Eskom wrong about renewable energy costs

Read Eskom’s original article here: http://www.eskom.co.za/news/Pages/Jann9.aspx

Richard from the Project 90 Policy and Research team responds below:

Eskom claims that renewable energy is causing a “net loss to the economy”, but if we look into the future and beyond vested interests, it is easy to see that renewable energy is now the cheapest source of new build electricity and getting cheaper, while coal is becoming more expensive financially, socially, and environmentally.

On 10th January Eskom released a media statement asserting that in 2016 renewable energy resulted “in a net loss of R9.0 billion to the economy”

[1]. They arrived at this figure by using a methodology developed by the Council for Scientific and Industrial Research (CSIR), which showed the economic benefit of renewables in the first six months of 2015 to be almost R4 billion. Herein lies the first issue: incorrect application of the methodology. In early 2015, the power system was constrained, hence diesel was used in open cycle gas turbines to prevent load shedding. The CSIR methodology was specifically designed to measure the immediate fuel saving effect of renewables in such circumstances. In 2016 there were no power system constraints, and in fact, as per its media statement, “Eskom currently has surplus capacity until 2021”.  The CSIR methodology used in 2015 was not appropriate for use in the different circumstances of 2016, and it is misleading to extend the financial figure to something other than its intended purpose.

In any case, renewable energy did carry a reasonably high cost in 2016, but this must be put into context and we must ask two critical questions: 1. What are the long term benefits of this higher cost; 2. If we want to get the full picture, and a sound comparison of coal and renewables, what is the true cost of coal?

Eskom’s announcement raises very important issues that need to be aired in the current energy debate in South Africa.

  1. Initially high renewables tariffs are a developmental cost.

The renewable energy that Eskom refers to in its media release is purchased from Independent Power Producers (IPPs). Through the national renewable energy programme, there have been a number of bidding windows (BW). During this process the cost of solar photovoltaic (PV) dropped from R3.65/kWh in BW1 to R0.62/kWh in BW4 expedited. Wind power dropped from R1.51 to R0.62 per kWh over the same timeframe. Coal IPPs come in at R1.03/kWh, and Eskom’s new Medupi and Kusile power stations have current levelised cost of electricity (LCOE) estimated at R1.05 and R1.17 per kWh respectively[2]. While a proper comparison should be across all the IPPs, however you look at it, wind and solar PV are now cheaper than coal for new build electricity production.

To get to this point, there needed to be support for, and investment in renewables. This is what caused the rapid drop in prices, but there was (and still is) a cost to that. The electricity Eskom bought from renewable energy IPPs in 2016 uses the higher tariffs from BW1 and BW2. This means that the snapshot figure seems high right now, but as more wind and solar PV come on board at R0.62/kWh (or less), the average cost paid by Eskom will decrease.

The initially high cost of wind and solar PV was necessary to bring us to a point where they are now the cheapest source of new build electricity. This high starting cost was required for creating a better long term energy source – we are paying off the technology learning that will contribute to a more resilient economy in the future.

  1. What to do if you have surplus capacity?

In the current situation of excess power, we are faced with a choice between coal and renewables.  Eskom argues that less renewable energy should be bought from IPPs. From an environmental, human health, climate change and long term financial stand point, the real answer is to use less coal.  While the international trend is to move towards renewables, Eskom, with its vested interest in coal, is fighting this at every turn. Evidently, what is best for the Eskom business model is not aligned to the national interest, which highlights the problem with having a monopoly in the electricity sector.

Since Eskom is owned by the State, and the State represents the people,  government needs to step in and change the direction of power development to one that results in a greater good. This also applies to choices for new generation capacity.

  1. How much is additional coal capacity costing us?

Despite the growth of renewable energy worldwide and the demonstrated cost reduction in South Africa, along with the quick build times, Eskom is forging on and building two more huge coal fired power stations. As with most mega-projects, Medupi and Kusile have shown substantial cost over-runs. By July 2016, analysis [3] already showed that the combined cost to completion of both projects had increased by R90.9 billion. However, this excludes other costs such as interest during construction, which alone is estimated at about R100 billion (and rising) due to delays. These are examples of proper economic losses, as there is no long term advantage that will result from them. All of these costs will eventually be recouped through a higher electricity price.

In contrast, any cost over-runs for renewable energy are borne by the private developers of the IPPs.

Meridian Economics demonstrated that if the second half of Kusile was cancelled, the contract termination fees paid, and the equivalent electricity then generated from renewables, we would have electricity that is about 40% cheaper and also save about R100 billion in construction costs.[4]  Is government considering this option?

  1. What are the hidden costs of coal?

Over and above the direct financial costs of burning coal for power, there are many externalities. These are factors that are not internalized into the monetary costs at present. What are the environmental costs in terms of air and water pollution? What are the climate change costs linked to greenhouse gas emissions? What are the social costs associated with the heath of coal miners, and people living near the power plants?

These are difficult to quantify, but the new draft Integrated Energy Plan (IEP) does provide Rand values per kilogram for pollutants. A bit like a carbon tax, these will increase the financial cost of using coal to generate electricity. While allocating a financial value to externalities may push markets and decision makers to choose better and healthier alternatives, should we not make the move away from fossil fuels on principle?

Coal mining near the Oliphants River has caused water quality to become so bad, that it can no longer even be used for cooling in Eskom’s coal fired power stations[5]. When the negative effects of an industry become severe enough to affect its own functioning, surely it is time to move on? This is not economics, it is just common sense.

While a quick glance might show that wind and solar PV are expensive, on closer investigation it becomes clear that these are now the cheapest source of new build electricity, and the higher costs alluded to in Eskom’s recent media statement are simply a result of the development costs that we are still paying off. The truth is that coal use results in far more money being genuinely lost from the economy.  Apart from the external costs of coal, it makes plain financial sense to invest in renewables for a secure energy future.

 

Richard Halsey is a member of the Project 90 by 2030 Policy and Research team

 

[1] http://www.eskom.co.za/news/Pages/Jann9.aspx

[2] CSIR analysis, IPP office,.

[3] https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-overrun/#.WHdgElV96Uk

[4] http://meridianeconomics.co.za/wp-content/uploads/2016/12/Grov%C3%A9-Steyn-Bday-Kusile-article.pdf

[5] http://cer.org.za/wp-content/uploads/2016/06/Zero-Hour-May-2016.pdf

 

By | 2017-07-24T12:00:39+00:00 January 17th, 2017|