Release
The past two weeks has seen South Africans, somewhat unusually, speaking in one voice. The accents of both messages and speakers may have differed at the NERSA hearings investigating Eskom’s MYPD3 application to NERSA to increase the cost of electricity to consumers, but there was a broad consensus that the requested increases of 16% for each of the next five years is unsustainable for the economy.
We heard mining and agriculture telling NERSA of job losses and South Africa becoming uncompetitive. At the other end of the spectrum we heard about quadriplegics requiring electricity to assist them in breathing at night. We all need electricity, and we need it at an affordable rate.
The NERSA hearings and the submissions it garnered were very informative for wind energy and the role of IPPs, especially when we consider that the second round of the Department of Energy’s Renewable Energy IPP Procurement Program (REIPPP) saw average levelized prices for wind being bid at 89c/kWh. This the latest price for new wind energy.
As against this, estimates for nominal new Eskom coal power range from NERSA’s 97c/kWh to Standard Bank’s estimate that Kusile will cost R1,38/kWh in 2019, when it is commissioned. The entire spectrum of estimated Eskom new coal cost thus falls above the actual cost for new wind power, and the inescapable conclusion is that the more wind power we build, the more money we save.
Add to this the University of Pretoria’s report of 2012 estimating the externalities of Kusile (the social costs of health impacts, water, climate change impacts, mining impacts) at between 97c and R 1,88/kWh) and it is clear that wind power’s real cost to the broader economy is about a half or a third of the cost of the power that Kusile will produce.
Eskom states in the MYPD3 that it is asking for a 16% rise in tariff annually, with 3% attributed to purchasing IPP power. Various speakers and commentators have erroneously equated “IPPs” with “renewables”, and the message that has reached the public is that renewables “subsidization” is the reason for Eskom‘s additional 3% increase in tariff.
In truth “IPP power” consists primarily of two very different categories of power. The first is the peaker plants – open cycle gas turbines that according to the MYPD will produce approximately 400 GWhs/annum at the extraordinary cost of R6,93/kWh . The second category is renewable energy, primarily wind power and solar PV, which in the second round of REIPPP procurement was procured at a weighted average cost of about ZAR 1,12/kWh.
It is thus clear that the bulk of the so-called “IPP cost” is due to non-renewable energy, but – due to the way the MYPD was written – renewables have been blamed for the aggregate effect.
Eskom analysis also fails to account for or mention the social and enterprise development investment that the renewables industry undertakes – but other generators do not.
In terms of the “rules of the game”, any renewables IPP wanting to bid under the REIPPP must ensure 2.5%-5% of ownership by local communities. This is an excellent initiative but needs to be financed. Further, 1 – 1.5% of gross revenue must be spent on socio economic development, preferably within a 50km radius of the project (usually rural areas). A further 0.6% of turnover must be spent on enterprise development – most often this will target education and skills development.
These amounts become very significant over the project lifetime and are likely to make a strong contribution towards community upliftment, job creation and social development. As an example, a community trust in the later years of a large wind farm project might earn dividends in excess of R 20 million per annum.
Ever since applying for the World Bank loan to co-finance its new-build and attracting criticism for its lack of renewables, Eskom has repeatedly stressed its commitment to renewable energy. Its lumping together of IPPs in its revenue application was clumsy but probably not malicious.
On 19 December 2012, a Ministerial determination was gazetted that places the entire responsibility for building about 10,000 MWs of power of various kinds (renewable and otherwise) on the shoulders of IPPs. This implies that the die is cast – a fundamental decision has been made to involve IPPs in the future of the South African economy.
We needn’t have the debate any more: IPPs are here to stay. In the case of wind IPPs, the benefits to the electricity consumer and the country at large are likely to be very significant.
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