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Head in the sand: Eskom fails in a land of cheap energy

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Renewables pose a threat to coal and nuclear, because wind and solar are undeniably cheaper forms of energy, argues Dom Wills.

This year Eskom turned 94 years old. But so far 2017 has been one of the most damaging years yet for South African's besieged power utility.

In 2008 and 2014 Eskom had to cope with load shedding and the power utility took a lot of heat for the rolling blackouts and the subsequent damage to the economy. Yet, during those years, Eskom was at least perceived to be the good guys doing a tough job.

This apparent positive spin led to many South Africans and businesses supporting Eskom's initiatives to cut energy consumption and increase efficiency.

In contrast, 2017 paints a bleak picture. When compared to 10 years before, the figures speak for themselves. In 2007, Eskom sold 218 TWh electricity for 18.33c per kwh at a 16.11% profit margin. A decade later in 2017, Eskom sold less power - 214 TWh electricity for 82.66c per kWh at a 0.5% profit margin.

Thus, in the last 10 years, the state utility has grown worse off. It is selling less power, for higher tariffs, at a lower profit margin. This begs the question whether solutions exist that could reduce Eskom’s costs and boost profit. And could Eskom implement these solutions?

Renewable energy success and shuddering halt 


The Renewable Energy Independent Power Producer (IPP) Procurement Programme operated under a competitive auction model. IPPs needed to be have the most competitive rates in order to secure a Power Purchase Agreement (PPA). This was arguably the most transparent and successful public-private partnership we’ve seen in South Africa, and the model has since been replicated all over the world.
 
The first round of renewables did not come cheap. This was due to the costs and investment needed to establish a renewable industry from scratch. However, the investment allowed unprecedented growth in an industry made up of construction teams, legal teams, banks and finance houses who were all doing renewables for the first time.
 
And it paid off. Six months after the first round, in 2012, the second round prices of solar dropped by 40%, followed by drops of 47%, 36% and 29% in each respective year.
 
Eskom’s role in the renewable energy programme was to facilitate the connection into the grid and sign the associated agreements to buy the power from IPPs. This was a gift to Eskom: a perfect procurement mechanism with an integrated resource plan to show them the megawatt map for the next 20 years.
 
And yet, unfathomably, Eskom began to refuse to sign the renewable PPAs in 2016. Not only this, they filled the public domain with numbers from the high round one project tariffs, they wrote columns in media publications, made public statements, and they used Twitter and social media to create confusion and misconception about the renewables programme.

Eskom began a war on renewables, framed as consumer protection. Yet the truth is blatant. Renewables pose a threat to coal and nuclear, because wind and solar are undeniably cheaper forms of energy.

The evidence for this is that in 2017 the average tariff cost of solar is below 60c per kW. This is well below any new coal or nuclear power stations. The pricing of both wind and solar are also steadily shrinking and as more renewables are deployed, investors’ confidence increases and increased volume and efficiency means that capex costs are coming down globally. Paired with South Africa’s extensive solar and wind resources, these potential benefits of these technologies are vast.

Intermittency elephant 


The drawback of renewables is the lack of dispatchability and intermittent nature of wind and solar. Perhaps this is one of the main reasons for Eskom’s reluctance in considering renewables seriously for South Africa's utility energy mix.

But the dilemma has already been solved. Utility-grade storage projects are coming online all over the world, ready to peak shave, load shift, grid balance and provide frequency and voltage support.

With increasing scale, manufacturing models show Lithium Ion storage to be on the same cost reduction and learning curves that we’ve seen in solar photovoltaic over the past six to 10 years. Storage projects could potentially be procured under a similar mechanism seen in the renewable energy programme to make sure that costs are driven down as fast as possible.  

A clear future


If South Africa’s story is to drive industrialisation in Africa, we’re going to need reliable electricity at the lowest rate. It seems logical that after spending six years building the renewable industry, we should be building many projects at those low tariffs and seeing Eskom’s average cost of electricity tumble down.

We have the best wind and solar resources in the world, and we could have the cheapest energy. Eskom has an opportunity to take its head out of the sand and follow other leading economies of the world like the US, China, Japan and Germany, who are focusing on low-cost renewables and storage technologies. Eskom can decide if their future is one which enables South Africa’s prosperous growth, or hinders it.


 

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Fin24

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