The Unrevealed Cost Of Renewable Energy Projects

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The South African Wind Energy Association took Eskom to the National Energy Regulator of South Africa (Nersa) over its refusal to continue signing on the fourth round of independent power purchase agreements. Eskom looks forward to this challenge and hopes that issues that were raised before, especially around pricing of the renewable energy projects, will come out in the open so that all of us can discuss them and find a long-term solution.

For now, let me address those who believe that renewable energy should be rolled out at any cost to the economy. Our strategic objective is to decarbonise the electricity sector, provide universal access of electricity to the masses of our people, and to supply affordable electricity to grow the economy.

The Council for Scientific and Industrial Research (CSIR) methodology was used to show that renewables resulted in a net economic loss of R4.27bn in the first six months of 2016. This result was sent to the CSIR and is undisputed. The CSIR has subsequently alluded to a possibility of revising their methodology. The timing of this revision is interesting, given that it seems driven by the need to position renewables positively despite their negative economic impact over the first six months of 2016/2017.

The exorbitant Renewable Energy Independent Power Producers Programme (REIPPP) tariffs from bid windows 1 to 3.5 continue to be unaffordable and require a revised funding model that does not prejudice the consumer. For the first six months of 2016, R6.64bn has been spent to purchase 3 048 Gigawatt hours (GWh) of renewable power at an average cost of 218 cents per kilowatt hour (c/kWh). The entire 218c/kWh is passed through to the consumer and is blended into the Eskom selling price of 83c/kWh.

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The negative impact on the consumer is that R5.24bn of the requested R15bn revenue increase requested for 2016/17 from Nersa is as a direct result of the growth in renewables. Therefore, if there had not been this growth in renewables the additional revenue request could have been reduced by R5.24bn. What this means is that from a tariff increase of 9.4%, Eskom would potentially have received a tariff hike of 5.9%.

If Eskom agrees to sign up to bid window 4.5, in 2021/2022 there will be 21 Terawatt hours (TWh) bought from renewable IPPs at a resultant average cost of 207 c/kWh. According to the current funding structure, these costs will be passed through to the already over-burdened consumer.

In order to prevent a repeat of the R4.27bn net economic loss recorded in the first six months of this year, Eskom should not sign the remaining expedited renewable IPPs including bid window 4.5. In addition, costs linked to bid windows 1 to 3.5 should be ringfenced and funded separately.

This will serve as a crucial first step towards protecting South African electricity consumers from unnecessarily high tariffs. It is not good enough to say Eskom must shut up because these cost are carried by the consumer.

Eskom forecasts adequate electricity supply until 2021, inclusive of a 19% reserve required by Nersa. There is no need to sign up additional IPPs. The next capacity challenge is projected to be in 2026-2028. At this time the peak load is expected to reach 40 Gigawatt (GW) compared to 35 GW this year.

From grid stability point of view, the projected 40 GW plus the 19% reserve margin required by Nersa must be supplied by non-renewable technologies which include nuclear, coal and gas technologies. It is a given that there will be a large increase in the quantity of intermittent renewable energy that will be supplied in years to come. This cannot be relied upon to meet the 40 GW peak demand.

The CSIR recently provided information on the cost of new power from wind, solar photovoltaic (PV), baseload coal IPP and nuclear power generation technologies in South Africa. That study shows levelised cost of electricity calculations for new baseload coal at between 105c to 116c/kWh and new baseload nuclear at 117c to 130c/kWh.

New power from solar PV and wind is shown to be at least 40% cheaper than that from new baseload coal today. On the basis of this information, commentators have rushed to call for the exclusion of coal and nuclear from the revised integrated resource plan. It is my view that the analysis by these commentators is not thorough and is lacking in rigour.

Let me draw your attention to the work of Paul Joskow of the Massachusetts Institute of Technology published in February 2011. He demonstrated that levelised cost comparisons are a misleading metric for comparing intermittent and dispatchable generating technologies, because they fail to take into account differences in the production profiles of intermittent and dispatchable generating technologies.

He uses a simple set of numerical examples that are representative of actual variations in production and market value profiles to show that intermittent and dispatchable generating technologies with identical levelised total costs per kWh supplied can have very different economic values due to differences in the economic value of the electricity they produce.

Another scholar, Tim Mount, brings an interesting angle to this discourse. In his paper of January 2011, he deals with the hidden system costs of wind generation. These hidden costs are ignored completely.

Energy experts who are often quoted in the mainstream media are yet to produce evidence that they have analysed operational issues associated with large-scale integration of intermittent technologies into electric power networks, the associated incremental costs, and implications for pricing network reliability services such as frequency regulation and spinning reserves, redispatch costs, output constraints resulting from transmission constraints (including those placed on wind), and capacity values – based on the expected capacity factor during the few highest peak hours of the year rather than nominal capacity or average capacity factors.

I want to invite members of academia to engage in the energy mix debate. I also challenge those formations who always speak in defence of the poor to speak out.

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