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SA can save billions by building gas turbines first, then PV-solar and wind

24th January 2017

     

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The REIPPP  (0.17 MB)
  • Dawid Serfontein, Associate Professor in the School of Mechanical and Nuclear Engineering, North-West University.

This is a response to the Fin 24 article Koko unpacks Eskom’s renewable costs, but experts disagree (17 Jan.).
I am impressed with the dramatic reductions in the prices of PV-solar, wind and gas power and therefore I agree that it will be wise for SA to build a fleet of these renewables, backed up by gas turbines, fuelled with affordable imported Liquefied Natural Gas (LNG). But then we must build it in the right sequence.

The REIPPP so far had the cart before the horses and thus wasted billions of Rands. SA, however, can save billions of Rands by simply interchanging the build sequence for the next three years or so to gas turbines first, then wind and then PV-solar. This is article not about promoting nuclear: If new nuclear can be brought online below about R1.00/kWh, it will be an extremely valuable low carbon and non-polluting power sources. However it will take between 7 and 12 years to build the first nuclear plant. We will also only know whether we can get the nuclear plants below R1.00/kWh once the tender prices are in at the end of 2017. Therefore nuclear will not be discussed here.

Signing the new 591 MW PV-solar REIPPP contracts for the 2016 Expedited Bid Window will costs Eskom R0.62/kWh. But what will this power save Eskom? Mr. Koko said, only R0.13 coal fuel for existing coal plants. Therefore Eskom will buy this REIPPP power at a loss of R0.62-R01.3 = R0.49/kWh.

However, in a CSIR study Prof. Tobias Bischof-Niemz stated that in 2014 Eskom bought 2.19 billion kWh of PV-solar + wind power via Bid Windows 1,2 and 3 contracts of the REIPPP for R4,529 million. However, this saved SA a total of R5,305 million worth of extremely expensive load shedding (R87/kWh), very expensive diesel fuel (R3.10/kWh) for Eskom’s Open Cycle Gas Turbines (OCGT) and some affordable coal fuel (0.23-0.35 R/kWh). SA thus gained a net financial benefit (profit) of R780 million on the REIPPP in 2014. I do not dispute these results. However, this report is misleading in that it selectively emphasises those results and arguments that supports the profitability of these REIPPP contracts and selectively neglects to emphasise those arguments and even its own results that show that specifically the PV-solar contracts ran at a loss to SA, namely: The 1.12 billion kWh of PV-solar produced only R2,806 million of value, but cost 3,084 million.

The PV-solar thus produces a nett loss to SA of R278 million. However this loss is not mentioned. All the profit was thus generated by wind power. However the report deemphasised this crucial finding by adding the loss for PV-solar was to the profit for wind so that only this joint profit was explicitly mentioned. More seriously, although this fact was not explicitly hidden, the report it neglected to explicitly warn its readers that 2014 was a year of exceptional power shortages, due to the collapse of the cola silo at Majuba power station.

Due to these shortages Eskom suffered very high levels of extremely expensive load shedding and OCGT diesel burning, which created the said opportunities for the wind power to run at a profit by displacing these costs. However, the report did not emphasise that once the situation will eventually return to normal (as it did about six months after the report was published), load shedding would disappeared and OCGT diesel burning would became very rare, so that the REIPPP renewables would then almost certainly not displace much load shedding or OCGT diesel burning and that therefore the whole “REIPPP renewables are profitable” narrative of the report would then fall flat.

The narrative of this report actually did fall flat on about the 8-th August 2015, when Eskom restored sufficient power supply. The reality is thus that PV-solar alone now generates a loss of about:

= 1.12 billion kWh/year x (R3.28/kWh REIPPP tariff in 2017 Rands - R0.57/kWh (displacement cost of coal + global warming in 2017) )
=1.12 billion kWh/year x R2.71/kWh
= R3.03 billion/year.

The situation with wind power is slightly better, as the wind normally blows strongest during the early evening demand peak and therefore there is still a chance that wind power will still prevent some expensive OCGT diesel burning on some evenings. However, also due to the addition of pumped storage from Ingula, SA now faces very little OCGT diesel burning and therefore the gain from displacing this diesel burning will be small. Therefore the loss from wind power will also be larger. So the total loss may be closer to R 6 billion/year.

However, as Rounds 1, 2 and 3 are now water under the bridge, we’ll return to the latest Expedite REIPPP Bid Window: Prof. Harold Winkler and Brenda Martin said REIPPP PV solar and wind power saves full coal power cost, including power plant capital cost. I argue that the pollution cost of coal burning should be added to this. The Draft 2016 IRP Base Case ignored global warming cost of coal’s release of CO2. However the Draft 2016 IEP priced CO2 cost at R0.26/kWh.

If we add that to the Draft IRP Base Case’s costs, and the full cost of new coal power becomes: (R0.25/kWh fuel cost + R0.26/kWh global warming cost +R0.61/kWh capital and other costs) = R1.12/kWh (of which the cost of coal fuel + global warming cost = R0.51/kWh). Subtracting the latest R0.62/kWh PV-solar price from the R1.12/kWh total cost theoretically gives a profit to SA of R0.50/kWh.

So with all these conflicting numbers, who is right?

SA uses little power during the middle of the night, then develops a small power demand peak in the early morning when everyone cooks breakfast, a slight reduction in power demand during the middle of the day and finally a large power demand peak in the early evening when everyone cook dinner and watch television. Eskom’s fleet of base-load coal and nuclear plants, with the help of a little wind power and pumped storage, can normally cheaply supply all demand up to the level of the morning demand peak. It is thus only during the early evening demand peak that Eskom is on some days forced to run its very expensive diesel-fuelled Open Cycle Gas Turbines (OCGTs). This is also the time when load shedding in exceptional cases occurs.

However, in 2014 the coal silo at Eskom’s Majuba coal plant collapse, forcing SA into extremely expensive load shedding and almost round the clock very expensive OCGT diesel burning. In this period PV-solar power from the REIPPP created substantial value by staving off the fraction of this load shedding and OCGT diesel burning that occurred during the middle of the day, when the sun shines. This situation continued through the winter of 2015, as delaying maintenance in order to run their coal plants 24/7 in order to try and keep the lights on, caused some of Eskom’s coal plants broke down.

However, Eskom worked hard to catch up on its maintenance backlog and are continuously succeeding in bringing new coal units on-line at Medupi and Kusile and recently at the Ingula pumped storage plant. Therefore Eskom ended the crisis and brought sufficient power supply on-line on 8 Aug. 2015. Since then SA had no load shedding and only a small amount of OCGT diesel burning and only during the evening demand peak, when the sun never shines. Therefore the CSIR study’s vison of PV-solar displacing substantial amounts of load shedding and OCGT diesel burning is now simply wrong and is likely to remain wrong for the foreseeable future.

So now PV-solar power displaces only coal power. The question remains: does this save Eskom the full cost of new coal power, including capital cost, or just the coal fuel and global warming cost? A well-balanced combination of wind turbines and PV-solar panels, backed up by gas turbines can supply fully dependable and dispatcheable power, as the gas turbines can be started up if the wind drops or the sun sets. Therefore such a combination could replace a coal plant or a nuclear plant and therefore it could save SA the capital cost of the coal plant. However, the problem is that the contracts for new coal plants are fixed many years ahead of their delivery date.

Therefore, even if Eskom were now to procure a large amount of PV-solar, wind and gas power through the REIPPP, it will take many years before this will result in capital cost savings. In the short term, both Winkler and Martin are thus wrong: the latest round of REIPPP PV-solar and wind power will not save Eskom one cent worth of capital cost for new plants.  In the short term, the only benefit of these REIPPP plants will be the displacement of the coal cost + global warming cost. For our coal plant with the cheapest this amounts to R0.13/kWh coal + R0.26/kWh global warming = R0.39/kWh. For the coal plant with the most expensive fuel this will amount to about R0.51/kWh. So the PV solar cost of R0.62/kWh for the Expedited Bid Round will displace coal power at a loss of between R0.11/kWh and R0.23/kWh. However, there is no realistic scenario at which this new PV-power can generate a net benefit to SA.

At a 26% load factor, the 591 MW PV-solar of the Expedited REIPPP bid window will produce 1,350 million kWh/year, at an initial loss to our country of R0.23/kWh = R310 million/year. The loss/kWh on new wind power will be smaller than on PV-solar. However as the amount of wind power generated is much larger than for the solar, the total loss for wind will be similar than to PV-solar. However, more PV-solar and wind will obviously be added with each subsequent Bid Round, the total accumulated loss will quickly snowball to several billion Rand.

Therefor the policy of forcing Eskom to buy this PV-solar power through the REIPPP is clearly irrational. However, the SA constitution states that all laws, regulations and policies taken by Government must be “reasonable”. The following strategy could thus save SA several billion over ne next three years or so:

  • Honour all existing REIPPP contracts (Bid Rounds 1, 2 and 3). However, have the determinations for the REIPPP PV-solar and perhaps also some of the wind power in the Expedited Bid Round set aside in a court of law by showing that these are irrational and thus unconstitutional. Therefore refuse to sign these new contracts.
  • Expedite the procurement of preferable Combined Cycle Gas Turbines (CCGT), fuelled with affordable imported Liquefied Natural Gas (LNG), possible through the REIPPP. As LNG is cheaper than diesel and CCGTs use less fuel than the current OCGTs such CCGT power can probably be acquired at roughly R1.50/kWh, even after the global warming cost of the methane gas that leaks into the atmosphere during shale gas mining has been added. R1.50/kWh is much too expensive to be used as gas base-load power. Furthermore importing large amounts of LNG will expose SA to strategic risks, such as volatility of the gas price and a negative impact on our balance of payment. Therefore LNG imports should always be limited, for instance by also using pumped storage and hydro power as peaking sources. However, the only point of this argument is that if you are going to build the gas turbines anyway, it will be MUCH more economical to build them first and the wind and PV-solar later.

So this gas power would result in an affordable back-up power for the PV-solar and wind power contracts that have already been procured during Bid Rounds 1, 2 and 3. Since the combination of this PV-solar, wind and gas power will be fully dependable and dispatcheable, this will result in a large strengthening of SA’s power reserve margin, which has been inadequate since 2008.

  • However, as Eskom currently have enough power to supply all SA’s needs without load shedding and with minimal OCGT burning, the CCGTs should initially not be run, but just be kept in reserve. So instead of signing take-or-pay contracts, the owners of these plants should initially rather just be compensated for a reasonable rate of return on their capital costs.

 

  • This arrangement would give SA considerable security of supply, i.e. if an accident were to again take out one of our coal stations, we could immediately start up the CCGT and supply power at the specific times of day that it is most needed. This would much more effectively prevent load shedding or OCGT diesel burning than PV-solar that can only do so during the middle of the day when the sun is shining or wind that can only do so when the wind is blowing.
  • As and when the demand picks up, the CCGT can then burn the LNG, with the existing PV-solar and wind power from Rounds 1, 2 and 3 of the REIPPP as fuel savers for the CCGT.
  • If demand picks up even more, a few years down the line, we can then restart the bid processes for PV-solar and wind via the REIPPP. As PV and wind power prices drop continuously and dramatically, we can then look forward to obtain the PV-solar and wind power contracts much cheaper than is currently the case. It is likely that the fully dependable and dispatcheable new wind, PV-solar and CCGT combination that we will build at that stage, might deliver power cheaper than new coal. So at that stage construction of coal plants can be cancelled and the PV-solar, wind and gas combination can then displace also the capital cost of coal, which would make the renewable option fully profitable to Eskom.

So while the full details of this plans still needs to be worked out, the point is that the current REIPPP strategy to deploy intermittent wind and especially PV-solar power before gas backup is putting the cart before the horses and is wasting billions of Rands, without substantially improving our secure supply of power.

However, prioritising the deployment of gas backup, hydro or pumped storage and only then deploying new PV-solar and wind power plants, we will quickly improve our security of supply. As the wind and PV WILL be added later, this move will also not threaten the dream of building a very strong fleet of renewables. It will just reschedule this dream in such a manner that it will actually work.

Edited by Creamer Media Reporter

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