Addressing SA’s electrical supply challenges



The Fossil Fuel Foundation (FFF) conducted a two-day seminar recently on the problems confronting the electrical supply industry in South Africa as a whole and Eskom’s coal‐fired power stations in particular. I came away with the impression that the problem is indeed very serious with many commentators warning that the problems surrounding Eskom have the potential to destabilise the entire country.

Bruno Penzhorn

This article provides a summary of the proceedings of the FFF’s seminar as well as the broader power issues facing South Africa. This has proved to be a complex task given the ongoing developments and discussions between government, industry and NGOs, as well as the government’s endeavours to get Eskom back onto the rails.

The great re‐think on power generation

From its beginnings in the early 1900s, fossil fuel‐based generation of electricity grew from strength to strength during the past hundred years. However, today the industry with its high‐cost and long lead‐time power stations is in an extreme state of flux and uncertainty.

The industry is being blamed as being one of the offenders in causing climate change and this, together with stricter enforcement of environmental laws and regulations, is forcing utilities to reconsider their traditional methods of generating power. The general trend is to move away from centralised, bulk‐generation concepts to decentralised generation methods and solutions. Solidly anchored, 50‐year‐life‐cycle, coal‐ and nuclear power stations are being labelled environmentally undesirable and asked to step aside to make way for decentralised solar- and wind-powered generators.

These are known to be extremely temperamental and to only offer power when the sun shines and the wind blows. In contrast, the traditional, bulk‐power‐plant work horses were designed to offer stable power around the clock and they do not lend themselves to rescue intermittent power sources on an as and when required basis.

The challenges and consideration being faced globally in the decision-making process for future plant are:

Coal combustion power

Coal-fired power stations release CO2 and green‐house gases reputedly causing climate change and being seriously challenged by environmentalists and clean air protagonists world‐wide. Coal mining is environmentally unfriendly, scars the landscape and causes acid mine drainage and water pollution. it also creates huge, residual ash dumps adding another dimension in the damage to the environment.

 Nuclear energy power 

These are seen by many as the alternative base-load power producer to coal with less pollution, but they are very costly to build. Long, complex and uncertain licencing procedures, coupled with high costs of construction and long lead times before generation can begin, together with the disposal of  radioactive waste remains a problem that raises serious concerns about the suitability of nuclear power plants in many circles.

 Renewable solar and wind power

These only generate electricity when the sun is shining and the wind is blowing. However, technical innovations and volume‐based manufacture have managed to reduce the associated capital expenditure by 70% since 2010. These technologies promise to become a serious contender for supplying “base-load power” when combined with battery storage. Although reliable long-term battery storage is still a challenge, intensive research is underway to improve storage capacity and reduce costs. These projects create many jobs mostly in remote areas and as such, are a superb vehicle for the smooth transfer of the power generation role from state to private hands with real benefits for both.

 Gas fired power 

The major advantage of gas is the short start‐up time bringing power on line within minutes to take over from wind and solar power. They have very short construction times for MW rated power. However, there is no ready-made gas available in South Africa, although liquified natural gas could be imported and transported in bulk. Because fuel cost is painfully expensive when compared to thermal and nuclear power, these are ideally suited for intermittent, medium range power requirements but not to replace the bulk power generated by SA’s reliable six‐pack coal‐fired power stations.

 Anticipated worldwide trends up to 2050 

The shift from fossil fuel and nuclear energy generation to renewables is encountered worldwide as described in the June 2018 issue of the publication Energy Informer [1]. On pages 5 to 8, the International Renewable Energy Agency (IRENA) describes the anticipated global energy transformation up to 2050. The bar chart on page 7 shows that renewable energy’s share of total generation is expected to increase from 24% at present to 85% in 2050. This gives credence to the warning that overinvestment in new bulk power plants at this stage could lead to stranded assets and heavy losses before useful life expiration.

Present generation status in South Africa’s installed capacity

At present, power generation in South Africa is for all intents and purposes, the exclusive domain of our national utility Eskom. Eskom generates 96% of South Africa’s electricity and more than 45% of the electricity generated on the entire African continent.

Eskom’s total installed capacity amounts to about 45 000 MW consisting of [2]:

  • 39 342 MW from 14 coal fired stations
  • 2732 MW hydro and pump storage
  • 2426 MW peak load gas turbines
  • 100 MW renewable wind power

 Independent power producers (IPPs) 

As the name implies, generating plants built by IPPs are not state‐owned but are fully sponsored, built and operated by private industrial companies in compliance with power purchase agreements (PPA) issued by the government’s department of energy.

Wind and solar IPPs (renewables) [3] 

From zero beginnings some ten years ago, renewable IPPs have become the fashion of the day in South Africa. They are being favoured for their low capital cost, short lead times, and very often for supplementing power in remote and outlying areas. As mentioned, the main present advantage being that they are privately funded and offer great scope for job creation and promoting new entrepreneurs. The Black Energy Professional Association (BEPA) welcomes the opportunities created for black entrepreneurs and black‐owned IPPs. Except for Eskom’s 100 MW Ceres wind‐farm, all renewable energy projects are owned by IPPs in South Africa. Earlier this year the minister of energy, Jeff Radebe, approved R56-billion renewable IPPs, to be followed by another R50-billion, for 27 new IPPs providing an additional 1800 MW before year end.

 Coal-fired IPPs [4] 

Two new privately-owned coal‐fired IPP projects are close to financial closure subject to final EIA approval:

  • Thabametsi, a 557 MW (EIA application 1200 MW) power station based near Lephalale, Limpopo.
  • Khanyisa, a 336 MW (EIA application 600 MW) based near Emalahleni, Mpumalanga.

Both projects have received solid support from Radebe as this will increase private funding towards base-load power in South Africa. There are, however objections from NGOs who stress that the projects and their CO2 emissions will exacerbate South Africa’s inability to comply with the Paris Agreement. Cape Town University’s Energy Research Centre (ERC) has calculated that running these power stations would cost R19,68-billion more, over their life cycles, than cheaper alternatives.

The government’s new integrated resource plan’s (IRP’s) generation mix 

South Africa’s last IRP was prepared in 2010 with a partial upgrade in 2015. The ongoing speculations over the past few years for 9600 MW of nuclear power were highly speculative without proper evaluation. By contrast consumers, business, NGOs, universities and the wider public are now fully on the alert and insist that their voices be heard in future. Radebe has undertaken that the new IRP will be finalised by mid‐August and that a solid participation process will be followed. This to harness energy as a catalyst for investment and to re‐ignite growth and job creation in South Africa. The FFF conference convincingly recommended that the future IRP should not be cast in stone but reviewed regularly to take cognisance of new technologies and developments.

Some speculations on the future generation mix

Given the low growth in electricity demand at present, the country could end up with excess base‐load capacity in future. Some older power stations must be closed. Medupi and Kusile, two new large coal-fired power stations, should be the last six‐pack coal fired power stations to be built in South Africa. Some people suggest that the last two of Kusile’s units should not be built to avoid expensive stranded‐assets in the future. Nuclear power stations could be beneficial along South Africa’s coastline given the availability of cooling water and the remoteness from the central power hub.

 Foreign direct investments in South Africa and its energy sector 

President Cyril Ramaphosa has set a foreign direct investments target of US$100-billion into South Africa over the next five years. Radebe says energy can contribute $25-billion of that target [5].

 Eskom: Where to from here? 

Problem 1: Air quality and greenhouse gas demands on Eskom

Fossil fuel combustion produces 85% of the power generated in SA, emitting particulate matter, CO2 and greenhouse gases into the atmosphere in the process. Minimum emission standards (MES) in terms of the National Environmental Management: Air Quality Act were published in 2010. These standards became effective from 2015 with the intent to reduce the health impact caused by industry and domestic burning. The government’s department of environmental affairs granted Eskom a five-year exemption in 2014 but the problem still needs to be addressed and solved. Eskom calculated that ± R400-billion will be needed for modifications and upgrading of its older power stations, if it is to comply with air pollution regulations [6]. This is unaffordable as it would equate to a 7 to 10% tariff increase.

Seven out of Eskom’s 14 power stations are old, inefficient and too costly to run and should be taken out of service. Coal-fired power stations, even the new dry‐cooled ones, use lots of water which is a scarce resource in South Africa. South Africa signed the Paris Agreement in 2015 which stipulates that all signatory countries must reduce greenhouse gas emissions to limit global warming to 2°C per annum. This is a real challenge for all countries which led to President Trump withdrawing the US from the agreement.

 Problem 2: Eskom’s solvency 

The National Energy Regulator (Nersa) granted Eskom a 5,23% tariff increase for 2018/2019 against Eskom’s application for 19,9%. Eskom expected 12% as a minimum and intends to approach the courts for review. In terms of the Regulatory Clearing Account (RCA), Eskom is claiming R66,6-billion under‐recovery incurred over the past three -years due to higher primary costs and declining energy sales. This to be recouped by additional yearly increases of 3% over and above the Nersa approved increases for the years 2019/20, 2020/2021 and 2021/22.

Nersa recently granted Eskom R32,69-billion as a final settlement on its RCA application. Eskom’s acting chief financial officer stated that in next two years Eskom’s interest bill will exceed staff costs with its debt burden rising from R337- to R500-billion. Over the past few years, a number of municipalities have defaulted on their payments to Eskom for the electricity they receive. Municipal debt now stands at R13,8-billion [7]. Given the depressed market conditions in South Africa, Eskom’s energy sales have shown no growth over the past decade. Business organisations caution that higher tariffs will result in further reductions in sales which could lead to Eskom suffering a “utility death spiral”.

 A possible solution to solvency problem? 

In the March 2018 edition of Energize [8], Dr Tobias Bishof‐Niemz (CSIR Energy Centre) and Johan van den Berg (Advocate and ex-CEO of the South African Wind Energy Association) propose selling off Eskom’s coal fired power stations with associated PPAs in place. This could raise R450-billion they say, enough to repay Eskom’s debt and leave cash to upgrade the network and recapitalise the company.

Their proposal divides the power stations into three categories:

  • Category O: Camden, Hendrina, Komati, Grootvlei & Arnot. No longer cost‐effective to run and should be shut down without delay.
  • Category 1: The remainder Kriel, Matla, Duvha, Tutuka, Lethabo, Marimba, Kendal and Majuba to be sold with PPAs in competitive bids over next five years.
  • Category 2: The two new stations Medupi & Kusile still under construction also to be sold with PPAs as for Category 1.

 Problem 3: Employee numbers 

Present employee numbers 47 600 against 32 000 in 2010 with sales growth of only 1%. Nersa reports Eskom’s average annual cost per employee: R643 000 for 2016, R675 000 for 2017/18 and R708 000 for 2018/19. NUMSA (National Union of Metalworkers) maintains that Eskom’s top management increased form 80 executives in 2001 to 500 at present.

In recent years Eskom has been attracting people from industry with higher wages and salaries and attractive working conditions. In years gone by, Eskom was seen as an excellent training ground for young people who then left and joined industrial companies for better pay. Eskom’s remuneration bill is not sustainable and will require painful adjustments.

 Problem 4: Eskom is no longer fit‐for‐purpose [9]. 

Business Unity South Africa’s (BUSA’s) Martin Kingston warned Nersa in November 2017 that Eskom is no longer fit-for-purpose and its business model should be reviewed. According to the Energy Intensive Users Group’s (EIUG’s) Piet van Staden, Eskom is facing a perfect storm with both supply‐ and demand-side changing rapidly. This puts Eskom out-of-sync with the market, having to recover increasing fixed costs from a declining sales base.

Dr Grové Steyn, an infrastructural and regulatory economist, says generation and transmission should be separated. Transmission should then be established as a state-owned “Independent Transmission System and Market Operator” (ITSMO) and municipalities and large users should be free to choose their energy supplier. I agree with Dr Steyn, but recommend that Eskom be divided into three state‐owned entities as follows:

Generation (Genco)

Firstly, to structurally address the competition between Eskom and IPPs and secondly to allow our present base-load provider to optimise the performance of its huge asset base and to generate energy cost‐effectively and competitively. The sale of individual power stations to repay Eskom’s loans would be greatly facilitated if done by a focused and stand‐alone generation organisation rather than a large and complex vertically integrated utility.

Transmission (Transco)

To become the new “national utility” acting as a broker in buying power from generation and all current and future IPPs including coal, gas, wind and solar. Thereafter to re‐sell energy to its major clients, i.e. industry, mining, agriculture and distribution companies.

Distribution (REDS)

In 2006 the government decided to merge Eskom’s distribution and municipal electricity suppliers under the EDI Holdings into six regional electricity distributors (REDS). The endeavour faltered and was abandoned in 2010, mainly due to the municipalities not being prepared to let go of their assets and the lucrative revenue streams produced by them. However, things have changed and the revenue streams have turned into heavy liabilities contributing to many municipalities collapsing and landing under provincial administration. 

This, together with the scourge of illegal connections, has become a massive problem for both Eskom and the municipalities. There seems to be a political undercurrent in these developments based on the idea that free water and electricity should be supplied. This matter needs to be formally addressed and resolved as a national issue by government and all stakeholders [10].

Thereafter for the implementation of the agreement reached, the EDI/REDS concept should be revived to include the lessons learned and the new circumstances since it was first mooted in the 2000 to 2010 decade.

References 

[1] EEI, June 2018

[2] Eskom Generation Mix (May 2017)

[3] R50bn New IPPs Approved (Jun 2018)

[4] Coal IPPs will cost R20bn more (Jun 2018)

[5] Energy’s $25bn towards $100bn FDI Target (May 2018)

[6] Eskom’s Air Quality Roadmap (May 2018)

[7] Municipalities owe Eskom R13.8bn (May 2018)

[8] Solving Eskom’s R400bn Debt Problem (Mar 2018)

[9] Eskom no longer Fit‐for‐Purpose (May 2018)

[10] Revive the REDS (June 2018)

Send your comments to energize@ee.co.za

 

 

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