Consulting firm warns of ‘vicious cycle of defection’ from Eskom, municipalities

19th August 2016

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

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The rapid decline in renewables pricing, large-scale battery production and new technologies reducing the price of storage, which will make renewables feasible on a larger scale within 15 years is putting State-owned power utility Eskom at risk of losing electricity demand to the renewables-storage sector, states management consulting firm Datta Burton & Associates.

Further, municipalities are at even greater risk, the firm says, noting that large metros generate about 30% of their revenue from electricity sales with profit margins of 15% to 20%.

However, if high income and business customers begin to defect to alternative power uses or reduce consumption, municipalities will need to charge higher prices for the remaining paying customers, the firm says.

“This creates a vicious cycle of defection, known as the utility death spiral,” Datta Burton & Associates says, estimating that, if Eskom loses just 300 000 high-use customers, it will have to increase tariffs by 23% to maintain current revenue levels.

These increases, added to general price increases and new nuclear build costs, currently projected at R1-trillion, would be “ disastrous”, the firm believes.

The firm underscores the attraction for consumers of reduced costs enabled by renewable energy, which is aided by a reduction in storage costs, pointing out that, since 2007, solar module costs have decreased by 80%, with the price falling 26% every time output doubles.

Further, South Africa’s successful Renewable Energy Independent Power Producer Procurement Programme has experienced the positive cost trend in the renewables space, with the Round 4 tariffs decreasing 25% to as low as R0.57/kWh for wind and an average of R0.79/kWh for solar in 2015.

This is compared with the levelised cost of electricity (LCOE) of R1.05/kWh for coal-fired power stations Medupi and Kusile, and the R1.75/kWh for the new Hinkley nuclear plant in Britain. In addition, concentrated solar power, which prices at R3.94/kWh, is also cheaper than alternative peaking supply from diesel and gas turbines.

Considering recent trends, analysts have projected future costs based on a steady learning curve as total capacity increases, noting that if these continue and solar module prices reduce by 40% over the next five years, “renewables will easily beat out increasing Eskom tariffs”, the firm avers.

While renewable-energy generation is often criticised as being nonviable for baseload generation, batteries allow for renewables to time-shift their power production, as well as provide an alternative to expensive surge generation.

Further, with the growth in electric vehicles rapidly advancing battery technology, lithium-ion battery storage costs, for example, have been declining rapidly since 2005 and are now below original forecasts for the year 2020.

These costs could be priced at $220/kWh for use in renewable transmission systems and as peaker replacement, in five years, which would convert to a LCOE of about R3.50/kWh. However, some forecasts see a price of $100/kWh by 2025, which translates to R1.76/kWh – low enough to compete with peaker plants and for effective transmission system use in combination with renewables.

“Although this may seem high when one adds solar costs and compares it with coal and nuclear, it actually becomes very attractive to high-end users having to fund Eskom’s growing costs and tariffs,” the firm says.

Consequently, Eskom would be forced to increase rates, owing to a depleting user base. This, in turn, would make renewables and battery storage “the best option” for the rest of the users as well, the firm says.

One option for Eskom to overcome the ‘death spiral’ is changing the revenue model to charge for access to the grid, Datta Burton & Associates posits, noting that Eskom could recover some revenue from such a scheme, as it is unlikely customers would go completely off grid, owing to cost and flexibility factors.

Another option is for Eskom and municipalities to redesign the grid and distribution model to focus on the benefits and generating properties of renewables. “Government can contribute to this option by pushing renewables through tariff structures, private partnerships, and creating a new job generating industry within South Africa,” the firm concludes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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