Clean energy should fill the Eskom void

Thobelani Maphumulo is an investment analyst and author of Invest Your Way to Wealth.
Thobelani Maphumulo is an investment analyst and author of Invest Your Way to Wealth.

The domestic electricity supply has experienced unendurable volatility in recent years, adversely affecting economic performance. 

This has stimulated the discourse about energy security and electricity-generation technologies.

On the whole, the energy policy framework should be underpinned by these five considerations: electricity demand outlook, low carbon emissions, sufficient reserve margin, investments and job creation. 

The department of energy’s integrated resource plan provides guidelines on the character of the energy sector in the years ahead. 

To a great degree, government subscribes to the fidelities of clean energy. South Africa is one of the top emitters of carbon dioxide in the world due to Eskom’s coal-fired power stations and Sasol’s coal-to-liquid plants, located in Mpumalanga. 

These two companies account for more than 50% of the country’s carbon emissions.

The 2015 Paris Agreement’s central effort is to keep global average temperature increases below 2°C above the pre-industrialisation level. 

Average global temperatures are rising at a disquieting rate, expected to reach 4°C at the end of this century. 

It is imperative to reduce the role of fossil fuels – coal-fired power stations and gas (methane releases carbon when it burns) – in the global electricity-generation mix. 

Currently, solar and wind technologies contribute a third to global electricity generation; the target contribution is 50% by 2050. 

Since 2010, there has been a discernible decrease in all-in costs of electricity from wind and solar. 

Wind, solar and battery technologies are at the centre of emission reductions; the collapse in costs bodes well for clean energy. 

The cost of building new solar and wind plants is now cheaper than the cost of new coal-fired power stations. 

The installed capacity costs of solar photovoltaic and onshore wind plants are between $1 200/kW and $2 500/kW, in most countries. 

The significant decrease in costs has been a function of falling prices of photovoltaic modules, wind turbines and balance of systems. 

Bigger wind farms use higher hub heights and sweep large areas, resulting in a higher electricity harvest. 

Subsequently, bid tariffs have fallen significantly in the past few years. Wind and solar tariffs are around $0.045/kWh and $0.10/kWh in Europe and Africa, respectively. 

The SA government has procured 6 422MW, of which 3?876MW is operational and available to feed the grid. Currently, renewable energy accounts for 4.8% of electricity generation and 25% of Eskom’s production costs. 

The renewable energy production costs have generated an ideological cleavage among stakeholders; the debate is centred around the financial impact of independent power producers (IPPs) on Eskom. 

On the one hand, opponents argue that the IPPs’ primary energy costs have worsened Eskom’s precarious financial position. 

Eskom pays a tariff of R2.21/kWh to IPPs. This is much higher than 26c/kWh and 6c/kWh for coal and nuclear, respectively. It is noteworthy that Eskom’s liquidity problems are largely due to high leverage – R450bn in total debt and high debt servicing costs – due to the Medupi, Kusile and Ingula new build projects. 

On the other hand, proponents of renewable energy argue that although Eskom pays high tariffs to IPPs, the company recovers the costs from customers. Eskom’s 2019 financial results confirmed this assertion. 

The opponents’ tariff lament is not entirely misguided, especially for the earlier bid windows. Tariffs are an integral part of a purchasing power agreement as they largely determine the cash flow stream, funding mix and internal rate of return for the project companies. 

Fortunately, recent bid windows have seen a drastic decrease in tariffs, in line with global trends. Solar photovoltaic plants have declined from R4/kWh in the first bid window to 96c in the fourth round. 

Similarly, wind technology tariffs have fallen from R1.67/kWh to 76c in the fourth bid window. Without renewable energy, the country would have experienced severe blackouts. 

Eskom has struggled to maintain its coal-fired power stations, leading to unplanned breakdowns and an erosion of its reserve margin. Eskom needs approximately 5 000MW of reserve margin to ensure security of supply. 

On the nuclear front, Koeberg contributes about 1 800MW to electricity production, and the plant’s life will be extended for another 20 years. Nuclear is a clean technology, which is cheap to operate and maintain.

It should continue to be part of the energy-generation complex. Unfortunately, new nuclear plants are very expensive to build at $10 000/kW. 

IPPs can explore building small nuclear units provided the returns justify their investments. The decommissioning of Eskom’s old power stations, together with the utility’s financial problems, present an opportunity for clean technologies to contribute significantly to the generation mix. 

Clean energy – solar, wind, hydro and nuclear – should contribute more than 50% to the power mix by 2050, in line with global projections. 

Major stakeholders should construct a social contract that comprehensively speaks to low carbon emissions, job creation, and the localisation of the energy equipment and systems industry. 

Thobelani Maphumulo is an investment analyst and author of Invest Your Way to Wealth

This article originally appeared in the 6 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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