“The low cost of wind power and how it softens the Eskom price impact”
We heard mining and agriculture telling NERSA of job losses and South Africa becoming uncompetitive. At the other end of the spectrum we heard about quadriplegics requiring electricity to assist them in breathing at night. We all need electricity, and we need it at an affordable rate.
The NERSA hearings and the submissions it garnered were very informative for wind energy and the role of IPP’s, especially when we consider that the second round of the REIPPP procurement process saw average levelised prices for wind being bid at 89c/kWh. This the latest price for new wind power.
As against this, estimates for nominal new Eskom coal power range from NERSA’s own 97c/kWh to Standard Bank’s estimate that Kusile will cost ZAR1,38/kWh in 2019, when it is commissioned. The entire spectrum of estimated Eskom new coal cost thus falls above the actual cost for new wind power, and the inescapable conclusion is that the more wind power we build, the more money we save.
Add to this the University of Pretoria’s report of 2012 estimating the externalities of Kusile at between ZAR 0,97 and ZAR 1,88/kWh (health impacts, water, climate change impacts, mining impacts) and it is clear that wind power’s real cost to the broader economy is about a half or a third of the cost of the power that Kusile will produce (see http://www.greenpeace.org/africa/Global/africa/publications/coal/FULL%20SCIENTIFIC%20PAPER%20139%20pages.pdf)
Within this context it is very disappointing to have to conclude that renewables have been harmed by the MYPD3 application – wind power also. How could this have happened?
Eskom states in the MYPD3 that it is asking for a 16% rise in tariff annually and that 3% of the 16% is due to the fact that it has to pay for IPP power. Various speakers and commentators have erroneously equated “IPP’s” with “renewables”, and the message that has reached the public is that renewables “subsidisation” is the reason why Eskom must charge 3% of the 16%. As one example, Brian Kantor and David Holland equate these erroneously, while the BUSA submission contained the same error. Indeed, I have heard of colleagues attending the World Economic Forum at Davos that even there, it was said that the introductipon of renewable energy in SA is causing a 3% increase in the power price.
In truth “IPP power” consists primarily of two very different categories of power. The first is the peaker plants – open cycle gas turbines that according to the MYPD will produce approximately 400 GWhs/annum at the extraordinary cost of ZAR 6,93/kWh (for cost see MYPD3 Table 55 p 136 - 13,34 billion; for generation See Table 17, page 63 - 1,926 GWhs over the five year period). The second category is renewable energy, primarily wind power and solar PV, which in the second round of REIPPP procurement was procured at a weighted average cost of about ZAR 1,12/kWh. It is thus clear that the bulk of the so-called “IPP cost” is due to non renewable energy - but that due to the way the MYPD was written, renewables have been blamed for the aggregate effect.
Even beyond this elephant in the room, there is a second logical error in asserting that renewables are responsible for a certain portion of the Eskom price increase. This is that Eskom in saying so is comparing new power to the absence of power and assuming the latter to cost nothing. Indeed, according to NIRP3 the cost of the unmet electricity demand in 2008 was ZAR 75/kWh – about 84 times more than the cost of new wind power. Eskom is assuming this to be zero (because in the absence of buying renewables SA Inc would be without the power) and then blaming renewables for the cost. What it should have done was to say what it would have cost for Eskom to build the new power themselves (presumably about ZAR 1,38/kWh) and compared that with what it costs to buy from IPP’s (ZAR 0,89 for wind). In such a case it would have been abundantly clear that wind power saves the consumer money.
A third reason why the Eskom analysis is erroneous is because it fails to account for or mention the social and enterprise development spend that the renewables industry undertakes - but other generators do not. In terms of the “rules of the game”, any renewables IPP wanting to bid under the REIPPP must ensure 3-5% of ownership for local communities. This is an excellent initiative but needs to be financed. Further, 1 - 1.5% of turnover must be spent on socio economic development, preferably within the immediate radius of the project (usually rural areas). A further 0.6% of turn over must be spent on enterprise development – most often this will target education and skills development. These amounts become very significant over the project lifetime and are likely to make a strong contribution towards community upliftment, job creation and social development. As an example, a community trust in the later years of a large wind farm project might earn dividends in excess of ZAR 20 million per annum.
The members of the renewables community are naturally extremely upset by the erroneous message that has emerged regarding renewables through the MYPD3. There is indeed a line of thinking that asserts that the confusion has been wholly intentional on the part of Eskom. The theory goes that Eskom above all else is intent on recovering its monopoly position in the market – for this reason the implicit yet erroneous line saying “you can have IPP’s, but it’s going to cost you.” For this reason the utility’s insistence to model a scenario where they build 100% of all power going forward and for this reason their insistence on building an investment grade credit rating at the expense of the sovereign rating – it would create the situation where in 5 – 7 years, only Eskom can build new generation assets.
While the level of frustration amongst renewable energy proponents is understandable, one has to give Eskom the benefit of the doubt. Ever since applying for the World Bank loan to co-finance its new-build and attracting criticism for its lack of renewables, Eskom has repeatedly stressed its commitment to renewable energy. Its lumping together of IPP’s in its revenue application was clumsy but probably not malicious – as was the cost comparison of new energy procured from IPP’s with doing noting and starving the economy of the power.
On 19 December 2012, a Ministerial determination was gazetted that places the entire responsibility for building about 10,000 MW’s of power of various kinds (renewable and otherwise) on the shoulders of Independent Power Producers. This implies that the die is cast – a fundamental decision has been made to involve IPP’s in the future of the South African economy. We needn’t have the debate any more - IPP’s are here to stay. In the case of wind IPP’s, the benefits to the electricity consumer and the country at large are likely to be very significant.