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United call for electricity decisions, but less accord on nature of future mix

University of Cape Town Graduate School of Business Professor Anton Eberhard on the need for a more dynamic electricity planning system. Camera Work: Nicholas Boyd. Editing: Shane Williams. Recorded: 15.8.2013.

16th August 2013

By: Terence Creamer

Creamer Media Editor

  

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It is common cause that South Africa has already left it too late to meet the 2023 schedule for the introduction of the first new nuclear capacity in line with the Integrated Resource Plan’s (IRP’s) proposal for the addition of 9 600 MW of such production by 2030. It is also widely accepted that the current IRP is outdated, owing to a fall off in demand – which may or may not have, in turn, been precipitated by the country’s electricity shortages since 2008 – and some energy efficiency gains.

There is also broad agreement among electricity practitioners and market experts that firm decisions are urgently required regarding the future direction of South Africa’s electricity supply industry. But there is far less accord on what form that additional capacity, which will be required following the integration of the giant Medupi and Kusile coal-fired power stations later in the decade, should take.

Some argue that such decisions should serve to open the way for additional mega-projects – including nuclear, coal and hydro – to meet growing demand, stimulate new mining and industrial activity off a secure power base and replace the coal-fired capacity that will have to be retired during the 2020s, unless life-extending solutions are found.

Others are more cautious, arguing that the level of uncertainty surrounding demand makes it necessary for South Africa to pursue a more incremental approach to the introduction of new generating capacity.

Leading the charge for a new approach is University of Cape Town Graduate School of Business Professor Anton Eberhard, who has described Eskom’s “big coal, big nuclear and big networks” business model as being “Neanderthal”.

Addressing a recent Fossil Fuel Foundation conference, the National Planning Commission member asserted that the cost of massive capital infrastructure, especially those incorporating new, bespoke designs, “often ends up being more than double initial estimates and is commissioned long after it is first needed, compromising electricity supply security”.

Therefore, Eberhard has called for an overhaul of the country’s prevailing planning and investment paradigm in favour of a process that is more responsive to changing circumstances, including changes to the demand trajectory – South Africa has experienced six years of flat and even declining electricity supply, with Eskom sales falling 3.7% in 2012/13 to 216 561 GWh.

The IRP could provide a “useful base”, but South Africa also requires a plan that is continually updated and a market that is less reliant on centrally proclaimed Ministerial determinations to unlock new generation investments.

In addition, a heavier weighting should be given to generation solutions, such as gas and renewable-energy projects, that can be introduced in more modest increments than is the case with large coal and nuclear projects.

EMERGING DEMAND

However, there are others who believe that South Africa needs to accept that, as an emerging market in an emerging continent, demand is going to continue to rise and that, as an economy that is still heavily reliant on resources and is expressing an aspiration for higher and higher levels of minerals beneficiation, large-scale baseload solutions will be required to support and stimulate such investment.

There is a view, for instance, that Eskom’s low prevailing reserve margin is supressing demand that would otherwise have come to the fore and that, in the absence of longer-term certainty over baseload-supply security, demand will remain supressed.

Addressing a recent Gordon Institute of Business Science forum, Eskom CEO Brian Dames, who arguably symbolises the ‘big is beautiful’ position, argued that the major lesson from the cost and schedule over-runs at Medupi and Kusile is that decisions on mega-projects need to be taken timeously.

He has also asserted that, to mimimise the risk of financial and schedule slippages, South Africa should avoid a “stop/start” approach to investing in large-scale infrastructure and should rather adopt a model of ongoing construction.

For Dames, therefore, the main structural constraint is a failure to make decisions, not that the mega-projects are in themselves too risky.  “As a country, we should not again take the risk of leaving it so late to start with infrastructure development . . . whether Eskom builds it or whether the private sector builds it. There needs to be policy certainty and there needs to be timeous investment decisions,” he avers.

GAS & NUCLEAR

The decisions to which Dames is referring relate either to a new nuclear programme, a third large-scale coal-fired power station, or the introduction of gas on a larger scale.

In fact, both Eberhard and Dames concur that gas could be a “game changer”, with Eberhard arguing that there is a high probability that “liquefied natural gas (LNG) imports, or offshore gas, or shale gas, or pipelines from our neighbours, or a combination of these options, will transform our energy sector”.

Where there is far less concurrence is on the issue of nuclear, which Eskom is still keen to pursue, despite concern over the capital costs.

In fact, Eskom’s David Nicholls argues that nuclear will offer predictable baseload, high load factors, stable and low fuel cost and low environmental impacts and should, therefore, be included in South Africa’s future electricity mix.

Nicholls acknowledges that there is a wide range of cost estimates for nuclear projects (an issue that has emerged as a key concern for critics), with some projects associated with overnight costs of as low as $2 000/kWe and others estimated to be as high as $6 000/kWe. However, he is convinced that, if South Africa procures from a supplier that has been active in building projects in recent years, it will be possible to procure a solution well below the upper end of the range.

This view appears to have gained resonance within the Department of Energy (DoE), whose director-general Nelisiwe Magubane has indicated that a decision will be made on nuclear this year. She has also indicated that the updated IRP, to 2050, is unlikely to eliminate nuclear from the mix and that various funding options will be considered, despite Eskom having been declared the owner operator.

But Eberhard questions this commitment to nuclear energy, as well as the lack of transparency surrounding the technology.

“Why is nuclear treated differently? Why do the new generation regulations, issued under the Electricity Regulation Act, explicitly exclude nuclear. Why do we have a special Cabinet National Nuclear Energy Executive Coordinating Committee that is responsible for nuclear power procurement (like the large armaments procurements of the 1990s)? Why should nuclear energy be treated differently from coal or hydro or gas or solar or wind energy? All of these energy sources have to fulfil the same purpose and need to be evaluated in terms of the same criteria: secure, competitively priced and environmentally sustainable power.”

Where Eskom, the DoE and Eberhard agree is that there is definitely scope for more gas in the plan, with Eberhard calling for a gas policy to support a material scaling up.

Dames says that the integration of shale gas is a “no brainer” if large-scale resources are to be unearthed, but says Eskom is also willing to support the importation of LNG to support the creation of a gas market while the shale exploration is undertaken.

Sasol New Energy’s Cavan Hill says the main future sources include known conventional gas reserves in South Africa and the region, the large discoveries being unearthed in the Rovuma basin of northern Mozambique, unconventional sources such as shale gas in the Karoo region of South Africa, or coal-bed methane in Botswana, South Africa and Zimbabwe, and LNG imports.

Much will hinge, however, on the creation of supporting infrastructure, which is the current main constraint to the introduction of large-scale gas-fired electricity production in South Africa.

Econometrix MD Rob Jeffrey, who is a strong supporter of integrating additional gas into the energy mix and of efforts to unearth the true extent of South Africa’s shale gas resources, argues that South Africa’s growth and development will be determined in large part by the secure supply of competitively priced electricity.

“Electricity and employment growth are the key to South Africa’s economic, social and political prosperity,” he states.

Edited by Creamer Media Reporter

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