A ‘perfect energy storm’ is heading towards South Africa. A combination of factors are challenging power supplies, delayed new power generation, a backlog of maintenance, an ageing fleet, water shortages and drought, coal quality and supply, a shortage of power generation across the SADC region, a controversial nuclear procurement program, a delayed gas program (‘fracking’ and offshore), amongst others all contribute to an ongoing razor-edge balancing act for supply and demand of electrical power. This can only benefit the growth of consumer renewables.
South Africa now faces a unique set of circumstances that will progressively result in the transfer power away from the grid and into the hands of consumers, both small and mid sized businesses and domestic, who will turn to energy saving technologies, and end user power generation.
A Brief History
Historically South Africa enjoyed low electricity prices, as a result of abundance of cheap coal, a controlled power generation and distribution network, and at that time well run utility in Eskom.
At the end of apartheid in 1994, Eskom had a surplus of power and with low electricity prices was able to attract international investment both into resources and energy intensive industries such as smelting. Long-term contracts were entered into, providing stable business plans and outlook.
By 1998 electricity experts who had been constantly warning of the potential future risks of not investing in maintenance and future energy generation were worried, but despite ‘white papers’ the warning went unheeded by the politicians and ANC policy.
In 2002 the then Minister of Energy accepted that in only a few years time there would potentially be shortfalls in supply to demand requirements. Eskom was given the thumbs up to build 2 of the world’s largest coal fired power stations Medupi and Kusile with a combined output of 9,600MW.
New Power Generation
Today both power stations are running years late, (with Unit 6 at Medupi only recently August 2015 synchronized at 800MW), and massively over budget. Estimates range from R105-115 billion (actual) to when consequential costs are estimated to be as high as R300 billion.
Irrespective, both figures are dwarfed by the contentious nuclear procurement (under discussion) where cost estimates are R1 trillion for power plants of a similar output, and those figures are before the Rand’s devaluation.
In 2008 the country endured its first period of extensive load shedding. Power demands outstripped supply, until almost mysteriously it stopped overnight. A combination of running open cycle gas turbines (OCGT) to meet peak demands, and the slow down in the world’s economies consequent in part on the subprime crisis, and lower demands for resources, resulted in Eskom being able to balance keeping the lights on.
The consequences of under investment in maintenance, and lack of new power generation is progressively taking its toll.
Electricity prices that had been kept artificially low began to climb rapidly and depending on large user or domestic tariffs are up by 150%-400% in only 10 years.
The trend is not changing, with Eskom looking for rises of 25%, and Nersa, as regulator, trying to constrain it. Simultaneously Eskom has run out of power, despite demand being approx. 3 000MW less than in 2007 and 1 000MW less than in 2014.
Constant rotational load shedding has been endured in 2015, OCGT’s running continuously at huge expense per kWh, and a constant demand supply razor-edge balancing act. Eskom’s recent 30 days “success” without load shedding (August) seems to ignore the fact that ferrochrome smelters have shut down, and mining is being cut back as platinum and gold prices have fallen.
Climate Change Obligations
Conditions for the financing of Medupi and Kusile included SA improving its appalling carbon footprint.
By 2010 the serious move to renewable energy generation had begun, with private investment flooding in from overseas to take advantage of the high prices being paid in Rounds 1 & 2 (REIPPP). By Round 3 and 4 prices had fallen by up to 70%, but commitment to some 3 700MW through wind, solar PV, concentrated solar power (CSP), a little bioenergy and hydro was contracted. A further 3 000 MW and even more recently a further 6 000MW from clean renewable energy generation is forecast.
While the successful renewable generation program is providing clean energy, it is not replacing Eskom, but supplementing coal fired generation mainly during daylight. In the not too distant future potentially 8%-10% of required base load power output (using 2014 as a baseline) during daylight hours may be provided by renewable energy technologies.
As the price of electricity continues to rise, conservative estimates are 8,5% per annum compound, the real dawn for consumer renewables is coming. Simultaneously the genuine avoidance of carbon emissions from coal fired kWh will be achieved.
Already in mid 2015 the ‘cross over’ point for solar thermal (solar water heaters) is close, where the cost of grid supplied power is more expensive than solar. The payback on capital investment has fallen to as little as 2-3 years. With rooftop solar PV electricity generation the payback has fallen to 6 to 8 years without battery back up. With battery back up the period is 12-14 years.
Every year that passes the cost per kWh of solar power will be that much more attractive than coal fired kWh, particularly as the costs of consumer renewables is expected to continue to fall in real terms.
Basic Consumer Renewable Economics
Blessed with high solar radiation, South Africa as a country that relied on cheap electricity, will at the consumer end progressively adopt renewables because of the basic economics of solar water heaters and solar PV being cheaper than Eskom or the municipalities as resellers of power. High solar radiation at almost double that of much of Europe, enables consumer renewables to compete with fossil fuel kWh’s, although the price paid for grid power is as little as 50% of prices paid per kWh in countries such as Germany.
Domestic water heating with electricity accounts for 14-18% of Eskom’s daily output and with both commercial and domestic savings in water and other light electricity loads through PV, up to 30% and more is likely to be removed by 2030 from Eskom’s required power output (using 2015 as the baseline).
As kWh’s are removed, even greater pressure for price increases are maintained, to meet overheads of fuel (coal and gas), maintenance, and to fund new builds. This is before thorny issues such as ‘coal cliffs’ (coal shortages expected in 2017), currency weakening, a progressively aging fleet (most are approaching their sell by date), or embarking on nuclear programs that are almost certainly unaffordable.
Other Power Generation Opportunities
Other opportunities for power generation that were ‘game changers’ such as ‘fracking’ shale gas in the Karoo, developing offshore gas (PetroSa recently reported the largest government owned loss in history at R14,5 billion) are fast becoming distant memories. The 50% fall in oil and gas prices has changed the potential.
Even longer term plans for hydro power from the Congo (in process since 1968) are in doubt as a result of climate change. In Uruguay where 75% of power was hydro, they have moved to wind power progressively as annual rainfall decreases.
Closer to home the rains in Angola have failed, and at Victoria falls, rather than being in flood, it is at its lowest levels. Zesa in Zimbabwe has already cut power from Kariba hydro by 40% (September 2015) and by December 2015 the dam levels may have fallen below the minimum to produce power. Load shedding or more accurately power cuts of 18 hours a day is already happening in Harare (September 2015). Making Zimbabwe’s 250,000 electric geysers solar powered is being considered as law.
Downstream Cahora Bassa hydro, which supplies approx. 5% of Eskom’s power will be facing the same challenge. The wet season in Zimbabwe (November – March) has seen progressively lower rainfall over 30 years, and it is almost certainly too little and too late to avert significant power reductions from hydro over the next 12 months.
Consumer Renewables Outlook
By 2030 it is possible if not probable in South Africa that 80%+ of middle and upper income homes (5m approx.) will have either solar water heating or rooftop PV or both. A similar picture will exist in commercial buildings, factories, hospitality, and farming, because consumer renewables will be the cheapest option, and market forces will have changed the dynamics.
Power will have been transferred both physically and actually to the hands of the people, service delivery models from power suppliers and municipalities will be forced to change.
In the interim both Eskom and municipalities, as resellers, will probably remain reluctant to embrace feed in tariffs (FIT’s). Why would they when they need the income from electricity sales to cross subsidize other essential services?
Current Barriers to Rapid Adoption of Consumer Renewables
Domestic consumer disposable spend in South Africa is far less than in Europe. Government incentives, rebates or tax credits for consumer renewables are non-existent. Consumer awareness to energy efficiency remains low, but is changing.
The biggest barrier however is the lack of easy credit and at affordable rates. The SA banks not surprisingly are more attracted to financing large utility scale developments than small end user renewables, and which they view as an expense rather than an asset.
This will progressively change as corporate customers leverage their balance sheets for buying consumer renewables and banks will turn more attention to this area of opportunity. In the domestic sector it is probable that foreign investment will progressively come into the country to finance consumer renewables (it is already happening) and will finance hot water and electricity consumer renewables.
Other financial models such as ESCO’s where consumers do not purchase or own the renewable equipment, but where they purchase electricity or hot water at lower prices than Eskom can supply, will also find acceptance.
In the same way as the Internet, cell phones, social media platforms, and other disruptive technologies, consumer renewables, despite having been around for a long time, will progressively be adopted by the consumer because it makes economic sense.
The government appears to fail to recognize that consumer renewables will alter the energy security and supply mix. History has the habit of repeating itself, with a possible power surplus in 2030 if nuclear procurement goes ahead, similar to 1994, but with massive debt, and fewer customers to sell it to.