Currently, Eskom supplies the vast majority of electricity to our country. It generates about 90 percent and buys the rest from local independent power producers (IPPs) or neighbouring countries.
Recently it was leaked that Eskom did not want to sign further contracts with IPPs. This has caused quite a ruckus in the media, and we need to look at why there has been such a strong reaction, and the motives behind this move.
The bulk of these IPPs generate electricity from renewable energy (RE). The programme has drawn investment of more than R193 billion in five years. It has been commendably transparent and received international acclaim. In the fourth bidding round, wind power came in at 69c per kilowatt-hour (kWh) (levelised cost of electricity), which is substantially less than the figure of 119c/kWh for Eskom’s new coal-fired power station Kusile, if it is ever completed. Remember, the price Eskom pays for IPP electricity will not increase by more than inflation, as it is fixed by the contract.
By contrast, Eskom’s own electricity generation costs depend on Eskom’s own management and efficiency. Also, private investors take the risk of construction cost overruns for IPPs, unlike the case of Eskom’s power stations where these costs are passed onto the customer.
Mixed messages
When presenting their annual report, Eskom chairman Dr Baldwin Ngubane said: “South Africa’s energy mix is expected to shift considerably towards renewables over the next two decades.”
However, chief executive Brian Molefe then stated that renewable power “just raises Eskom’s costs”, which was rather odd considering the continued downward trend in their pricing relative to coal and nuclear. His justification is that Eskom is forced to buy power from IPPs at the times of day when demand is low, which actually just highlights the inflexibility of coal-fired power stations, as these need to run all the time.
The IPPs also gave a net benefit to the economy to the tune of R4bn in the first six months of 2015 alone, according to a study by Council for Scientific and Industrial Research (CSIR).
A few days after the IPP announcement, Eskom’s group executive for generation, Matshela Koko, then proclaimed that “Eskom embraces renewable energy”, and that “renewable energy projects are not a threat to the Eskom business case, they complement what Eskom is already doing”. Evidently Molefe and Koko don’t have the same spin doctor.
Koko then went on to write: “South Africa requires a base load solution in its energy mix, and this cannot come from coal due to South Africa’s COP21 commitments. It can only come from a nuclear energy source.”
Clearly he hasn’t read the research from the CSIR, which shows that renewable energy models, plus natural gas, are actually a better base load option than new-build coal or nuclear.
So what is going on here? Why are there mixed messages coming from Eskom, and why are they trying to move away from such a successful RE programme and promote nuclear? Let’s take a step back and look at the bigger picture.
In 2015, the global investment into renewables was more than double that into coal. In terms of new installed capacity, RE was more than all coal, gas, large-scale hydropower and nuclear, combined. While the rest of the world clearly sees that renewables are the way of the future, Eskom is suddenly wanting to pull out.
Here are two main explanations. The first is that IPPs are starting to undermine Eskom’s monopoly on energy generation. These IPPs represent that most feared by any monopoly: competition. The second is that the IPPs are even further reducing the case for nuclear as a national requirement. If the new nuclear build were to go ahead, Eskom would stand to profit from it.
Sole player
1. Competition from renewables
For many years, Eskom has essentially been the sole player in terms of the generation, transmission and distribution of electricity. When the IPP programme started in 2011, load shedding was still on the cards, and the utility was eager for extra sources of power.
Since the RE-IPP programme has exceeded expectations, it is now threatening to take an increasingly large slice of the generation pie. This is evidenced by additional determinations from the Department of Energy on the amount to be procured nationally.
Due to the economic downturn and higher electricity prices contributing to lower electricity demand, Eskom currently has enough supply leeway (at least for immediate future) to try ward off the competition. IPPs retain the revenue from electricity sales, and Eskom just provides transmission.
This is a fundamental shift from the status quo, and now that RE-IPPs are really taking off, Eskom wants to apply the brakes to keep their current model going just a little longer. In fact, Eskom even acknowledges this in their 2016 integrated report: “The rise of IPPs in the South African market creates uncertainty about our future role in the energy sector.”
2. Nuclear tussle
While a few climate change deniers are still making a noise, even Eskom (as one of the highest carbon dioxide emitters in Africa), has acknowledged the need to transition to a low carbon economy. So coal needs to be phased out in the long term.
Now, since Eskom already has one nuclear power plant in Koeberg, it plays into their hands to push for more. However, even if you ignore the safety and environmental concerns, and the vast construction times, nuclear just does not make economic sense for South Africa.
A recent study by the University of Cape Town specifically looking at the local situation confirmed this. Even France, which has long been the international champion of nuclear power is scaling it down. Nuclear has had its role in world development, but it is no longer the front runner for low emission energy generation. That title now belongs to RE, as its rapid deployment on both a small and large scale across the world illustrates.
The snag is that the state has made it clear that it supports nuclear, and the state also owns Eskom. Since the IPPs are now making the case for a new nuclear fleet even weaker, the IPP announcement is hardly a shock. We can expect plenty more pro-nuclear talk from Eskom in the months to come.
Another fundamental issue here is the complete absence of objective and up-to-date energy planning at a national level. The 2010 Integrated Resource plan (IRP) which deals with electricity, has not been updated every two years as it is meant to be. Molefe accidentally shot himself in the proverbial by pointing out that the push for renewables was based on the out-of-date IRP. Exactly.
If the IRP were objectively updated with the latest costs and technologies, would the case for RE not be even stronger and that for nuclear weaker? In this regard, we must be aware of the process called “policy adjustment”.
Essentially if the new IRP does not suit the ruling agenda, it can be “adjusted”, ostensibly for reasons of practicality. The extent of the “adjustment” will all be rather murky as the public won’t see the draft version prepared by scientists and energy modelers.
For now, Finance Minister Pravin Gordhan has pointed out that policy around renewables is not dictated by Eskom, and the Minister of Energy has also confirmed that the IPP programme will continue and that 17 800MW of RE power will still be added to the energy mix by 2030. Regardless, what we urgently need is an unbiased, and un-doctored electricity plan for South Africa.
For Eskom, as a monopoly, the rise of renewables as competition is a problem. For our country and its people, renewables will be a vital part of our future energy solution. Therefore, the government, as the main shareholder in Eskom must ensure that it does what is in the best interest of all of us, not a corporate agenda.
The future of energy is that of decentralised models of energy production with renewables as a key component. This is exactly what Eskom is now trying to turn away from.
It seems this move to shun further IPP contracts is little more than a political move to save a few corporate hides. Last financial year, the 11 Eskom directors split R18.3m in bonuses alone, so evidently being part of the energy incumbency can be lucrative if you are at the top.
The most important aspect is what action to take. Unbundling Eskom so that the main functions of electricity generation, transmission and distribution are each done by the entities most suited to do so, is the logical course of action.
* Richard Halsey is a member of Project 90’s policy and research team.
* The views expressed here do not necessarily reflect those of Independent Media.
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