First published in Cornerstone, Volume 4, Issue 4
By Rob Jeffrey, Senior Economist and Managing Consultant, Econometrix (Pty) Ltd
The three fundamental objectives of South Africa, and most emerging nations, are to address inequality, unemployment, and poverty. These objectives cannot be achieved by redistribution of wealth alone. They can only be achieved by raising the economic growth rate. A higher growth rate is dependent on having the correct public policies in place and having an adequate and growing supply of affordable electricity. In order to ensure economic growth, South Africa must develop its industrial base and therefore it is essential to supply electricity at the lowest possible cost.
In South Africa the major electricity supply company is Eskom. The major issue raised by Eskom executives in this debate concerns renewables. They have accurately described the fallacy and weakness of the primary renewables, wind and solar. These are highly variable, often supplying power when they are not needed and not supplying power when they are needed. As a result, these are expensive forms of energy production, yet the supply must be bought in terms of the purchase agreements at set prices. This has been the experience of Germany (under the “Energiewende” program) where the country sells unwanted electricity at a loss to other countries and purchases the required supply at a premium. These prices are in effect financial subsidies for wind and solar.
In Germany, they are fortunate that they have other major electricity-generating countries nearby; they can tap into electricity provided by nuclear power plants in France, coal-generated electricity in Poland, or hydro-electricity from Scandinavia. South Africa does not have that option. Due to these financial subsidies, Germany, aside from Denmark, has the most expensive industrial and household electricity in Europe. Consequently, Germany has now placed a cap on the supply of renewables and is in the process of removing all financial subsidies to renewable companies. What “energiewende” has clearly established is that wind energy and solar CSP are not technologies suitable for mass baseload electricity supply. This theme has been repeated in other countries such as Australia where their wind energy drive is a case in point and echoes what has happened in Germany.
The drive for “green energy” is slowing growth and enforcing poverty in emerging economies. In developed economies, it is causing unemployment, reducing living standards, and increasing energy poverty. This can be seen in the political backlash in Britain, the U.S., and even Germany. In these nations, affluent environmentalists argue that the cost is merited. They have the ear of financial institutions and governments. The institutions see secure profits because of guaranteed prices and subsidies, and governments can afford the subsidies because there are limited objections to “green” taxes. Green taxes can become a regressive tax with people on lower incomes having to pay relatively more than people on higher incomes. Consequently, renewables are in effect a tax on the poor.
In South Africa, concerns exist over plans to introduce massive windfarms totalling 60 GW spread across South Africa. It is deemed that geographically separated windfarms will ensure a more continuous supply of electricity. A wind profile study has been conducted across the country. This theoretical study held the view that somewhere in the country, the wind is blowing. This is not the experience of Europe and the UK where the average load factor from all onshore windfarms remains 30% or less. Electricity generation would still need to have back up for baseload power when delivery fails. As set out by the Council for Scientific and Industrial Research (CSIR), a full delivery plan for 16 GW of baseload electricity requires a total of 60 GW energy capacity consisting of onshore facilities (offshore windfarms have not yet been considered, as they are far too expensive) of 32 GW wind, 12 GW solar PV, and 16 GW of gas for consistent secure delivery of electricity. This full delivery plan for 16 GW baseload power would require more than 6000 kmof unsightly windfarms generally built on high ground to ensure maximum efficiency. More than 12,000 km of roads will be needed to service all the units and the landscape of the countryside would be criss-crossed by at least 10,000 km of additional transmission lines. They would also damage the local habitat, with extensive evidence from other windfarms of mortality to insect, bird, bat, and other flying life that are particularly vulnerable to windfarms. Windfarm developers in the planning stages must take adequate preventative provisions and actions to avoid habitat, ecological, and environmental problems.
The second major issue raised by Eskom concerned nuclear. The CEO of Eskom stated that baseload electricity should be provided by coal (presumably including other fossil fuels, primarily gas) and nuclear. The question remains, how much nuclear? Nuclear power stations can take up to 10 years and longer to build, and the upfront costs make a large build program unaffordable for a country such as South Africa. As an example, Britain recently approved the construction of the Hinckley Point nuclear power station project. The total cost for the 3200-MW Hinckley Point nuclear power station could be US$30 billion. In comparison, the new 4800-MW Medupi coal-fired power station costs an estimated US$14 billion and the initial, now installed, renewables 2310-MW program cost approximately US$12 billion.
Renewables in South Africa only have a load factor or deliver power 31% of the time, their total cost exceeds nuclear with load factors of 92% while clean coal-fired plants such as Medupi with load factors of 85% are far less expensive. Renewable capital costs have dropped substantially since 2011 and are currently far below the initial costs as set out above. The guaranteed delivered costs for wind-generated electricity are approximately 62 cents/kWh. A first assessment would indicate that wind is cheaper than its coal and nuclear competitors. However, based on this guaranteed delivered price and a load factor of only 31%, this guaranteed price effectively becomes a subsidized price as it is paid for whether the electricity is required or not. There are also increased costs due to a low load factor on transmission costs, and furthermore, greater distances are involved. As a result, the true total cost of wind power as a deliverable baseload dispatchable power source is significantly more expensive than coal-generated electricity. The cost is also greater than nuclear which, in turn, is also approximately 30% more than equivalent coal-fired electricity.
These significantly higher final delivered electricity prices would have a major detrimental impact on the economy. Increased electricity costs would slow economic growth and devastate the goods-producing industries—in particular, the key mining, manufacturing, agricultural, and agro-processing industries. These industries are important to South Africa’s export performance and employment growth, particularly among the relatively unskilled work force. By 2030, it is estimated that there will be 16 million new workers entering the work force. With low baseload electricity growth of only 2.5% per annum, due to the planned heavy reliance on renewables unsuitable for baseload power, GDP growth is unlikely to increase at more than approximately 2.8% per annum. At this growth rate, fewer than 6 million jobs will be created by 2030, resulting in unemployment growing by at least 10 million job seekers.
INDEPENDENT POWER PRODUCERS
The third major issue raised concerned the role of Independent Power Producers (IPPs). The point made was that Eskom would no longer sign new agreements with IPPs. According to Eskom, the issue concerned the guaranteed prices and offtakes of renewables, not the IPPs themselves. It would be uneconomic for Eskom to pay guaranteed prices without assurance that electricity would be delivered. This is economically, and from a business perspective, absolutely correct and there is now concern about the future role of IPPs. However, IPPs are essential for the future of energy provision and economic development of the economy.
Eskom is already a giant monopoly controlling generation, transmission, and distribution of the entire market, which cannot be allowed to continue in a market-orientated economy. Eskom generates, distributes, and controls through the grid close to 40,000 MW. By 2035, in less than 20 years, South African electricity demand is expected to increase to over 70,000 MW. The bulk of this electricity growth should be provided by IPPs to ensure a more competitive power market.
The existence of a mega-monopoly, whether state-controlled or privately owned, prevents competition and will affect negatively on the economy. The structure of Eskom in this process must be addressed. Eskom, one of the largest electricity utilities in the world, should be split into at least two, and preferably three, stand-alone independent operating companies: a generation company (Genco), a company responsible for the grid transmission and market operations (Gridco), and a distribution company (Disco).
Internationally, countries are increasingly privatizing and deregulating their electricity sectors to ensure more efficient management. The three companies, Genco, Gridco, and Disco, should be set up as three independent public-private partnerships with management firmly in the hands of the private sector. Genco would focus on baseload generation, replacing its aging fleet using clean coal technologies supported by major gas operations. This structure would allow the IPPs to flourish and bring in genuine competition free of all subsidies. This must include all generating, grid, and distribution subsidies. If subsidies are required, for example to encourage distribution and poverty alleviation, these must be government funded not company funded. Some difficult political decisions would need to be made in a transparent way.
The fourth major issue in the background of every decision regarding energy is climate change and the commitment to COP21. The outcome of COP21 was the Paris Agreement. What was important was not only what was agreed but more importantly what was not agreed.
Governments were able to negotiate a set of sound long-term global objectives. The Paris Agreement reflects a “hybrid” approach, blending bottom-up flexibility (to achieve broad participation) with top-down rules, to promote accountability and ambition. Importantly, the agreement asked for no firm commitments by any country. Many provisions establish common goals while allowing flexibility to accommodate different national capacities and circumstances. The reason for an objective or goal without binding obligations was simply that various countries were unable to reach national political agreement internally (e.g., the U.S.). Emerging countries were also not going to make firm commitments as they had other priorities such as high levels of poverty and/or had rich fossil fuel reserves. In summary, countries were expected to do what was in their best economic and financial interests. This is and needs to be exploited by all emerging economies with high levels of poverty and with extensive, relatively cheap fossil fuel resources.
ENERGY POLICIES IN EMERGING ECONOMIES
The emerging countries include the ASEAN countries, China, Russia, India, Vietnam, Korea, and Poland. Many of these countries are embarking on major expansions of coal and fossil fuels. They have determined that clean coal and gas are the cheapest, most efficient, and reliable sources of electricity to achieve their economic growth objectives and, in turn, poverty reduction, with replacement of aging inefficient power stations a major objective. Clean coal is globally recognized to be a cost-effective and efficient method of reducing emissions and reducing other pollution.
The 10 ASEAN countries are prime examples of countries using clean coal technologies. In these countries, electricity generation increased by an average of 7.5% per year, from 155.3 TWh in 1990 to 821.1 TWh in 2013. Fossil fuels generated 79.4% of ASEAN electricity in 2013. Coal-based electricity capacity is projected to increase from about 47 GW in 2013 to 261 GW in 2035, an average growth rate of 8.1%. In Vietnam, GDP growth is expected to average 6% per annum between 2015 and 2030. Coal generation will increase from 36% of electricity generation to 56%, increasing at 7.2% per annum. All these countries are expecting annual growth of over 5% for the next 15 years. South Korea expects growth in its power sector of 3.6%, the major proportion of which will be coal and gas. In Poland, electricity growth is also expected to be primarily coal-based generation.
Piyush Goyal, Minister of State with Independent Charge for Power, Coal, New and Renewable Energy in the Government of India, has stated, “We will be expanding our coal-based thermal power. That is our baseload power. All renewables are intermittent. Renewables have not provided baseload power for anyone in the world.” It is not surprising, therefore, that in India annual average electricity demand between 2000–2013 grew from 376 TWh to 897 TWh, most of it coal based. Coal-fired electricity is forecast to grow at over 4% per annum from approximately 166 GW to 500 GW by 2040.
In comparison, the average growth in “Electricity available for distribution in South Africa” as measured by StatsSA grew an average of only 1.7% during 1990 and 2015. Average GDP growth was 2.5% during the same period. Even worse, average electricity demand growth from 2000 to 2015 has averaged only 1.3% per annum. Over this period, the average GDP was 3.1% per annum. This higher economic growth was due to excessive growth in the services sector, primarily in the public and government sectors, not from the mining and manufacturing sector where growth was poor. The equivalent figures for the period 2008 to 2015 were electricity supply growth of only approximately 1.1% per annum and GDP growth of only 1.9% per annum. It is little wonder that South African GDP growth does not parallel other high-growth emerging economies. In terms of the IRP, electricity growth between 2015 and 2030 appears to be approximately 3.9%. However, because of the low load factors of renewables, real deliverable baseload electricity growth could be only 2.5% per annum. As a result, future average growth to 2030 is unlikely to average more than 2.8% per annum.
THE WAY FORWARD
South Africa is facing slow growth and lack of both domestic and foreign investment primarily in the mining and manufacturing industries. From a policy point of view, public policies need to change radically to make South Africa (a treasure chest of coal and minerals) attractive to such investment again. Planning for low baseload electricity growth is a self-fulfilling prophecy. Industrialized countries and their leaders need to recognize that the needs and requirements for emerging and developing economies are independent from their own with different priorities such as poverty alleviation.
Emerging markets need secure baseload electricity power at the lowest possible cost to give them a comparative economic advantage, whether that natural resource is oil, hydroelectricity, or a fossil fuel such as coal or gas. The developed world needs to recognize that, at this stage of technological development, fossil fuels in the form of gas and coal will continue to play a substantial role in providing the country’s major energy source. In a speech earlier this year, President Obama acknowledged that emerging economies such as India, China, and the ASEAN countries would be building coal-fired power stations out of necessity, but advised they should use clean coal technology.
It is time for South Africa to break away from the vested idealistic or financial interest driving the large renewable expansion schemes. They are not the panacea for the country’s future energy problems and growth. Nuclear and coal are the only sources of energy that can provide security of baseload electricity supply at internationally competitive prices. The fact that nuclear is capital-intensive upfront means that South Africa cannot afford a major investment in nuclear as the way forward. Nevertheless, if procurement goes ahead, it should be no more than a maximum of 3200 MW. The way ahead for South Africa lies in limited nuclear build, major new build, and replacement of relatively older coal-fired power plants with new clean coal power generation supported by major expansion of gas plants. It should be made mandatory to install solar PV on all new domestic houses and all business buildings. Tax incentives should be available to install solar PV on new and existing structures.
The South African economy cannot afford to restructure its economy and industry toward renewable energy nor can it afford the other structural changes this implies, including any form of carbon tax, either now or in the foreseeable future. Such a move will only increase uncertainty and further reduce long-term domestic and foreign investment. Carbon tax and massive renewable policies are poised to take South Africa in the wrong economic direction resulting in slow economic growth and increased unemployment. This will have major detrimental economic, political, and social consequences affecting the country for a generation.
The cost and burden of such plans always fall on the poor in terms of high unemployment, regressive taxation, and increasing poverty. South Africa already has these problems and needs to follow the lead of other emerging nations that are increasingly using coal and gas to pursue higher growth. Energy, electricity, and employment growth are the keys to South Africa’s future economic, social, and political prosperity, sustainability, and stability. It is time to put South Africa first.