SA needs to diversify energy sources to deliver
The country is not taking advantage of its clear lead in solar and wind resources
The Integrated Resource Plan (IRP) 2018 is being finalised amid yet another electricity crisis in SA. And the agenda at the UN-hosted climate talks offers a sober reminder of the challenges the world faces in tackling a warming planet.
Both have a bearing on how SA secures its energy needs up to 2050. However, in a dynamic and rapidly changing sector globally, SA appears to still be grappling with the basics instead of taking the lead in resolving key issues.
SA has a wealth of solar and wind resources. Studies by the Council for Scientific and Industrial Research show wind farms using only 0.6% of SA’s land mass could generate our required 250TWh/yr of electricity. A simple analysis of solar irradiance done by RMB shows that solar PV (photovoltaic) plants covering less than 1% of the Northern Cape land could generate SA’s power needs.
Though initial projects had higher feed-in tariffs, prices have dropped at a far better rate than could have been expected, with current bid rounds for solar PV and wind projects coming in at about R0.65c/kWh in the renewable energy independent power producers programme (REIPPP). This is now lower than the levelised cost for a new coal plant and will no doubt beat those for new gas power plants.
The more competitive pricing reflects not only global economies of scale reached by solar PV and wind turbine suppliers, but also the quality of SA’s wind and solar resources.
But is SA building the full supply chain capability to localise construction and operations of solar PV and wind-power facilities?
Unfortunately, stop-start procurement from independent power producers (IPPs) has resulted in the closure of assembly facilities and training and development centres and severe stress in the construction industry. A priority of the IRP 2018 should be to create consistent demand through the continuous procurement of additional PV and wind power.
Though the manufacturing of PV wafers or complex wind turbine components is unlikely to achieve scale off domestic demand, a programme of offsets for the assembly of PV panels or wind turbines both for local use and regional export would be a good start. A sizable installed base would also allow for the assembly plants to provide replacement panels.
SA has committed to promoting renewable energy as part of its efforts to reduce greenhouse gas emissions. However, a drawback is the variability of renewable energy. While SA has procured several solar thermal systems that are able to store energy, they are able to generate power only for a two to three-hour period from the stored energy. Therefore, a grid wholly powered by wind and solar sources would lack the necessary stability and predictability of supply. Short-term variability as a result of wind gusts or cloud cover can, to some extent, be balanced across a portfolio of sites.
A long-term solution is necessary and new developments in battery technologies, though still at an early stage, look promising. SA should consider procuring battery storage, perhaps bundled with new solar or wind generation or separately as an ancillary service. These could involve capacity balancing, frequency regulation, reactive support, spinning reserve or storage. The government could look at offering incentives to make investment in and research into battery storage attractive.
For long-term and greater balancing of the grid with a larger proportion of renewables, the draft IRP 2018 proposes 8,000MW of gas power from independent producers to be procured through a Gas2Power Programme.
Gas turbines typically have fast ramp-up times and can provide intra-day or long-term seasonal balancing of the grid, but that flexibility comes at a price. A mid-merit or load-following plant with 35% average capacity factor would generate power at a 40% premium per kilowatt hour compared to a base-load plant with 85% capacity factor, as the capital equipment needs to be paid for no matter how much or how little power is dispatched.
In addition, gas is difficult to store so most supply agreements have a take-or-pay element, which means their use needs to be reasonably predictable.
The Gas2Power programme could be invaluable in assisting the country develop a gas industry. As SA currently has no primary gas resource, a sizeable and predictable demand from independent gas producers would allow for the importation of liquefied natural gas (LNG) and the development of regassification terminals.
However, importing a fuel priced in US dollars and subject to the dynamics of international supply and demand has the same drawback we face on the importation of oil/petrol, as the gas price will be passed on to consumers through the tariff. For instance, 8,000MW of mid-merit gas-fired power will probably require R17bn of LNG a year if we calculate the cost at an estimated $8/mmbtu with the rand at R14/$. A simultaneous increase in the LNG price in US dollars and weakness in the rand could have a substantial effect on the cost of power sourced from gas IPPs. Nevertheless, as part of a diversified energy mix ways could be devised to manage this.
But let’s not forget coal — our current cost-effective and abundant source of primary energy for baseload power. It doesn’t have the drawback of being priced in dollars and the coal industry supports critical jobs. However, from an emissions and water-usage perspective, the old power stations run by Eskom are very much out of favour. Sadly, Eskom’s financial flexibility to drive the clean-coal agenda in SA and keep the industry alive is clearly limited.
Recapitalising Eskom through the sale of noncore assets could free up some capital, allow Eskom to refocus on operating newer coal-fired power stations and drive the clean coal agenda to save the coal industry in SA.
Rather than ploughing more money into extending the life of old power stations with high maintenance costs, should Eskom not be looking at investing in grid expansion and procuring power delivered by IPPs? The latter option means it will not have to take a risk on construction and operations and only pays for what is delivered.
The key is to have flexibility in the generation sources, let the technologies compete against each other and restructure the industry to allow for this competition.
Separating out the system operator to allow all generation sources fair access to the grid would enable the much-needed competition SA’s energy system requires.
Webb is senior transactor in infrastructure finance at Rand Merchant Bank.