Eskom’s proposal to restructure renewable energy tariffs will impede growth in private sector investment in renewable energy projects and destroy intentions to wheel surplus energy through Eskom’s grid, as doing so will hold little financial gain, Meridian Economics MD Grove Steyn has said.

Speaking at public hearings held by the National Energy Regulator of South Africa (Nersa) on October 27, he said that, despite the need to balance Eskom’s revenue collection efforts with the need for a rapid rollout of renewable energy projects, the issue of restructuring tariffs was “very complex” and that loadshedding was the most pressing issue that needed to be resolved in the immediate term.

“Our main concern is that [Eskom] did not take into account the short to medium term economic reality in the power sector and the fact that we have a massive loadshedding crisis, and that reality did not seem to influence and shape the technical analysis they did for this proposal,” said Steyn.

He explained that South Africa was now heavily dependent on a rapid acceleration of private sector investment in distributed generation to help the country overcome loadshedding as soon as possible.

Loadshedding was made worse by “significant challenges” in terms of Eskom’s energy availability factor, as well as delays and challenges with the Independent Power Producer (IPP) Office’s procurement programmes, particularly the Risk Mitigation Independent Power Producer Procurement Programme and the Renewable Energy Independent Power Producer Procurement Programme, stated Steyn.

“We have a huge gap and we need to scale up the distributed generation sector rapidly,” he said.

“Our concern is that Eskom’s tariff restructuring proposals will have unintended consequences of substantially disincentivising and delaying the rollout of these critical investments in the short to medium term and that this should be avoided at all costs.

“[We dispute Eskom’s] proposal, in particular to transfer generation capacity cost recovery from variable to fixed charges,” Steyn said.

In this regard, he said that a main finding from a power system modelling study recently done by Meridian Economics – which was based on hourly data from Eskom from the entire power system in 2021 – showed that, with an increase in available renewables in the system, 96.5% of all loadshedding in 2021 would have been eliminated. “This is a really important finding.”

Another finding, Steyn highlighted, was that, even if Eskom paid for these new renewables, based on conservative cost assumptions, the utility would still have saved R2.5-billion in 2021, compared with its total generation costs. “The saving will be much larger for Eskom if it does not have to pay for the renewables.”

Therefore, he said that despite investors pouring money into embedded generation projects and bearing all the costs and risks associated thereto, they provide significant benefits to the power system currently “for free”.

This, Steyn said, was a prime example of a positive externality, and a “really important” part of the economics South Africa’s electricity grid currently faced, and which needed to be taken into account when considering tariff restructuring.

The savings stemming from using renewables are as a result of having to use, to a lesser extent, peaking power plants, which Eskom has recently been operating throughout numerous days to reduce loadshedding stages, he said.

Peaking power plants are designed and intended to be used only during peak power demand times, such as evenings, and are not intended to be relied upon for baseload generation throughout the day.

“Renewables have the opportunity to reduce how much we have to use those very expensive resources [the peaking power plants].

“On the pumped storage side, they are huge efficiency losses – about a third of the energy that we get from the pumped storage will be saved if we had additional renewables on the system,” said Steyn.

A similar point applies to Eskom’s open-cycle gas turbine (OCGT) peaking plants that burn vast volumes of diesel in engines similar to an aviation jet engine.

“Last year, and definitely this year, and for the next few years, we [have and will continue to] actually use the[se] peakers throughout the day, not just at peak times; and that is why additional renewables is able to displace a significant portion of the use of peaking plant,” he said.

Currently, Steyn said, the key problem in South Africa’s power system is that the country is “energy short”.

“It is not primarily a capacity problem, it is an energy problem; but the capacity we do have – the peakers and the pumped storage – are essentially stranded or sterilised because they run out of energy.

“In pumped storage assets, we cannot actually use all the water in the dams because we need them to be available as a fast response [measure] to [additional] large coal plant failures, so we cannot ever allow the pumped storage assets to be empty. In the [OCGTs], we simply run on fuel,” he said.

Steyn noted that taking into account these factors, any restructuring of renewable energy tariffs would have a negative impact on current and future investment into renewable energy plants and IPPs’ willingness to wheel energy through Eskom’s grid.