A ROAD MAP FOR SA’S ENERGY FUTURE
Energy planning is a global priority, and private sector participation is critical to achieving sustainable energy solutions.
Energy planning is the archetypal “wicked” problem. Its significance cannot be underestimated. It reaches the furthest corners of social and economic development at a macro- and community-level, impacting our basic needs – jobs, livelihoods, water, education, health and the environment that sustains us. Spanning every sector of society in this way, it draws in multiple perspectives from disparate value systems.
THE NATIONAL INTEGRATED RESOURCE PLAN
Globally, the energy market is in rapid flux, responding to the technological advances dominating price dynamics, and social awareness driving power consumer choices. We observe continuing defection from national supply, divestment from certain supply sectors, disruption from step changes in energy storage innovation and cost gains in a maturing renewables market. Following South Africa’s crippling load-shedding and subsequent economic slowdown, the present national demand is materially lower than that projected in the Integrated Resource Plan 2010 (IRP2010). These are all features of a context within which we would be fools fuelled by hubris if we were to lock in our long-term choices today based on trends projected 30 years into the future.
Mega-projects are symptomatic of the one-size-fits-all long-term commitments that have typified our energy management architecture in the past. Internationally and locally, they have a track record of material cost and schedule overruns1, increasing the cost per unit energy. For Eskom to continue to fund new capacity, with its relatively high gearing and the most recent credit rating downgrade, National Government guarantees would be increasingly necessary to ensure continued access to funding markets.
However, given Government’s own funding challenges, private sector participation will be critical. It must then be acknowledged that in line with international trends, the private sector will be attracted to certain sectors, such as renewable energy, while other sectors (notably coal-fired and nuclear power generation) will no longer attract significant investor appetite due to mandate constraints, reflected in increased cost of capital requirements for those options.
IN ONE STUDY, OUT OF 180 NUCLEAR GENERATION PROJECTS ASSESSED, 97% EXPERIENCE COST OVERRUNS, WITH AN AVERAGE OVERRUN OF 117%.
IN COMPARISON, WIND POWER PROJECTS WERE FOUND TO BE LESS AFFECTED, WITH 5% OF PROJECTS EXPERIENCING COST ESCALATIONS WITH AN AVERAGE OVERRUN OF 7.7%.
With this level of complexity and uncertainty, there will undoubtedly be unintended consequences to the most well-meaning interventions. The latest plan, the IRP2016, is an attempt to juggle multiple crystal balls, some more transparent than others. In such a complex environment, with the potential for any decision to have far-reaching socio-economic implications and against a market backdrop of rapid disruption, how do we plan and develop an energy mix that has the greatest systemic benefit?
ADAPTIVE PLANNING TO MAXIMISE VALUE AT MINIMUM RISK
We shouldn’t look for a single large intervention that will alleviate all of our concerns. Instead, we must approach this problem as one that needs to be managed on an ongoing basis. If we attempt to come up with the ultimate single solution, we will be ignoring the dynamic nature of the problems. We must consider possible solutions holistically, taking the following into account:
Look at it from multiple perspectives by facilitating truly representative engagement between stakeholders
Cross examine the system value of the different technologies and implications of their integrated development
Make the planning process adaptive by updating it regularly and assigning greater value to shorter lead times and smaller components
We have already learned a great deal about what needs to be fed back into this process so that we keep learning as we go. The costs of wind and solar power have dropped past two historic milestones since the inception of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). First, both wind and solar (photovoltaic) PV fell below the new-build cost of coal and nuclear. Then, in the expedited window of the fourth round of the REIPPPP, the average tariff for solar PV dropped to the point where it matched that of wind2. The rapid downward cost trajectory of storage must be captured in a learning rate projection to avoid the model missing the hinge point at which it becomes a viable alternative to other forms of flexibility, such as gas.
We have learned that the rationale behind including artificial annual build constraints on renewable energy in the IRP2010 no longer applies. At that time, market capacity was uncertain and there were concerns about grid integration. Since then, the private sector and Eskom have successfully integrated 3 052 MW from 56 operating IPP projects3. South Africa already has sufficient flexibility to accommodate 25% variable energy without additional upgrades, storage or peaking capacity4. In the IRP2016 model, the requisite amount of each type of generation for matching supply to demand is costed according to its fixed and variable components. This ensures that the blended cost is representative of the system cost for variable generation in the mix. There is no hidden “backup” cost. With these learnings and the known strategic grid corridors defined in the gazetted Renewable Energy Development zones, artificial build constraints on renewables should be removed as they distort the ability to solve for a least-cost solution. Without them, the model generates a least-cost high renewables scenario with greater system value in nonmonetary parameters such as water, carbon and job creation5.
Participating in the REIPPPP has afforded Old Mutual Investment Group the opportunity of realising impact and of supporting the National Development Plan. The IDEAS portfolio alone contributed R192 million in enterprise development and socio-economic development funding, with tangible results in education, health and social development in rural communities – 41% of the R473 million national total by March 2017 – and the creation of some 7 800 direct job-years of employment – 25% of the national total of 31 200 job-years.
UNLOCK OUR CREATIVE CAPACITY TO GENERATE A SUSTAINABLE TRAJECTORY
Our diversity in perspectives and our delightfully unpredictable nature as human beings will add the element of the unexpected – and hence risk – to our forecasts. Despite this, we should take comfort in the fact that in these same qualities is the creativity that will save us from our presently unsustainable trajectory. If we are able to respond to disruptions appropriately, we will harvest opportunities for energy solutions that are more capable of meeting our needs. Failure to do so will result in us finding ourselves on the wrong side of history.
Sovacool, BK, Gilbert,A, Newgent, D, An international comparative assessment of construction cost overruns for electricity infrastructure, Energy Research and Social Science Journal, July 2014 p.154, table 1 2
“Formal comments on the Integrated Resource Plan (IRP) Update Assumptions, Base Case and Observations 2016”, CSIR Energy Centre, Pretoria, 31 March 2017
3 “Independent Power Producers Procurement Programme (IPPPP) An Overview, as at 31 March 2017”, IPP Office
4 International Energy Agency, Next Generation Wind and Solar Power report, 2016 (http://www.iea.org/publications/freepublications/publication/next-generation-wind-and-solar-power---from-cost-to-value---full-report.html)
5 “Formal comments on the Integrated Resource Plan (IRP) Update Assumptions, Base Case and Observations 2016”, CSIR Energy Centre, Pretoria, 31 March 2017