Renewables must line up for energy race and show competitive spirit

Cost will always be a factor in determining SA’s power mix — nuclear needs to be given a run for its money

The announcement by Energy Minister Mmamoloko Kubayi that the nuclear build programme is still on the table and the fact that previous international agreements will be renegotiated according to due legal process is at the centre of intense public discourse.

However, this focus is fast being overtaken as support for renewables gains momentum and the least-cost scenario (no nuclear) gets qualified support.

The outcome of the Integrated Resource Plan 2016 detailing the forward supply-demand balance is pending after further written submissions. We await the results of the adjudication and number-crunching of the final mix of different technologies and their respective market share requirements.

Although it is generally accepted that electricity will be decarbonised, the intense debate on the way forward as a mix of renewable and nuclear has gained momentum, with much diverse opinion among the proponents for the technologies.

The Council for Scientific and Industrial Research’s (CSIR’s) “least-cost power option” excludes nuclear in its energy mix. This follows a detailed cost analysis of a few scenarios by its Energy Centre. The least-cost mix option comprises renewables, mainly wind and solar, and nonrenewable gas.

There has been little detailed cost-effect analysis of renewables internationally, but this has recently been provided by way of the German experience, which targets this specific mix. Germany has been referred to as a “lavish first-mover spender” that in 2016 resulted in about 32% of electricity from renewables (quite exceptional by global standards).

Equally important are the country’s plans to phase out nuclear by 2022. Electricity will also be decarbonised and Germany’s ambitious carbon emission targets are a decrease of 40% by 2020 (one of the boldest in the world) and 80% to 95% by 2050. Following Germany’s experience, there are a number of “second-mover” countries such as China, the US and India that are spending huge amounts on renewables.

An excellent discussion of this in Fortune magazine recently included an analysis of the effects of Germany’s spend on the renewables programme. To move solar and wind from niche technologies to mainstream has required significant subsidised spending that has resulted in visible signs of economic strain on the economy.

Although the Germans have used this subsidy approach, they now intend trying the auction process to rein in the costs. The German ministry for economic affairs and energy director-general Thorsten Herdan stated earlier this month that the country’s photovoltaic plants can generate electricity at a cost of 97c/kWh (converted to rand). The first auction on May 19 reduced this figure to an average bid of 80c/kWh — a significant downward movement on price.

The effect of the subsidy approach is evidenced by the increase in the average German household expenditure on electricity, which went up by 50% from a base of €1,050 in 2007 to 2016.

Germany spent about €25bn on renewables in 2016, of which more than 90% was paid for by a surcharge on electricity bills. In addition, the effect on the traditional utilities is profound: the plummeting share prices of Germany’s large energy companies are the end-result.

On the positive side, Germany’s grid system can handle the intermittency issue at significant renewable market share (32%). Herdan has stated that “our grids are more stable than ever”. Whether this will still be valid at much higher levels of renewables remains to be seen, but German engineering is well-known for its impeccable standards.

Also of considerable importance in the fourth industrial revolution environment and the “digital” reduction of jobs is the increase in employment by using renewables. Job levels quoted for renewables are at 330,000 in Germany. Large enough.

Of further significance with the German experience and cost of electricity at 97c/kWh is the gap between the low auction bids reported elsewhere. For example, Chile (40c/kWh) and the United Arab Emirates (30c/kWh).

The CSIR is quoting current figures of 62c/kWh for wind and solar. In October 2016, Eskom former acting CE Matshela Koko said the cost of renewables to Eskom for the first six months of the 2016-17 financial year was 218c/kWh, while the comparative Eskom average selling price was 89c/kWh.

Implicit in this is that renewables are too costly to be considered as the way forward when compared to nuclear.

Also implicit in Koko’s figures is a lack of proposed reduction in bid costs going forward. A CSIR working document released in January indicates the actual tariff price at various bid windows: R3.55 for bid window one, R2.18 for bid window two, R1.17 for bid window three and R0.62 for bid window four.

This would suggest the initial high cost of renewables (on long-term contracts) can be regarded as an entrance ticket. Scale of operation is always important in introducing new technologies from niche to mainstream in addition to the cost reduction as a function of cumulative production — classic Boston Consulting Theory of the 1970s.

By comparison, reported figures from the October 2016 CSIR Windaba in Cape Town for new base-load coal and nuclear are at R1.51 and R1.17/kWh (although a recent public relations pitch for the nuclear lobby suggests a level of 80c/kWh for new nuclear and an operating cost for Koeberg of less than 40c/kWh).

So there is certainly merit in an energy plan involving renewables (without nuclear), with the advantage of renewables being built at incremental bites rapidly to follow the supply and demand balance easily without the need for major capital costs.

It might be sensible to speculate that if the Medupi discounted cash flows were to be recrunched using the ~300% overspend and many years of delay in construction, the efficiency with which the capital was used may well show a negative return on investment (a moot point: is that why the price of electricity had to be increased drastically?).

Returns on investment are particularly sensitive to the first years of expenditure because of the discounting mechanism. That is, major capital expenditure plants need to be built near budget and on time to generate the positive returns on investment presumably calculated in the project report.

This is particularly important when alternative competitive technologies exist, as with renewables and nuclear today. But the question is: can Eskom build new major nuclear plants on time and within budget?

While the German decision to use a subsidy approach rather than a bidding or auction process is not known, the need to rein in the costs of the subsidy approach is receiving urgent attention. It remains to be seen whether second movers such as the US, China and India will follow a similar commercial model with a successful track record of prices competitive with nuclear.

Arising out of all this is that renewables should be a doable path for SA to reduce this cost (of renewables) to Eskom. Without this, the nuclear build option will continue to enjoy Kubayi’s favour.

Unless renewables can show a track record of getting the scorecard in SA down to those of coal and nuclear, it is difficult to fault the government’s logic of pursuing both. The bid window four figure certainly suggests that, in theory, it should be possible to get this scorecard down.

To use a cricket analogy: creative brilliance in the nets is fine enough, but scoring a triple century out in the middle against, say, England is a different matter – ask Hashim Amla.

It certainly makes sense that the question of the market structure needs to be tackled if renewables (together with gas) were to be given the sole nod and nuclear and coal phased out. W(h)ither Eskom?