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Transition Talk
Transition Talk
One of the most common remedies proposed for addressing Eskom’s financial and operational problems is that of reducing jobs at the State-owned utility. The argument is premised on the view that Eskom is massively overstaffed and that its headcount should, thus, be reduced to help lower costs and boost efficiencies.
Eskom is indeed a large employer, with about 39 000 people staffing its generation, transmission and distribution units (a total of 47 000 employees at group level), and its payroll made up about 15% of total revenues of R180-billion in financial year 2018/19. Even if the utility were to pursue aggressive downsizing, it is unlikely that it would be able to realistically reduce its headcount by more than 10% over the coming five years. Reducing its total payroll by 10% would, in turn, reduce its cost base by less than 1.5%.
Given the confluence of South Africa’s unemployment crisis and an energy transition that will require people with technical skills, more creative solutions than simply slashing jobs should surely be considered.
One proposal would be to abandon the idea of retrenchments entirely, and repurpose Eskom’s well-structured and effective technical training system to help build the pipeline of technical skills required for the energy transition.
Governments around the world are grappling with ways to reignite their economies and limit the duration of recessions precipitated by the response to the Covid-19 pandemic. South Africa is no different.
Naturally, the first response of the South African authorities has been to direct limited fiscal resources towards bolstering the capacity of the health system to respond to the pandemic. Thereafter, the focus shifted to schemes designed to sustain social-welfare support for the most vulnerable, while offering some income protection for wage earners and some support for businesses in distress.
Attention is now being given to how a combination of fiscal and monetary instruments can be deployed in a coordinated manner so as to reinvigorate the economy and reverse the recession.
Without question, government will be looking to infrastructure as one of the most important tools for stimulating growth and creating jobs. Several commentators are calling for an internationally coordinated effort to rebuild economies that have been ravaged by the coronavirus.
Coal, which has been the workhorse of South Africa’s electricity system for generations, will continue to play a significant role for years to come. Those coal-fired power stations that remain in operation will also need to secure continued supplies of the energy mineral and State-owned electricity utility Eskom has expressed a preference for doing this through long-term contracts.
There is a risk, however, that these long-term coal-supply agreements could lock in South Africa’s coal dependence at a time when many countries are starting to actively retreat from coal and when the international community is considering the imposition of trade and investment penalties against products with a high carbon footprint. Already, it is becoming increasingly difficult to raise bank finance for coal-related investments and this trend is likely to only intensify.
When released in October, the Integrated Resource Plan 2019 (IRP 2019) highlighted that South Africa would face an electricity capacity shortfall of between 2 000 and 3 000 MW for the coming three years, as well as relatively modest energy deficits (measured in gigawatt-hours, or GWh) over the period. Subsequent analysis by the Council for Scientific and Industrial Research (CSIR) points to a larger capacity deficit (up to 8 000 MW) and dramatically larger yearly energy shortages over the period, potentially rising from 2 000 GWh in 2020 to 4 500 GWh in 2022.
In other words, the CSIR is cautioning of energy shortages that are materially bigger than those of 2019, when South Africa experienced its worst-ever year of load-shedding. Last year, Eskom declared rotational power cuts equivalent to 1 350 GWh of customer demand shed, which cost the country anywhere between R60-billion and R120-billion, with the higher figure derived using the official cost of unserved energy of R87.50/kWh.
When the question arises as to what South Africa’s most abundant source of energy is, the usual answer is coal. South Africa has built almost its entire electricity system, as well as a good portion of its liquid-fuels industry, on the back of its plentiful reserves of coal. Further, it is estimated that there is still another 33 Gt (where 1 Gt is equivalent to one-billion tons) of the energy mineral yet to be mined, which equates to about 300 years at the current rate of domestic consumption.
In reality, though, South Africa‘s solar and wind resources are infinitely more ‘abundant’ than its coal resources. Instead of mining these renewable resources, however, technologies need to be deployed to ‘harvest’ them. To do this involves not only solar panels and wind turbines, but land.
Several large multinationals, such as Google and Amazon, are actively procuring renewable energy as part of efforts to transition their operations away from fossil fuels. Typically, these companies are seeking to take physical delivery of the clean energy produced by wind and solar plants to directly decarbonise their business processes.
Given that climate change is a global problem, however, it doesn’t really matter whether the decarbonisation takes place in the US, or Europe, or South Africa, as the effect on carbon in the atmosphere is the same. Hence, a case could be made for pursuing renewables projects in regions that will deliver the largest decarbonisation benefits at the lowest possible cost. In other words, decoupling the corporate’s electricity consumption from the physical renewables assets so as to deliver the largest climate-positive return for each dollar invested.
Germany’s electricity generation in 2019 year-to-date has been almost 47% based on renewables, a significant increase from only 9% in 2002. The cost of new renewables, specifically solar photovoltaic (PV) and onshore wind, are now by far the lowest of all new-build power-generator options. Why then are German household electricity prices some of the highest in the world? The average German residential household pays 30.22 euro cents (€ct) for a kilowatt-hour (kWh) of electricity, which is about R4.80/kWh.
The answer is twofold. First, Germany started to invest into renewables at a time when the technologies were still expensive. Because the assets are financed on the back of 20-year offtake agreements, whose annual payment obligations are charged as a renewables levy on the electricity end-consumers, these high costs will be felt in the power system until the early 2030s. Second, household electricity prices are generally not a very good proxy for the cost of electricity generation, because they include a number of cost items that are not related to the generation source of electricity and are additionally levied with consumption taxes and levies that are not related to energy at all. In Germany, that is particularly true.
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More Transition Talk:
Until relatively recently, much of the world’s decarbonisation attention was on the electricity sector. The focus was natural because, firstly, the sector is a large contributor to global greenhouse-gas emissions, and, secondly, it is relatively easy to transition. Especially now, where, after two decades of continuous cost reductions and technology improvements, carbon-free electricity from wind and solar photovoltaics (PV) is by far the lowest new-build option in almost any power system.
As a direct result of having eliminated the economic trade-off between clean and cheap power, electricity is emerging as the fuel of the future for the energy sector as a whole. Serious initiatives are now under way to deploy increasingly decarbonised and ultracheap electricity in support of decarbonisation efforts in sectors such as transport, heating and cooling, as well as the heavy-industry sector.
The argument that renewable-energy independent power producers (IPPs) are destroying Eskom financially is a gross misrepresentation.
Fact is: the State-owned utility bought electricity from renewable IPPs in financial year 2018/19 at an average price of R2.06/kWh. Fact is also: the standard average price at which Eskom sells to its customers is closer to R0.90/kWh. At first glance, this sounds like selling renewable energy at a loss. But it is not. Eskom sells the IPP electricity at the exact same rate as it buys it for.
The renewable-energy industry in South Africa is effectively at the very beginning of an S-curve. With 5% of South Africa’s electricity provided by renewables, the industry is nowhere near its ultimate size. In 20 years from now, it should be at least ten times larger than it is today. When looking back on the sector’s development, say in 2040, key measures of success will be not only whether the fleet of solar, wind and flexible generators is delivering reliable, low-carbon electricity at least cost (see also Engineering News March 22, 2019, page 49 ) and with the most jobs (see also Engineering News March 8, 2019, page 51 ), but also whether the South African ownership base of those assets is reflective of the country’s racial demographics.
Indeed, the transformative opportunity associated with building a new industry from scratch, such as renewables, is surely many times more potent than is the case in established industries, such as mining or financial services. Instead of inducing transfers from one category of shareholder to another in enterprises that are typically in a steady state, the embedding of ambitious transformation targets in an entirely new industry holds genuine potential for black shareholders and for the country.
As outlined in the previous Transition Talk column (see Engineering News July 12–18), while gas will become more important in South Africa’s future electricity system, its role should not be overstated. Even in the absence of other flexibility options – such as batteries, pumped-hydro schemes, demand shifting, biogas, or the more flexible use of the existing coal fleet – only a relatively modest amount of gas will be needed to balance a system in which the penetration of variable renewable energy (VRE) – that is solar photovoltaic and wind – is rising progressively.
Under the least-cost scenario outlined in the draft Integrated Resource Plan 2018 (IRP 2018), the gas-based electricity generation is only 3%, or 10 TWh of the total in 2030. In the new coal scenario, IRP3, or in the new nuclear scenario, IRP6, it is similarly small amounts of gas required to fill the gaps between variable demand and the respective bulk electricity source (VRE, coal or nuclear). The installed gas-fired capacity of gas engines and gas turbines in 2030, according to IRP1, is 14 GW.
Imagine the planning of the electricity system as a builder who wants to build a sturdy wall at the lowest cost. In the old world, the cheapest way to construct such a wall was to use rectangular bricks, akin to coal or nuclear in the power sector. To hold the wall together, expensive cement (midmerit and diesel-fired peaking stations) was applied relatively uniformly. In the new world, irregularly shaped natural stones (solar photovoltaic (PV) and wind) have become almost 50% cheaper than the rectangular bricks. To build a natural-stone-based wall, at points more of the expensive cement is applied to close the gaps, at other points less. The outcome is still a sturdy wall, but one which is now cheaper than the brick-based wall. It is what a power-system planner would call ‘least cost’.
South Africa’s industrial, transport, energy, trade and fiscal policies remain heavily geared towards the private automobile and, more specifically, ones powered by the internal combustion engine (ICE).
The Automotive Production and Development Programme, which incentivises the assembly of ICEs locally, remains the centrepiece of government’s industrial policy. The country’s transport strategy is equally supportive of the nation’s 12-million ICE fleet. Fiscally, meanwhile, fuel taxes remain an important revenue stream (over R60-billion in 2017/18) and make up more than 40% of the final pump price.
In the previous Transition Talk column (Engineering News May 17–23, 2019), I explored what it would take to depoliticise the process of drafting a rational Integrated Resource Plan (IRP) for South Africa. Such a plan will outline what investments need to be made in the electricity sector. The next step, which is the topic of this Transition Talk, is to procure the generation assets required in the plan in an efficient manner.
In regulatory terms, where prudence and efficiency are the two key objectives, the IRP stands for prudence (doing the right things), while the implementation of the IRP represents efficiency (doing things right).
Less than a decade ago, a least-cost IRP would have selected coal-fired power generators as the energy workhorses. Under this scenario, the coal plants provided both the bulk energy, or kilowatt hours, as well as firm capacity, or kilowatts (together with a few diesel-fired peaking plants to fill the gaps). The two largest cost items in the power system, energy and firm capacity, were hence provided by one technology, in the form of coal-fired power stations.
As South Africans know all too well, the processes involved in drafting and approving an Integrated Resource Plan (IRP) for electricity are emotive, opaque and highly political. It took nearly ten years to update the initial IRP 2010, despite the fact that the document lost relevance almost from the very day of promulgation, as the country’s electricity reality began diverging materially from the demand and technology-cost assumptions contained in the promulgated document.
Various update attempts fell short, particularly as the technoeconomic outcomes began clashing with the narrow interests of a powerful business and political elite. Even the most recent, comparatively coherent and transparent attempt at finalising an updated IRP (IRP 2018) fell prey to those able to use their political influence to usurp rationality in favour of self-interested lobby groups.
There is a way, however, for South Africa to depoliticise the IRP process and transition to a more transparent, technology-agnostic consultative methodology for determining the best technology mix to procure and, crucially, keep the plan up to date.
Presentation: Power fuels and its potential for South Africa
Presentation: Power fuels and its potential for South Africa
ENERTRAG South Africa CEO Dr Tobias Bischof-Niemz delivered a presentation on power fuels and their potential in the South African context at a pre-event to the Berlin Energy Transition Dialogue 2019 in Berlin, Germany, on 8 April 2018.
Click the Download Button Below to View the Presentation.
Presentation: South Africa’s IRP and Eskom restructuring
Presentation: South Africa’s IRP and Eskom restructuring
Dr Tobias Bischof-Niemz delivered a presentation on South Africa’s IRP and Eskom’s restructuring at the RMB’s SA Investment Forum in London, England, on March 6, 2019. Click Link Below to View the Presentation
IRP and Eskom- RMB Investor Forum – TBN_6Mar2019_FINALDownload
More Transition Talk:
More Transition Talk:
For thought leadership on South Africa’s Energy Transition, read Dr Tobias Bischof-Niemz’s Transition Talk column, published in Creamer Media’s Engineering News. Latest columns are listed below:
There has been no increase in overall electricity demand since South Africans first began experiencing load-shedding back in 2008. Yet the threat of rotational cuts remains, because of the precipitous decline in the energy availability factor of State-owned power utility Eskom’s coal fleet and the underinvestment in new generation capacity. New generation capacity is required urgently to restore the balance between supply and demand.
Under a steady-state scenario, such new supply would be added in line with Ministerial determinations for the procurement of various generation technologies as directed by an up-to-date Integrated Resources Plan (IRP). South Africa’s electricity supply industry is currently not in a steady state, however. In addition, the immediate supply deficit cannot easily be met through government’s centralised procurement system, as its rigorous processes take several months to complete, during which no construction is possible.
Hardly a week passes without a statement being made about the high costs of renewable energy in South Africa. Typically, the argument is made on social media and is framed to suggest that Eskom is buying electricity at R2.22/kWh from renewable-energy independent power producers (REIPPs) and that this is proof that renewables are much more expensive than other forms of electricity generation.
The proposition is at odds with the alternative narrative of onshore wind and solar photovoltaic (PV) being the cheapest form of new generation. It also conflicts with various analytical reports indicating that a new-build combination of wind, solar and flexible generators represents the least-cost electricity expansion scenario for South Africa.Advertisement
That such starkly divergent positions are able to coexist is obviously perplexing and is also resulting in a good deal of confusion about what direction South Africa should take with regard to its future electricity investments.
South Africa has correctly identified the lack of investment as a serious constraint to economic growth and job creation. President Cyril Ramaphosa has moved to address the problem by reaching out to domestic and foreign investors both informally and through the inaugural Investment Conference, which took place in Johannesburg in October 2018.
Without question, affordable and reliable electricity is a prerequisite for many investors, particularly in areas such as mining and mineral processing, where South Africa has a relative advantage, owing to its natural resources, as well as its well-developed capabilities in extracting, processing and exporting the mineral products. Likewise, the country’s reindustrialisation aspirations, as well as its plans to expand the agricultural and agroprocessing sectors, could well turn not only on security of electricity supply, but also on the pricing of that energy.
As outlined previously, an electricity system made up of solar photovoltaic (PV) plants, wind farms and flexible generators will employ at least 30% more people than a comparable energy-equivalent coal fleet (see the Transition Talk column in the February 22-28 edition of Engineering News). This net jobs advantage is, however, disguised by the geographically disbursed nature of renewable-energy investments.
There is considerable support in South Africa for the notion that a transition in the electricity system from coal to renewable energy will trigger a jobs bloodbath at both Eskom and the Mpumalanga coal mines. The opposition to renewables is underpinned partly by the notion that there are more jobs in coal than in renewables. A detailed analysis of the job numbers, however, suggests quite the opposite. It points to there being at least 30% more jobs in a fleet comprising solar photovoltaic (PV) and wind farms when compared with an energy-equivalent coal fleet.
hat Eskom needs to be restructured is no longer in question. In its current form, the organisation poses a systemic risk to the South African economy and is ‘too big to fail’. The real question is what form this restructuring should take. For sure, the generation assets need to be separated from the transmission system operator (TSO) and from the distribution unit. But is that enough? Can the generation assets be kept in one legal entity? There is the risk, for instance, that the animal instincts of the separate board and executive team presiding over a 40 GW-plus behemoth could prove impossible to tame. In the absence of the moderating influence of Eskom’s prevailing unified leadership structure, the generation tail could truly end up wagging the power-system dog and undermining both the TSO and the regulator.
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Looking for more?
Why Not Read The Book? Published as a Routledge Focus in 2018, South Africa’s Energy Transition explores the technical, economic and industrial opportunities associated with country’s transition to an electricity system in which coal is progressively replaced by solar and wind. It’s a Roadmap to a Decarbonised, Low-Cost and Job-Rich Future!
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