The recent discussion about energy and electricity is one of the most important debates South Africa can have.
One of the fundamental objectives of South Africa is the necessity to address urgently inequality, unemployment and poverty and this objective cannot be achieved by redistribution of wealth alone. It can only be achieved by raising the economic growth rate.
A higher growth rate is dependent on having the correct public policies in place and having an adequate and growing supply of affordable electricity. In the article below Rob Jeffrey covers the latter aspect.
In order to ensure economic growth, South Africa must develop its industrial base and it is therefore essential to supply electricity at the lowest possible cost. He says it is time for South Africa to break away from the vested idealistic or financial interest driving the large renewable expansion schemes. They are not the panacea for the country’s future energy problems and growth.
By Rob Jeffrey*
The first major issue raised by the CEO of Eskom in this debate concerns renewables. He has accurately described the fallacy and weakness of the primary renewables, wind and solar. These are highly variable, often supplying power when it is not needed and not supplying power when it is needed. As a result, these are expensive forms of energy production, yet the supply must be bought in terms of the purchase agreements at set prices.
This has been the experience in Germany under their energiewende programme. Germany sells unwanted electricity at a loss to other countries and purchases the required supply from other countries at a premium.
These prices are in effect financial subsidies for wind and solar. In Germany, they are fortunate that they have other major electricity generating countries nearby.
They can tap into electricity provided by nuclear power plants in France, coal-generated electricity in Poland or hydro-electricity from Scandinavia; South Africa is not in that enviable position.
Because of all the financial subsidies, Germany, other than Denmark another country with major wind sourced energy, has by far the most expensive industrial and household electricity in Europe.
They have now capped the supply of renewables and are in the process of terminating all financial subsidies to renewable companies. What energiewende has clearly established is that wind energy and solar CSP are not technologies suitable for mass base load electricity supply.
This theme has been repeated in other countries such as South Australia where their wind energy drive is a case in point and echoes what has happened in Germany. A view of the literature on energiewende, wind in South Australia and growing energy poverty in industrialised and developed economies are compulsory reading for all interested in the energy field.
The drive for “green energy” is slowing growth and enforcing poverty in emerging economies. In developed economies, it is causing unemployment and reducing living standards. This can be seen in the political backlash in Britain, the US and even Germany. In these nations, affluent environmentalists argue that the cost is merited. They have the ear of financial institutions and governments. The institutions see secure profits because of guaranteed prices and subsidies, and governments can afford the subsidies because there are no objections to “green” taxes. Of course, the poor and underprivileged suffer from the added tax burden. They are the real as victims as renewables are in effect a tax on the poor.
Of concern are plans to introduce massive wind farms spread across South Africa for between 30GW and 60 GW of wind turbines. It is deemed that geographically separated wind farms will ensure a more continuous supply of electricity. This theoretical, but unproven, view is that somewhere in the country, the wind is blowing and the sun is shining.
This is not the experience of Europe and the UK where the average load factor from all onshore wind farms remains less than 30%. Even allowing for better wind delivery, electricity generation is still not certain all the time and one would still need to have full back-up for base load power when delivery does not occur.
A full delivery plan would require more than 6 000 square kilometres of unsightly wind farms generally built on high ground to ensure maximum efficiency, requiring more than 12 000 Kilometres of roads to service each unit. In addition, the landscape of the countryside would be criss-crossed by at least 10 000 kilometres of additional transmission lines.
This is a potential environmental catastrophe, not only would there be damage to the local habitat, but the damage to insect, bird, bat and other flying life does not bear thinking about. It is a known fact that large birds such as vultures and eagles, but also other bird life, cover large areas while hunting and feeding, they are particularly vulnerable to wind farms.
The facts from Europe and America indicate that the plans will in effect decimate enormous numbers and areas of larger birds while the impact on bird migration could also be catastrophic. Environmentalists need to take note of the habitat, ecological and environmental disaster that is in the planning stages and take preventative action.
The second major issue raised by Eskom concerned nuclear. The CEO of Eskom stated that base load electricity should be provided by coal and nuclear, presumably including other fossil fuels primarily gas. The question remains how much nuclear? Nuclear power stations take ten years to build, and the upfront costs make a large build programme unaffordable for a country like South Africa.
As an example, Britain is re-looking at the Hinckley Point nuclear power station project. The total cost for the 3 200MW Hinckley Point nuclear power station is approximately R333bn. This should be compared to the 4 800MW Medupi power station costing an estimated R200bn and the initial, now installed, renewables 2310MW programme costing approximately R170bn.
When one considers that renewables only deliver power 31% of the time, their cost far exceeds nuclear while clean coal fired plants such as Medupi are far less expensive.
It is recognised that renewable capital costs have dropped substantially since those early days and are currently far below the initial costs as set out above and guaranteed delivered costs for wind generated electricity now stand at approximately 66 cents/kWh.
Based on this guaranteed delivered price and a load factor of only 31%, this guaranteed price effectively becomes a subsidised price as it is paid for whether the electricity is required or not. There are increased costs caused by the low load factor on transmission costs and furthermore greater distances are involved.
As a result, the true total cost of wind power for delivered power is significantly more expensive than coal-generated electricity and it is also greater than that for nuclear which in turn is also approximately 30% more than equivalent coal fired electricity.
These significantly higher final delivered electricity prices have a major detrimental impact on the economy. They slow economic growth and devastate the goods-producing industries including the all-important mining, manufacturing, agricultural and agro-processing industries.
These industries are key to South Africa’s export performance and employment growth, particularly amongst the relatively unskilled working population. It is estimated that there will be 16 million new workers entering the work force in the period up to 2030.
With low base load electricity growth of only 2.5% per annum, due to the planned large reliance on unreliable renewables not suitable to be included as base load power, GDP growth is unlikely to increase at more than approximately 2.8% per annum. At this growth rate less than 6 million jobs will be created by 2030. In other words unemployment will grow by at least 10 million job seekers.
Independent Power Producers
The third major issue raised concerned the role of Independent Power Producers (IPP). The point made was that Eskom is going to stop signing new agreements with Independent Power Producers. According to Eskom, the issue concerned the guaranteed prices and offtakes of renewables, not the IPP’s themselves.
This is economically and from a business point of view absolutely correct and the concern has broadened to the future role of IPP’s. IPP’s are essential for the future of energy provision and economic development of the economy.
Eskom is already effectively a giant monopoly controlling generation, transmission and distribution of the entire market, which cannot be allowed to continue in a market-orientated economy. Eskom already generates, distributes and controls through the grid close to 40 000 MW. By 2035, in less than 20 years, South African electricity demand will increase to over 70 000MW (provided the correct economic policies are followed to foster economic growth).
The bulk of this electricity growth should be provided by IPP’s. The existence of a mega-monopoly, whether state-controlled or privately-owned, does not make economic or business sense. The structure of Eskom in this process must be addressed.
Eskom should be split into at least two and preferably three stand-alone independent operating companies. A generation company (Genco), a company responsible for the grid transmission and market operations (Gridco) and a distribution company (Disco).
Governments everywhere are notoriously poor managers of commercial entities; this government is no exception and the list includes SAA, SABC, and Denel as just a few examples.
The three companies, Genco, Gridco and Disco, should be set up as three independent public-private partnerships with management firmly in the hands of the private sector. Genco would need to focus on base load generation, replacing its ageing fleet and limited growth almost certainly using clean coal supported by major gas operations.
The structure would allow the IPP’s to flourish and bring in genuine competition free of all subsidies. This must include all generating, grid and distribution subsidies. If subsidies are required, for example for distribution and poverty alleviation these must be government funded not company funded. Some difficult political decisions would need to be made but these would have to be brought out into the open.
The fourth major issue that looms in the background of every decision regarding energy is the environmental issue and the commitment to COP 21, the outcome of which was an excellent agreement. What was important was not only what was agreed but more important what was not agreed. The agreement gave a set of sound long-term global objectives. In broad structure, the Paris Agreement reflects a “hybrid” approach, blending bottom-up flexibility (to achieve broad participation) with top-down rules, to promote accountability and ambition.