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Eskom 'blatantly distorted' renewable energy costs

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 16 Jan 2017
The initially high cost of wind and solar PV was necessary to bring SA to a point where they are now the cheapest source of new build electricity, say industry players.
The initially high cost of wind and solar PV was necessary to bring SA to a point where they are now the cheapest source of new build electricity, say industry players.

Power utility Eskom is being accused of blatantly distorting the facts associated with the cost of renewable power purchases.

Cape Town-based environmental and climate change non-profit organisation 'Project 90 by 2030', together with the South African Renewable Energy Council (SAREC), and various independent energy bodies, have come out in strong opposition to Eskom's claims that renewable energy posted a net loss of R9 billion in 2016.

Eskom arrived at this figure by using a methodology developed by the Council for Scientific and Industrial Research (CSIR), which showed the economic benefit of renewables in the first six months of 2015 to be almost R4 billion.

Cheapest source

Richard Halsey, a member of Project 90 by 2030, says Eskom claims renewable energy is causing a "net loss to the economy", but if one looks into the future and beyond vested interests, it is easy to see renewable energy is now the cheapest source of new build electricity and getting cheaper, while coal is becoming more expensive financially, socially and environmentally.

He explains that in early 2015, the power system was constrained, hence diesel was used in open cycle gas turbines to prevent load-shedding.

The CSIR methodology was specifically designed to measure the immediate fuel saving effect of renewables in such circumstances, Halsey notes. He adds that in 2016, there were no power system constraints, and in fact, as per its media statement, "Eskom currently has surplus capacity until 2021".

According to Halsey, the CSIR methodology used in 2015 was not appropriate for use in the different circumstances of 2016, and it is misleading to extend the financial figure to something other than its intended purpose.

"In any case, renewable energy did carry a reasonably high cost in 2016, but this must be put into context and we must ask two critical questions - what are the long-term benefits of this higher cost? If we want to get the full picture, and a sound comparison of coal and renewables, what is the true cost of coal?"

Eskom's announcement raises important issues that need to be aired in the current energy debate in SA, says Richard Halsey, a member of Project 90 by 2030.
Eskom's announcement raises important issues that need to be aired in the current energy debate in SA, says Richard Halsey, a member of Project 90 by 2030.

Eskom's announcement raises very important issues that need to be aired in the current energy debate in SA, Halsey says.

He notes that initially high renewables tariffs are a developmental cost. The renewable energy that Eskom refers to in its media release is purchased from independent power producers (IPPs).

"Through the national renewable energy programme, there have been a number of bidding windows (BW). During this process the cost of solar photovoltaic (PV) dropped from R3.65/kWh in BW1 to R0.62/kWh in BW4 expedited. Wind power dropped from R1.51 to R0.62 per kWh over the same timeframe. Coal IPPs come in at R1.03/kWh, and Eskom's new Medupi and Kusile power stations have current levelised cost of electricity estimated at R1.05 and R1.17 per kWh respectively.

"While a proper comparison should be across all the IPPs, however you look at it, wind and solar PV are now cheaper than coal for new build electricity production."

Price drop

He argues that to get to this point, there needed to be support for, and investment in renewables. "This is what caused the rapid drop in prices, but there was, and still is, a cost to that. The electricity Eskom bought from renewable energy IPPs in 2016 uses the higher tariffs from BW1 and BW2. This means the snapshot figure seems high right now, but as more wind and solar PV come on board at R0.62/kWh (or less), the average cost paid by Eskom will decrease.

"The initially high cost of wind and solar PV was necessary to bring us to a point where they are now the cheapest source of new build electricity. This high starting cost was required for creating a better long-term energy source ? we are paying off the technology learning that will contribute to a more resilient economy in the future."

Apart from the external costs of coal, he says it makes plain financial sense to invest in renewables for a secure energy future.

The CSIR has since issued a statement saying the real value of the projects arising from the first three bid window lies in the cost reductions achieved for solar PV and wind to 62c/kWh, which is 40% cheaper than new coal.

"In the current situation of excess power, we are faced with a choice between coal and renewables," Halsey says. "Eskom argues that less renewable energy should be bought from IPPs. From an environmental, human health, climate change and long-term financial standpoint, the real answer is to use less coal.

"While the international trend is to move towards renewables, Eskom, with its vested interest in coal, is fighting this at every turn. Evidently, what is best for the Eskom business model is not aligned to the national interest, which highlights the problem with having a monopoly in the electricity sector."

Long-term benefit

According to SAREC, these reductions would not have been possible in the absence of the competitive bidding associated with the Renewable Energy Independent Power Producer Procurement Programme.

"By taking a short-term view, Eskom have deliberately distorted tariff effects. Government's decision to invest in a renewable power purchase programme stands to benefit the country's economy in the long-term," says Brenda Martin, chair of SAREC.

In addition to significant tariff decline over the past four years, SAREC says in 2016, renewable power plants produced roughly 6TWh. The entire bid window four solar PV and wind projects, for which Eskom's signature under the PPAs is outstanding, will produce 9TWh/yr.

Simply put, it notes, this shows that for round four projects, the country will be paying 45% less each year for 50% more energy, compared to the projects already operational. These new renewable power projects will, therefore, be almost cost-neutral from a purely fuel-saving perspective.

"Any consideration of whether renewable power has cost or benefited the South African economy should look beyond short-term cost-avoidance, to long-term benefit and proven cost reductions over time. For example, while the first three bid rounds of solar PV and wind have resulted in tariff payments of roughly R12 billion in 2016, the fourth round of solar PV and wind projects will trigger tariff payments of merely R6.6 billion per year," Martin concludes.

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