The monopoly Eskom enjoys allows it to restrict growth of competition

Nuclear has a serious competitor and cost analysis favours renewables if the nation commits to this route

At last, the energy minister has announced that Eskom must sign power-purchase agreements with renewable independent power producers (IPPs) by the end of October. The pressure on electricity producers to decarbonise, in line with the Paris agreement, makes it inevitable that there will be competition between renewables and nuclear.

The attempt by the nuclear lobby in SA to downplay renewables technology was, therefore, not unexpected. How else should we read the refusal by Eskom over the past two years to sign the latest round of bids from IPPs, to the chagrin of the renewables fraternity?

Something is afoot at the state entity and one need look no further than the bid window model that quantifies the effect of the initial high bid window values on the Eskom blended tariff to customers. With the South African model focused on the auction or bid window process, the costs start off relatively high and reduce significantly over time. The argument for the initially high figure is that industry infrastructure costs are needed to set up a renewables industry from scratch. It follows that growth resulting from this initial investment is needed to establish construction teams, legal teams, banks and finance houses in this business sector for the first time.

For example, the IPP Procurement Programme starts at R2.52 per kilowatt hour for bid window one and reduces to 82c/kWh for window four. The Council for Scientific and Industrial Research believes the current levelised cost of wind and solar is 62c/kWh.

Unfortunately, according to Eskom’s Matshela Koko, the initial high levels of windows one and two in SA have meant that the cost to Eskom for onward transfer to clients has resulted in a huge loss of R4.17bn for the first six months of the 2016-17 financial year. This loss checks with a calculation using the prices for renewables at R2.18/kWh and the blended electricity tariff at 83c/kWh for a loss of R4.21bn, which suggests that an incremental cost model approach is reasonably sound.

In looking at the instances, one should not forget that these are not once-off charges, but long-term supply contracts.

However, this high figure (R2.18/kWh) has also been used by some nuclear lobbyists to implicitly downplay the much vaunted promise of both solar and wind (renewables) technology as more costly. Better put, this seemingly large continuing loss in the context of the relative annual tariff increases requested by Eskom is a deception. If one does some ranging calculations to assess the effect of the incremental excess over the base tariff (which excludes renewables) as distinct from the blended tariff of 83c/kWh, it will indicate the effect of the incremental excess on the base to provide the blended tariff.

This is important for those nuclear lobbyists who believe that the high nominal figure of R2.18/kWh compared with the blended tariff of 83c/kWh suggests that renewables technology is intrinsically more costly. This high figure has also been mentioned by Public Enterprises Minister Lynne Brown in Parliament.

In summary, the key issue is that the incremental cost over the base tariff of 3,115 GWh generated by renewables (six months, 2016) is spread over a much greater six-month base load of 130,000 to 140,000 GWh. That is, the base tariff is the blended tariff minus the incremental cost of 2c-3c as the renewable penalty, namely 80c-81c/kWh. At 3%-4%, this increment is significant but very much less than the 16% per annum that Eskom requested from the National Energy Regulator of SA in 2014 for three years, and the subsequent media rumours of 19.9% for 2017-18.

So, the counterargument for the pro-nuclear pundits is that once the bid windows for renewables are lower than the current base tariff, at say 60c versus 80c/kWh, then this large annual charge will be offset and progressively reduced, provided we get down the track of renewables and do not hesitate or obsfuscate — which is what the current Eskom approach is doing.

If SA were to go to renewables, at say 60c/kWh for large increments of installed renewable capacity, the pressure to forego the installation of additional nuclear capacity will increase as we go forward. In terms of scale, solar installations are becoming large; the biggest Chinese solar operational capacity (Tengger Desert Solar Park) is some 1,500MW with a 3,000MW facility (Datong Solar) being built in three phases, the first 1,000MW already being built — a significant critical mass. It should be remembered that these MW ratings are capability figures for solar, and actual daily generation is typically about 30% of this.

It is understood that at present, SA is in an electricity oversupply situation (Eskom’s defence) and this is likely to continue for some time, given that Medupi and Kusile still have much of their capacity to be commissioned. However, the monopoly situation Eskom enjoys means it is in a position to restrict the growth of a competitive industry. All this despite the governing party’s continuing mantra of defeating monopoly capital.

Of course, in ignorance it might seem commercially odd to decarbonise electricity and not add nuclear capacity (Eskom’s two main production methods), then for Eskom to support its competitors with renewables and knock itself out of business, thus bending over backwards to self-destruct.

Is this the reason for Eskom’s reluctance to sign? We need to remember that renewables are enjoying a high-growth environment globally, albeit it in a tough competitive business, and the global milieu for nuclear is becoming a lot tougher. It certainly depends on a policy decision for the right way to go. What then is stopping Eskom doing renewables and forgetting about nuclear?

The crux of the matter for nuclear is that it now has a serious competitor in renewables after coal inevitably leaves centre stage due to decarbonising pressures. To survive, nuclear will have to reinvent itself.

Currently, the best example of decarbonising of electricity is that of China. The government recently cancelled 150GW of coal-fired power stations planned for construction by 2020. Compare this with SA’s total generating capacity of 40GW. The Chinese plan is to also shut down some 20GW of outdated capacity and maintain total coal-fired capacity below 1,100GW — about 30 times larger than SA’s total generating capability. Big numbers.

The current stalling to sign the next round of IPP projects should not be repeated going forward. But equally, the solar industry needs to play a constructive role in bringing down local prices to world levels to offset the initial high industry start-up cost.