(IPPS). Government states that 30% of new generation capacity should be IPP. The main feature of reform and re-structuring in the electricity sector to date is that bold plans to re-structure to achieve competition and establish independent regulation have met with signifi­cant and effective resistance. Re-structuring has largely failed and the de-facto powers of the Na­tional Energy Regulator of South Africa(NERSA) are weak and only in the beginning stages of be­ing established. Prospective IPPs have shown very little interest. At the same time Eskom has held back from constructing new capacity while room was given for IPPs to enter the market. Ultimately, no new base-load capacity was licensed and by 2007 a serious supply shortfall has arisen. On the positive side the serious shortfall in capa­city and the stated intention of government to make room for IPPs in 30% of the market com­bined with the stated intention to achieve com­petition in the market provides an opportunity, in terms of stated policy agreement and com­monalities of interests between South Africa and G8, for cooperation between South Africa and G8 in this area. Petroleum/ liquid fuels sector The 1994 South African government inherited responsibility for a highly regulated petroleum/ liquid fuels sector where all aspects were cont­rolled through often non-transparent agree­ments and non-transparent regulation ranging from quota control of product imports through to price control of main products. The new government decided to make funda­mental changes in these arrangements and, in the words of the South African Energy Policy White Paper of 1998: “The government believes that competitive mar­ket forces should determine prices. Retail price regulation, import control and Government sup­port for the Service Station Rationalisation Plan will be simultaneously removed. Government is committed to promoting a climate that would be conducive to reasonable profits and sustained investment in the liquid fuels industry.” A phased process of de-regulation was mapped out in the South African Energy Policy White Pa­per of 1998. However, like the electricity sector, liberalization of the petroleum sector has met severe challenges: uncertainties during the pro­cess of attempted implementation of the fun­damentally new direction in policy have preven­ted necessary investment and development and have led to a severely stressed supply system. The current state of play is summed up below firstly in the words of a government commission and secondly in a press statement by an oil ma­jor operating in South Africa. According to the Moerane Investigating Team to the Minister of Minerals and Energy on the De­cember 2005 Fuel Shortages: