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South Africa: Energy Futures Contested

AfricaFocus Bulletin
March 30, 2015 (150330)
(Reposted from sources cited below)

Editor's Note

The energy crisis in South Africa, with regular "load-shedding" due to shortages of power from the monopoly utility Eskom, is now at the top of the political agenda, featuring in President Jacob Zuma's State of the Nation Address in February and in ongoing disputes about who is responsible and when the situation can be fixed. The long-term strategy to exit the crisis and begin a transition to a sustainable energy system is also marked by strong disagreements between utility and government officials and their critics.

The debate about management at Eskom and its political fallout is beyond the scope of AfricaFocus coverage (see http://tinyurl.com/ntkcmcw for a recent update). But the long-term issues of South Africa's energy strategy are relevant far beyond that country's borders. That debate is often technical, with projections of options based on widely varying assumptions. But the basic lines of debate are clear: (1)the current policy of doubling down on coal while rapidly increasing nuclear and gas generation, with a relatively minor role for new renewable energies such as solar and wind, versus (2) calls for a much more rapid introduction of new renewable energy capacity, both into the electrical grid and in "embedded" supply, such as rooftop panels and even solar-powered generators.

This AfricaFocus Bulletin contains excerpts from a October 2014 48-page report from the World-Wide Fund for Nature - South Africa, which outlines and critiques the current government plan for the period through 2030, and presents an alternative scenario with more rapid introduction of new renewable technologies.

The main point of the critique is clear. The rationale for a more rapid shift from fossil fuels is not only the damage to the present and future environment they cause. It is also that technology and the business environment at the global level are rapidly enhancing the potential for solar and wind, for countries at all levels of economic development. Even the presumed disadvantage of the variability of these energy sources is being addressed by extraordinarily rapid advances in battery storage and grid management.

An essential source on the renewable energy scene world-wide, with occasional articles on South Africa, is Greentech Media (http://www.greentechmedia.com/). Global developments are highly relevant for Africa, because technology is developing rapidly, and investors worldwide are looking for new alternatives not only in developed countries but also rising and middle-income countries including South Africa.

Two recent reports on the world energy scene document the rapidly changing technological and cost landscape:

"Renewable Power Generation Costs in 2014", International Renewable Energy Agency (IRENA), January 2015
http://tinyurl.com/oowgk7r

and

"Stranded Assets and Subcritical Coal: The Risk to Countries and Investors," University of Oxford Smith School of Enterprise and the Environment, March 2015
http://tinyurl.com/ndnaejg

Other relevant sources on South African energy of particular interest:

President Jacob Zuma, State of the Nation Address, Feb. 12, 2015
http://www.gov.za/state-nation-address-2015

Patrick Bond, "Zuma's Business-as-Usual Approach to South Africa's Energy Crisis," Counterpunch, Feb. 18, 2015
http://tinyurl.com/q52zycm

Roundup article on new utility-scale solar plants in South Africa Mybroadbank South Africa, Feb. 10, 2015
http://tinyurl.com/p5q5gqf

KaXu Solar One (concentrated solar power plant) launched at Pofadder near Namibian border, Mail and Guardian, March 5, 2015
http://tinyurl.com/qdrckb9

"Wind Energy Outperforms Expectations, says ESKOM," South African Wind Energy Association, Nov. 5, 2014
http://tinyurl.com/pmdwv9z

For previous AfricaFocus Bulletins on climate change and the environment, see http://www.africafocus.org/intro-env.php

++++++++++++++++++++++end editor's note+++++++++++++++++

Renewable Energy Vision 2030 – South Africa

World-Wide Fund for Nature (WWF), South Africa

October 2014

Excerpts only. Full text available at http://www.wwf.org.za / direct URL: http://tinyurl.com/pf8anra

Introduction

Background

Government plans for meeting South Africa's growing electricity demand needs are outlined in the Integrated Resource Plan for Electricity (IRP) of 2010. The plan contains long-term electricity demand projections, and details of how demand should be met in terms of generation source, capacity, timing and cost.

In late 2013, a draft update of the IRP was published for public comment. This outlined the optimal energy mix in a variety of scenarios linked to economic growth, the energy intensity of the economy, and various other factors and events.

In the Base Case scenario, premised on average economic growth exceeding 5% per annum and full implementation of the National Development Plan (NDP), there is a gradual ramp-up of renewable energy capacity to 9% of South Africa's total electricity supply capacity by 2030 (DOE 2013). Even in this optimistic scenario, generation from new coal-fired and nuclear plants will dwarf the share of electricity produced from renewable sources.

Further, should economic growth continue to be hover around current levels of 2-3% due to weak international demand, RE will only account for 6% of the country's electricity supply by 2030 1 . Continued reliance on coal-fired power for more than two-thirds of South Africa's electricity requirements suggests that there will be on-going competition between the energy and agricultural sectors for scarce arable land and water resources, threatening the delicate balance in the food- energy-water nexus.

WWF Plan of Action

The WWF calls for a more ambitious plan, suggesting that the IRP should provide for an 11-19% share of electricity capacity by 2030, depending on the country's growth rate over the next fifteen years. The basis for this proposal is outlined in detail in this report, and relies on a scenario-based approach to energy planning similar to that used by the Department of Energy (DOE).

For the purposes of this document, renewable sources comprise solar photovoltaic power (solar PV) and concentrated solar power (CSP), as well as wind-generated energy. Hydro-electric power is excluded due to concerns over the environmental impact of large hydro-electric power plants. Also excluded are sources such as landfill gas and biogas, given the relatively small role they play in Government's plans to procure electricity from RE sources.

For present purposes, RE comprises solar PV and CSP as well as windgenerated power. 'High demand' corresponds to the Base Case scenario in the IRP Update, while 'low demand' corresponds to the Weathering the Storm scenario

In the WWF's vision of the future, growing RE capacity comes at the expense of new coal-fired and nuclear capacity, with intermittency and dispatchability issues being countered by thermal and energy storage capacity, as well as by flexible gas-turbine generation. In addition to the obvious environmental benefits of this scenario, it will enable South Africa to add flexibility to energy supply capacity on an on-demand basis. In an environment of significant uncertainty regarding future electricity demand, the WWF considers this to be the most sensible approach.

The annual capital requirement associated with this goal is estimated to be R40-R80 billion in current Rand terms, depending on the rate of economic growth and the associated growth in electricity demand. In light of significant investor appetite for South African RE assets to date, the WWF believes that pools of private capital, notably from local retirement funds that manage approximately R3 trillion in savings, will support this requirement.

A growing demand from international institutional investors for high-quality infrastructure assets such as renewable energy plants further informs the organisation's expectations. Longer-term investments with relatively stable, predictable yields and low market correlations are perceived as valuable components of retirement fund portfolios, which have long-term obligations towards their members.

From a developer perspective, retirement funds may become increasingly attractive as cost-effective, supplementary providers of debt financing. This is especially true as banks are likely to raise pricing on project debt as a result of new regulations. Further, their appetite for extending further debt will depend largely on the degree of secondary market interest in the purchasing debt that they originate.

When it comes to financing for empowerment equity takes, this is already in short supply for RE projects, which presents another avenue of opportunity for retirement funds. In particular, financing the shares of black owned partners is expensive and scarce. A subsequent paper explores the participation of retirement funds in RE financing in more detail.

...

Utility-Scale Renewable Energy in South Africa: Past, Present And Future

Despite being critiqued for its heavy reliance on coal-fired power in the past, South Africa has recently developed what is arguably one of the most successful IPP-driven renewable energy programmes globally. It has hosted the fastest-growing clean energy market over the past five years, and is now one of the world's most attractive RE investment destinations (Pew 2014).

Further, RE is strategically viewed as an avenue through which the South African Government can respond to the challenge of climate change, improve energy security by diversifying sources of energy supply, and propel green growth through localisation and empowerment (DME 2003). The importance of developing the RE sector is further underscored by its inclusion as an integrated strategic project in the National Infrastructure Plan. This is overseen by the Presidential Infrastructure Coordinating Committee, and is aimed at catalysing development and growth in South Africa 3 .

The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), introduced in 2011, has by all accounts been very successful in quickly and efficiently delivering clean energy to the grid. Over six rounds of this programme, Government aims to develop private sector RE projects with a production capacity of 6 725 megawatts (MW) using a competitive bidding process. A total of 3 916 MW was allocated through the first three rounds.

During the first half of 2014, the Department of Energy opened a CSP-only bid window of 200 MW, and a fourth bid window of 1 105 MW covering PV, wind and other technologies. Favourable developments with respect to the RE price trajectory have been central to this development. Increasingly competitive bidding rounds have led to substantial price reductions, and current contracting of RE at internationally comparable tariffs supports the technology's potential as an affordable future source of electricity supply.

In three short years, wind and solar PV have reached pricing parity with supply from new coal-fired power stations from a levelised cost of electricity (LCOE) perspective. LCOE represents the cost per kilowatt hour of constructing and operating a power plant over a specified lifecycle, taking into account factors including cost of capital and the anticipated plant load factor. In the case of the REIPPPP, it is reflected by the bid tariff, which recovers plant cost over a 20 year power purchase agreement (PPA) period.

In bidding window 3 of August 2013, the average tariffs bid for wind and solar PV were R0.66/kWh and R0.88/kWh respectively, well below the recent estimates of R1.05/kWh for supply from the coal-fired Medupi and Kusile power stations (Papapetrou 2014). In 2013, the average levelised cost of electricity supplied to the grid was R0.82/kWh (Donnelly 2014), so wind-generated power has already achieved pricing parity with the grid.

CSP, while still expensive in relative terms, costs less than the alternative peaking supply option, namely diesel-powered open-cycle gas turbines. Bid at an average of R1.46/kWh in REIPPP Round 3, a two-tiered tariff structure would enable CSP to be supplied into the grid during peak hours at R3.94/kWh , which is cheaper than the alternative peaking supply option from gas turbines.

In a constrained energy supply environment, renewables now present a savings opportunity. This is a radical departure from conventional thinking, which positions renewables as a more expensive source of power. Generation by mid-merit coal and diesel power plants, the latter currently running in excess of a 20% load factor, is significantly more expensive.

At the Wind Energy Summit South Africa, held earlier this year (2014), National Treasury indicated that had the 4 GW 6 of RE procured under the REIPPPP already been connected by 1 January 2013, South Africa would have saved a staggering R11 billion in avoidable fuel costs through the displacement of these particularly expensive fossil fuel energy sources.

...

Government Targets and Future Planning

The Integrated Resource Plan for Electricity (IRP) articulates the principles and logic employed by the DOE to guide day-to-day decision-making regarding new investment in energy production capacity. Together with the Strategic Grid Plan and the Transmission Development Plan, this informs policymakers' views on decisionmaking and expenditure priorities in generation, transmission and distribution. All three of these documents are regularly updated to take into account changing conditions.

The draft IRP 2010-2030 Update Report (IRP Update), released by the DOE in November 2013, therefore models the 2030 energy mix according to various scenarios. This indicates the impact of different assumptions, including economic growth outcomes, climate change mitigation policy and large-scale strategic investments. Optimisation takes place on a constrained least-cost basis (i.e. the lowest cost of meeting South Africa's energy demand requirements is sought, subject to certain policy-driven or practical thresholds and ceilings).

From the WWF's perspective, there are several critical and debatable assumptions that may result in suboptimal investment decisions in RE. These relate to energy demand, pricing and hard-coded limits on procurement of new RE capacity. As a result, even in the optimistic Base Case scenario, the share of renewables in South Africa's electricity generation capacity by 2030 is only 9%.

Given the higher base levels and substantial renewable capacity growth rates seen in comparable emerging markets, it is likely that this achievement will be relatively unimpressive in international context. Brazil and Chile have already exceeded South Africa's targeted renewables share for 2030, while China and Turkey will achieve parity within the next three years if their growth in the share of RE over the past three years continues at the same rate.

...

From this discussion [of demand for electricity], it is clear that a great deal of uncertainty exists regarding real electricity demand in the coming 20 years. The optimal response is to plan flexibly, using power sources that can be procured in modest increments and brought on-line quickly and as required. RE plants fit this brief due to their modular nature and the fact that they can be speedily constructed as needed.

Relative Cost

The relative cost of the various electricity sources is another critical deciding factor, determining which energy mix will deliver on demand. All technologies in the figure below [see full report for figure] are evaluated on the basis of the LCOE to ensure direct comparison. From this it is evident that the LCOEs for coal and nuclear in the IRP Update are low relative to recent independent international estimates, which are approximately 20-25% higher (Citi Research 2013).

While the IRP Update estimate for coal may be accurate for old coalfired plants, it will not apply to the Medupi and Kusile power plants, which will generate much more expensive power and comprise 20-25% of the coal-fired plant mix by 2030. Further, the carbon tax mooted by Government will have a greater impact on coal-fired power than any other energy source, given its carbon intensity. The nuclear power LCOE is understated to an even greater degree in the IRP Update, although much uncertainty regarding actual costs is acknowledged. By contrast, RE levelised costs - even at the 2012 value of the Rand - are higher than the tariffs that were bid in 2013, erring on the high side. In particular, the LCOE calculation for solar PV seems too conservative by some margin. The net result of this mix of LCOE calculations [in the government's IRP Update] is a decision-making lens biased towards coal and nuclear in determining the optimal energy mix for South Africa. In reality, solar PV and wind already compete favourably with the more traditional alternatives of new coal and nuclear from an LCOE perspective.

Furthermore in the IRP Update the contribution of renewables is limited by hard-coded caps placed on the growth of capacity in solar PV and wind technology without justification from a technical feasibility perspective.

Annual additions to wind capacity are limited to 1 600 MW and solar PV to 1 000 MW. The justification for the wind limit is based on observed historical wind construction rates in a reference country, namely Spain. However, several large economies, including Italy, Germany and Japan, added more than this capacity during 2012. The cap on solar PV is imposed somewhat arbitrarily to “limit the major switch to this technology” resulting from assumed learning rates (DOE 2013: 19). In reality, rapidly declining solar PV prices have supported the technology, recently overtaking wind as the fastest growing clean energy source globally . It is understood that the DOE is currently starting to experiment with removing these constraints .

Gas is, however, viewed as an alternative to RE and a potential game-changer. In the IRP Update's Big Gas scenario, large scale exploitation of shale gas resources in the Karoo and the gas fields of Mozambique results in a rapid switch to a gas-dominated energy mix, with renewables playing a much smaller role than in the Base Case. Critical assumptions include availability of gas and water, which is unpredictable in the case of shale; timing of access to these regional gas resources, which will probably only occur in 2025; and a substantial reduction in the gas price to R50/GJ in 2035. As with renewables, there are significant new transmission requirements associated with gas, as generation may not take place at a load centre. Furthermore, substantial pipeline and gas terminal storage costs may be incurred. These will tend to push up the relative price of gas, even if regional sources can be competitively procured at source.

...

Conclusions and Recommendations

The WWF is optimistic that South Africa can achieve a much more promising clean energy future than current plans allow for. With an excellent solar resource and several very good wind-producing pockets, the country is an ideal candidate for an RE revolution.

We have shown in this report that the levelised cost of producing RE already competes favourably with the three main alternatives, namely coal, gas and nuclear, and that a broader RE base would contribute to a more climate-resilient future and insulate South Africa from dependence on expensive and unreliable fuel sources priced in dollars. Critical from a planning perspective, RE can also provide added flexibly on an 'as needed' basis, as electricity demand grows. This is vital in a highly uncertain environment.

In support of our vision, we call for several further actions related to RE in general. Firstly, comprehensive systems analysis needs to be undertaken in order to identify in greater detail grid suitability in high renewables penetration scenarios such as those outlined in this paper. This will inform the ideal mix across wind, PV and CSP technologies on an annual basis, as well as set out additional balancing supply requirements. Broadly speaking, it is understood that balancing gas capacity should be approximately 33% additional to renewable capacity, but this needs to be explored further.

Secondly, in procuring new electricity capacity Government should create incentives that are designed to relieve some of its most significant fiscal and grid constraints. Developers should be incentivised to connect to the grid where spare capacity exists to do so. Even more importantly, generation at close proximity to load requirements should be promoted in order to minimise strain on the ageing transmission network. Support for a distributed generation sector may be achieved through reforming a currently highly centralised electricity sector, including an easy utility licensing process and third-party grid access for supply of excess electricity at a predetermined tariff. Achieving more diversified electricity markets will boost prospects for developers and equipment suppliers, and reduce risk for banks and other investors. South Africa could then truly be positioned as a green manufacturing hub to service the broader Sub-Saharan region.

Thirdly, Government needs to commit to firmer policy on renewables and, in particular, to a longer- term RE procurement plan, subject to electricity demand growth. This will lay a foundation for deeper investment by developers participating in the REIPPPP, while simultaneously supporting the continued cost competitiveness of RE in South Africa. This should be accompanied by a coherent and consistent set of developer requirements in order to create a smoother implementation process.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to subscribe or unsubscribe to the bulletin, or to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org


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