This report assess the cost, emissions and supply security implications of South Africa’s coal baseload independent power producer (IPP) procurement programme which was launched in 2014 in line with the new coal capacity envisaged in the 2010 Integrated Resource Plan for Electricity (IRP 2010, DoE, 2011).
Since the release of the IRP 2010, however, there have been fundamental changes to the South African electricity sector. In particular, rapid changes in the costs of competing supply technologies and fuels globally and in South Africa, coupled with an unprecedented decline in demand for electricity, have rendered the assumptions of the 2010 IRP increasingly out of date. Later iterations of the IRP (2013 and 2016) were not or have not yet been gazetted, and the 2010 IRP thus remains the guiding plan for the construction of new generation capacity, despite these changes in the sector.
This is the executive summary of the report
This has the result of making provision for the addition of new generation capacity that is not necessary to meet demand and ensure security of supply of electricity, provides more costly electricity, and increases greenhouse gas (GHG) emissions. Under the coal IPP programme, preferred bidder status has been awarded to two projects: the Thabametsi and Khanyisa coal-fired power plants. Despite opposition from environmental groups, the minister of Environmental Affairs has stated that, at least in the case of Thabametsi, the environmental authorisation for the station should be upheld.
The minister has argued this on the grounds that the capacity is allocated by the IRP 2010 and the IRP decisions makers “concluded that the harms that would result from the establishment of new coal-fired facilities… were outweighed by the benefit to the country of having the additional energy generation capacity”.
Given this context, this study aims to quantify the effects of the inclusion of the coal IPPs in South Africa’s electricity system over the period from 2015 to 2052. The modelling framework indirectly allows for an assessment of supply security because the model is required to meet a 15% firm reserve margin of fully dispatchable plant.
The relative costs of a system with or without the coal IPPs thus reflects the costs of ensuring an equivalent level of operating supply security and system adequacy. The modelling highlights several key changes in the electricity sector that have not been considered by the minister of Environmental Affairs in her decision to uphold the environmental authorisation. This includes the substantially lower demand that has materialised since the IRP 2010 (and that is forecast into the future) and which renders the coal IPPs unnecessary for meeting short, medium, or long-term demand growth at lowest cost.
We also investigate the cost implications that the inclusion of the coal IPPs imposes on the system relative to cheaper alternatives (comparing total system costs), the GHG emission “lock-in” from the plants, and the effects this has on South Africa meeting its long-term climate change commitments. To do this, we model several scenarios using the South African Times Model (SATIM): a reference scenario, a climate change mitigation (CCP) scenario, a best-case sensitivity and a worst-case sensitivity. Each scenario results in a least-cost electricity build plan for South Africa (subject to the assumptions and constraints imposed on the model).
A key finding of the study is that in all scenarios, neither new coal nor new nuclear is required to meet demand at lowest cost. Thus, since a least-cost electricity build plan for South Africa does not include new coal plants, after running each scenario we run a comparative scenario (with all assumptions held equal) except that we “commit” to the coal IPPs – i.e. force them into the model – in order to compare the effects on the system.
The result of the assessment of new coal IPPs has shown that these plants are not necessary to meet demand, and further, that their inclusion in South Africa’s electricity system will substantially raise costs in the electricity sector, and substantially increase GHG emissions over their lifetimes. The inclusion of the coal IPPs in the electricity build plan increases the total discounted system cost across all of the scenarios analysed. The additional costs range from R16,4-billion (best case coal IPPs) to R27,99-billion (CCP).
In the reference scenario, the additional present value cost of building the coal IPPs is R19,68-billion. The stations also increase emissions by 205,7 Mt CO2 equivalent over the period. This amounts to a negative carbon price of R96/t CO2 equivalent; that is, this is the price per tonne that South Africans will pay for the extra emissions if the coal IPPs are built.
The analysis also includes sensitivities on costs and emissions to test whether more pessimistic renewable energy and gas costs could impact the overall findings. We find that even with pessimistic renewable energy cost projections and high gas costs, the coal IPPs still increase the system costs in the electricity sector compared to an optimised electricity build plan.
Even in the best case for the coal IPPs, when competing alternatives are expensive and the IPPs are able to mitigate their emissions significantly, the overall increase in system costs is R16,4-billion, and the increase in emissions is 97 Mt.
In the worst case for the coal IPPs, the increase in system costs is R23,11-billion and emissions increase by 218 Mt. In comparison, recent modelling on the emissions savings of mitigation policies showed that the emissions savings of the post-2015 National Energy Efficiency Strategy to 2050 will be 214 Mt CO2 equivalent (ERC, 2018). The carbon tax is expected to result in reductions of 115 Mt over the period 2020 to 2050.
Thus, the GHG emissions of the coal IPPs in the reference and worst case will almost offset the National Energy Efficiency Strategy. Even under the best-case for coal, the GHG emissions from the coal IPPs will almost offset the entire emission savings of the carbon tax for the South African economy. The coal IPP programme essentially negates key mitigation actions at the disposal of the government.
Finally, we tested the effects of building the coal IPPs in the context of climate change mitigation policy. Should South Africa take its own climate change commitments seriously, building the coal IPPs will dramatically raise the costs of meeting the low-PPD carbon budget as outlined in the National Climate Change Response White Paper.
Meeting the low-PPD when the coal IPPs are built requires increased mitigation in the power sector, with the existing fleet run at lower load factors to make room for the coal IPPs, and substantial higher investment required for new generation capacity. Notably, other sectors will also face higher mitigation burdens. In total, the additional discounted system costs to meet the low-PPD trajectory with the coal IPPs is R27,9-billion.
The implications of these findings are clear. South Africa is currently facing a large surplus in generation capacity, in particular inflexible base supply capacity. Eskom is facing a financial crisis and rising electricity prices will drive consumers away from the utility. Investments that unnecessarily increase costs in the electricity sector should be avoided.
Note 1: In each case, the total additional costs are the difference between the scenario with and without the coal IPPs committed (i.e. reference compared to reference plus coal, CCP compared to CCP plus coal, best and worse with and without the coal).
This is the executive summary of the report
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