Cheaper renewable energy in US shows up Eskom’s nuclear folly

Power station under construction at Hinkley Point in England will give true picture of cost overruns

In January 2013, a study commissioned by the Edison Electric Institute predicted utility companies in the US would fall into a death spiral as electricity consumers installed rooftop solar panels to make some or all of their electricity for less than it cost to buy power from the grid. The companies would sell less electricity and they would have to increase tariffs to meet their fixed costs. Higher tariffs would see more consumers defect from the grid, particularly as solar photovoltaic (PV) panels were becoming cheaper and more efficient. That would lead to still higher grid prices and more defections. In other words, a death spiral.

Well, it did not happen, and we can learn much from examining the tactics used by the utility companies to escape the descent into bankruptcy. As they saw it, the first problem was net metering, a scheme in which home owners could feed the surplus power from their PV panels back into the grid. If, for instance, a customer used 1,000 units of grid electricity and fed back 200 units from his solar panels, he would pay for only 800.

Clearly, net metering would erode revenues. The utility companies argued that they were in the business of selling electricity and not buying it from their customers.

Net metering, they said, was also unfair to normal customers who would, in effect, be subsidising the rooftop brigade. And those subsidies would increase as tariffs were raised to compensate for lower sales.

To deal with the problem, they persuaded some state legislatures to restrict the feeding of surplus home solar electricity into the grid and they tried to curb the subsidies that had been introduced to promote renewables.

This undermined the economics of rooftop solar and made it less attractive. When this legislation was introduced in Nevada, for example, Solar City, the leader in the field, pulled out of the state. But it was a short-term measure. The utility companies understood that panels would continue to improve and become cheaper. In addition, a new generation of lithium-ion batteries appeared with the potential to make off-grid electricity a practical answer to rising tariffs.

Since 2007, PV solar prices have decreased by 80% and prices continue to fall by 26% every time the total output of the industry is doubled. Wind turbine prices are falling by 19% every time output doubles. New solar and wind farms now deliver electricity more cheaply than any new gas, coal or nuclear power station. The utility companies realised that the only way to compete with PV solar panels was to use the same technology and to build their own solar farms to feed cheap electricity into the grid. In future, the competition would be between grid solar and off-grid solar, or distributed generation as the Americans call it.

They also understood that the economies of scale would favour them rather than the smaller and more complicated rooftop projects. In the past few months, they have been proved right as prices for solar farm electricity have fallen further; the most recent auction promised electricity at roughly 35 SA cents a kWh. That is one-third of what electricity from Medupi and Kusile will cost.

So, when Eskom rejects new solar and wind electricity, it is doing exactly the wrong thing.

It should be insisting on more renewable energy to subsidise the first schemes (which were expensive) and, eventually, their new coal-fired power stations.

Instead, Eskom plans to invest in new nuclear power stations. To put it kindly, this is irrational at this stage.

Eskom believes new nuclear electricity will cost 80c-R1 a unit. Fat chance!

When the tenders for the power stations come in, they will seem pretty good, but there is an old saying in the construction industry that the way to do business is to “tender low and negotiate high”. That is one of the reasons big projects always go over budget.

Eskom will find that every little change or deviation from the original and rather skeletal plans will add to the costs and there will be other costs that somehow did not appear in the tender. And there will be snags and delays and Eskom will find that they are in a very weak negotiating position. They will be helpless as construction costs increase.

There is, however, one nuclear power station under construction that will give us a true picture of the real costs and that is Hinkley Point on the Somerset coast of England. It is being built by the French company EDF backed by the French government, with a third of the finance supplied by China. What is of special interest is that the British government, well aware of the history of nuclear plants running way over budget, insisted that it would pay for the electricity, not the plant.

The French have to take on all the construction cost risks, exchange rate risks and there will be no way to hide costs by, say, shifting them to other budgets.

Britain will pay a “strike price” of £92.50 per MW/h. That works out at roughly R1.60 a kW/h at current exchange rates. That will be closer to the real cost of electricity from a new nuclear power station in SA than any numbers claimed by Eskom or the government.

There are other factors that will see Eskom’s general costs soaring, such as the increasing price of coal and labour. These cost increases will be reflected in rising tariffs.

While this is happening, the cost of renewable energy will continue to fall. It is quite safe to predict that there will be large-scale defections from the grid. The solar panel industry, rejected by Eskom, will turn its attention to distributed generation. There will be more rooftop solar on office, factory and other commercial buildings. We can expect to see car parks covered with solar panels to provide shade for customers and cheaper electricity for shopping malls. It is already happening, but the tempo will increase exponentially.

The municipalities will be in trouble, too, but they have better coping mechanisms and they do not have the vast capital costs of building and maintaining power stations. Some municipalities are already buying electricity from consumers who have installed their own solar panels.

The price they pay is more or less the same as they would pay Eskom, so it really does not matter to them whether the power comes from rooftops or the grid.

And in future, surplus solar power prices could even be fixed at prices lower than the rising cost of Eskom power. What is clear is that smart municipalities will be buying less electricity from Eskom in future.

The American utility companies avoided the death spiral by embracing renewable energy to keep their costs down and compete with distributed generation.

Eskom is hell-bent on doing exactly the opposite of that; it has decided to embrace the death spiral.