The letter from Matshela Koko ( Eskom embraces renewable energy ) deserves a right of reply. It is because that article is littered with so many inaccuracies and deliberately misleading statements, that a response is justified.
For some inexplicable reason, Eskom management - Mr Koko and Mr Brian Molefe - have embarked on a systematic process of trying to undermine the success of the renewable energy independent power producers (IPP) procurement programme in South Africa.
To suggest that Anton Eberhard and other analysts are distorting the facts is in itself a distortion of the facts. Each time Professor Eberhard or other market commentators state the facts, they cite their sources and back up their statements with numbers.
Difficult facts to dispute
The Medupi and Kusile projects are going to be the most expensive super critical coal-fired power plants ever built anywhere in the world. They have come in at about four times the original budget and it is unclear when they will both be fully commissioned. Both projects will be almost 10 years late when they reach full commissioning. The table refers:
You have pointed out that the Treasury had R200 billion of contingent liabilities on its books relating to the renewable energy IPPs. It would have been helpful had you clarified what this contingent liability related to. It is to cover two eventualities: firstly the probability that Eskom defaults in paying for the power that it buys from the renewable energy IPPs, and secondly to cover what is referred to as political force majeure, which is where political interference prevents the IPP from earning the revenue that it should.
As Eskom recovers the full cost of the renewable energy it buys from IPPs through the tariff increases that the National Energy Regulator (Nersa) awards it, a deliberate default from Eskom is the only way that the first of these contingent liabilities will ever materialise. Eskom, on the other hand, does not constitute a contingent liability on the books of the National Treasury. It is a very real, completely open ended and at this point in time, unquantifiable liability to the National Treasury as it slowly makes its way down the road to completing Medupi and Kusile for a total cost that is anyone’s best guess at this point in time.
Base-load energy source?
Renewable energy is not a base-load source of generation, nor is it intended as peaking power. Renewable energy is used around the world as mid-merit power to complement the energy mix. It is reliable but it is unpredictable, which is why it cannot be used as base-load or peaking power. It is, however, one of a number of generation alternatives that make up the overall energy mix in a country. In South Africa this also holds true. The majority of this country’s base-load energy comes from coal-fired power plants and Koeberg, while our peaking power needs are met through a combination of the Ankerlig diesel-fired plant in Cape Town, pump storage such as Ingula and the IPP peaking plants. To state that renewable energy IPPs are unable to meet the peak load energy requirements in this country is therefore misleading as it was never the intention that they should. It does Mr Koko’s job title a discredit as he of all people will know that the statement is factually incorrect. To then go and compare the concentrated solar power (CSP) tariff against Koeberg is comparing apples with pears. CSP at R2.00 per kilowatt-hour off-peak and R6.00/kWh at peak compares favourably against the Eskom-owned and operated Ankerlig peaking plant which costs about R3.50/kWh to run. CSP has no fuel, while Ankerlig needs diesel to run - go figure Mr Koko.
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The Integrated Resource Plan of 2010 made a commitment to renewable energy at a time when President jacob Zuma had made significant commitments to the reduction of carbon emissions in this country. Since then, the cost of building either a wind farm or a photovoltaic plant has come down to such a low level (62c and 72c per kWh respectively) that these two alternatives are the cheapest new-build options per kWh that this country has to choose from (source: CSIR). By comparison, Medupi and Kusile will cost between R1.30 and R1.50/kWh when they eventually reach full completion. This could very well increase depending on the cost of coal.
At no stage was it envisaged that we would install renewable energy sources in this country with battery storage to meet the base-load needs. Worth noting though is that battery storage and battery technology is developing at such a rapid rate that it is envisaged that by 2050 the majority of California will defect from coal-fired utility power to renewable alternatives such as PV battery storage and heating alternatives such as geothermal heat pumps (source: Rocky Mountain Institute). By definition, this means that as a large coal-fired power plant comes to the end of its useful life, it will not be replaced with a new one. Perhaps this global reality, which means that Eskom’s generating division may not exist come 2050, is what terrifies Mr Koko so much.
South Africa has a limited number of base-load alternatives. The first is coal, but for the reasons mentioned above and as correctly pointed out by Mr Koko, it is going to become increasingly difficult to fund coal-fired power plants. The second is import gas, the third is import hydro and the final one is nuclear. Import hydro and gas are cheaper alternatives than nuclear - despite this being proven to Eskom by pretty much every sector expert out there, the steely resolve with which Eskom and various politicians are now endorsing the nuclear programme, suggests that a far more sinister agenda is playing out now.
Can we afford nuclear?
Once the private sector (not Eskom) has finished building those projects that the Department of Energy has given preferred bidder status to (in the coal, gas and renewable IPP programmes), South Africa will find that it does not need to build nuclear power plants. From 2029 onwards the new-build needs of the country would be best served by import hydro and import gas power plants. This is the uncomfortable reality that Eskom now faces. Notwithstanding this uncomfortable reality, what will happen if we do decide to go ahead with the nuclear programme? We will be committing to buy eight 1200-megawatt nuclear power plants. Each will cost about R140bn to R150bn, resulting in a R1.2 trillion price tag. Once we sign up to the programme there will be massive penalties for cancelling it, so should we even consider signing up to the programme? Worth noting is that there isn’t a single third-generation nuclear power plant anywhere in the world that has been completed on time and/or to budget in the last decade. The R1.2 trillion will end up being a first estimate. Eskom has spent the last five years trying to raise the R250bn it needs to finish paying for the Medupi and Kusile plants.
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Funding
It still has not found the money. So how are we going to find R1.2 trillion to fund a nuclear programme? Pointing out this fact to Eskom is what cost Nhlanhla Nene his job and it will be left to Finance Minister Pravin Gordhan to make the difficult call once again. The blind support that Mr Koko and Mr Molefe have for the nuclear programme leave this country in a particularly precarious situation, particularly if the market speculation that Mr Molefe is going to be our next minister of finance proves to be correct.
As an active participant in the IPP programme, it is difficult to understand why there is so much bad press coming from Eskom, its chairman and its chief executive. Perhaps it is because the renewable energy IPP procurement process is such a success. Since 2012 close to R300bn of capital has been invested in the programme, more than 6300MW have been awarded preferred bidder status.
The renewable energy IPP programme is the most successful procurement programme ever undertaken by the South African government. It is held up globally as a model programme. It has been rolled out quickly and efficiently using funding from both local and international lenders. It is corruption free. The construction of the projects has come in largely on time and to budget. It is an inconvenient truth for Eskom that the same cannot be said about Medupi, Kusile and Ingula, all of which have experienced long delays, budget overruns and controversy.
If Eskom cannot get these three projects right, should it ever be entrusted to run a complex, vastly more expensive and difficult process? Experience suggests not. The private sector, on the other hand, has done everything necessary to suggest that it should be entrusted with the energy procurement needs of the country.
* Alastair Campbell manages a debt fund that lends to IPPs in South Africa.
** The views expressed here do not necessarily reflect those of Independent Media.
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