Eskom’s MYPD2 application

Lawful? Necessary?

Peet du Plooy

WWF: Trade & Investment Advisor (South Africa)

Key questions

1. Is the planning basis for the investment programme necessitating the tariff increase valid and legal?

2. Is the assumed growth rate in electricity demand justified, if the electricity price more than triples over only four years?

3. What are the long-term (cost, competitveness and environmental) risks to funding the proposed, coal-based and Eskom-driven expansion plan?

4. Is Eskom an “efficient producer”?

5. Are there alternatives?

Key question 1

Is the planning basis for the investment programme necessitating the tariff increase valid and legal?

Planning basis

“IRP1” As gazetted on 31 Dec 2009 (after the MYPD2 application), without further detail, public participation or incorporation of Eskom’s build plan revisions:

Energy Act 34 of 2008CHAPTER 2ENERGY SUPPLY, OPTIMISATION AND UTILISATION

Provision of data and access to data sources

3. (1) The Minister must establish mechanisms to ensure—

(a) provision of any data and information reasonably required for the purposes of conducting analysis required for energy planning from any person and the time period for the provision of such data and information, where such data is not already made available to any other public institution: and

(b) connection to any data and information management system, or any other system within the public administration, for the acquisition of energy data and information, in accordance with the Promotion of Access to Information Act and the Statistics Act, 1999 (Act No. 6 of 1999) where such data or information is collected by that public institution.

(2) The Minister may, for the purpose of ensuring optimal collection of data, subject to observation of confidentiality of information in the possession of a particular entity, permit sharing of information with any other entity within and outside of the boundaries of the Republic.

(3) The information provided under this Act that is not already in the public domain may only be supplied to persons outside of the Department subject to the provisions of the Promotion of Access to Information Act.

(4) The Minister must establish mechanisms t o—

(a) collect, collate and analyse energy data and information:

(b) manage energy data and information; and

(c) avail, in a manner prescribed, energy statistics and energy information to the public.

Energy Act 34 of 2008 (5) The Minister must annually publish an analysis—

(a) reviewing energy demand and supply for previous year;

(b) forecasting energy supply and demand for no less than 20 years; and

(c) of plausible energy scenarios of how the future energy demand and supply landscape could look like under different demand and supply assumptions.

(6) The Minister must publish—

(a) models used for data and information analysis;

(b) all the assumptions that are underpinning the models contemplated in subsection (a); and

(c) a list of categories of information or data that have been classified as confidential and the reasons thereof .

Safety, health and environment

4. The Minister may. after consultation with the Minister of Trade and Industry, the Minister of Labour and the Minister of Environmental Affairs and Tourism, adopt measures not contemplated in any other legislation, to minimise the negative safety, health and environmental impacts of energy carriers.

Energy access by households

5. (1) The Minister must adopt measures that provide for the universal access to appropriate forms of energy or energy services for all the people of the Republic at affordable prices.

(2) …

Energy Act 34 of 2008CHAPTER 3

INTEGRATED ENERGY PLANNING

Integrated energy planning

6. (1) The Minister must develop and, on an annual basis, review and publish the Integrated Energy Plan in the Gazette.

(2) The Integrated Energy Plan must deal with issues relating to the supply, transformation, transport, storage of and demand for energy in a way that accounts for—

(a) security of supply;

(b) economically available energy resources:

(c) affordability;

(d) universal accessibility and free basic electricity;

(e) social equity;

(f) employment;

(g) the environment;

(h) international commitments;

(i) consumer protection; and

(j) contribution of energy supply to socio-economic development.

Energy Act 34 of 2008 (3) The Integrated Energy Plan must—

(a) take account of plans relating to transport, electricity, petroleum, water, trade, macro-economy energy infrastructure development, housing, air quality management, greenhouse gas mitigation within the energy sector and integrated development plans of local and provincial authorities:

(b) inform and be informed by plans from all supply, production and demand sectors whose plans impact on or are impacted by the Integrated Energy Plan; and

(c) be based on the results of the energy analysis envisaged in sections 3(4)(a) and 3(5).

(4) The development of the Integrated Energy Plan must take into account—

(a) sustainable development;

(b) optimal use of indigenous and regional energy resources:

(c) balance between supply and demand;

(d) economic viability;

(e) environmental, health, safety and socio-economic impacts; and

(f) developmental requirements of the .Southern African region.

(5) The Integrated Energy Plan must have a planning horizon of no less than 20 years.

(6) The Integrated Energy Plan must—

(a) serve as a guide for energy infrastructure investments;

(b) take into account all viable energy supply options: and

(c) guide the selection of the appropriate technology to meet energy demand.

(7) Before finalising the Integrated Energy Plan, the Minister must—

(a) invite public comments; and

(b) duly consider such comments.

Key question 2

Is the assumed growth rate in electricity demand justified, if the electricity price more than triples over only four years?

Demand AssumptionThe expansion plan calls for 25% more supply (10GW added to 40GW)

Mining and industry use 2/3 (68% in 2002) of electricity> Production in energy-intensive gold-mining is levelling out.

Will energy-intensive industry grow if electricity prices rise by 228% in four years (25c/kWh to 82c/kWh)?

Households use 1/6 (17% in 2002) of electricity> 1/4 of these still needs to be electrified.

Even if these consumed as much as those already electrified (very unlikely), this would raise total demand by only 1/24 or 4%

Agriculture + commerce use 1/8 (13% in 2002) of electricity > How will this demand grow at three times the price?

Transport uses 1/50 (2% in 2002) of electricity> Vehicle electrification and road-to-rail will raise this, but by less than 10%

Key question 3

What are the long-term (cost, competitiveness and environmental) risks of funding (through the MYPD2) the proposed, coal-based and Eskom-driven expansion plan?

Long term cost risk

Opex R'm

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

FY08/9 FY09/10 FY10/11 FY11/12 FY12/13 FY13/14 FY14/15

MTPPP, PNCP, DOE IPP OCGT, REFIT1

Non-Eskom Generation (Coal)

Road maintenance

Other Opex

Cost_of_Cover

DSM

Maintenance

Human_Capital

Environmental_Levy

Primary Energy Gas Stations

Primary Energy Nuclear

Primary Energy Coal Stations

From Eskom MYPD2 application

?

SA’s energy profileSA share of world total :• Economy: 0.71%• Population: 0.73% • Energy Use: 1.14% • GHG: 1.16% • Electricity: 1.4%• CO2: 1.6% (Source: cait.wri.org +)

#2 in carbon intensity of electricity after Poland (before new build, #1 after?)

Risk in trade

Supply-chain accountability by foreign buyers (eg. UK chain stores) increasingly require carbon neutrality in our exports (high-value agricultural exports already affected)

Regulatory costs for embedded carbon in exported goods (border tax adjustments threatened by US, Germany, France)

Carbon is increasingly a consideration for hosting international events and tourism (World Cup will be one of the world’s most carbon-intensive events due to 1. SA being a long-haul destination, 2. carbon-intensive fuel and 3. carbon-intensive electricity 4. with no carbon offsetting)

Risk in tradeSouth Africa is accountable for CO2 emitted on behalf of countries who import goods manufactured here. Our emissions are higher than that caused by our

own consumption (Balance of Emissions Embodied in Trade).

Missed opportunityFunding the coal alternative also carries an opportunity cost in not

developing new… • technologies, • resources, and• Industries

We will be backing the slow horse…(Coal power investment grew by 4.4% world-wide 2000-2005,

In 2008 global investment was $110bn)

…and not the fast one.(Renewable energy investment grew by >60% 2004-2007,

In 2008 investment was $140bn)

Industrial evolution

Sustainable energy

not if, but when

(Graph source: BP)

…and who profits (most)

Unexploited wealth

Key question 4

Is Eskom an “efficient producer”?

National Energy Regulation Act 4 of 2006

Tariff principles

16. (1) … the setting or approval of prices, charges and tariffs and the regulation of revenues-

(a) must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return;

(b) must provide for or prescribe incentives for continued improvement of the technical and economic efficiency with which services are to be provided;

Financial efficiency

33c/kWh covers Eskom’s additional costs for existing stations.

The other 49c/kWh (82c/kWh - 33c/kWh) goes towards Medupi and Kusile.

This is because Eskom is not properly capitalized, making it a financially inefficient producer.

This is further evidenced by cost creep of 50% and 67% for Medupi (R120bn i.s.o. R79bn) and Kusile (R142bn i.s.o R85bn) compared to the prices approved by the Eskom board in 2007.

Financial efficiency

Medupi + Kusile would be 20% of total capacity (40GW + 10GW = 50GW)

A 20% mix of IPP-supplied clean energy (co-gen, wind, solar) costing R1.50/kWh would raise the tariff from 33c/kWh to 58.6c/kWh – an increase of 25.6c/kWh with rates fixed for 20 years.

Generator units would be built in many small (~100MW) installments instead of two large 5 000MW chunks, spreading risk and allowing for gradual financing.

Key question 5

Are there alternatives?

Spending R120bn betterItem Specification Number Unit Cost

(R'000)LTMS cost ('03 R'000)

Cost (Rbn)

MW coal power replaced

Jobs (direct)

Economic spinoffs Watt per R'000

Solar waterheaters 3,000,000 15 - 45.0 1,875 12,000 jobs in assembly and installing + 3.5x as many indirect/induced

41.67

Smart meters 3,000,000 2 - 6.0 885 3,000 jobs in installing, demand flexibility

147.50

Wind turbines (nominal MW)

30% availability factor 2,000 15,000 7,800 30.0 600 1,044 grid cost savings (coastal), potential for local

manufacturing (turbine blades, gearboxes)

20.00

CSP tower (MW) with salt storage for 24hr operation

100 55,000 22,200 5.5 100 174 potential for technology leadership, export, 70% local

18.18

Additional CSP (MW)

hybrid parabolic trough for electricity or heat

400 40,000 22,500 16.0 400 696 security of supply in mining 25.00

Photovoltaic systems

each 100Wp with battery backup @ R80/Wp

300,000 8 5 2.4 30 1,050 300 000 rural homes electrified, rural economies stimulated

12.50

Biochar/electricity from invasive aliens

Fenix stoves (50x extrapolattion on Bushbuck Ridge project)*

76,100 18 - 1.4 53 9,450 cheap electricity and heat for 76 100 non-grid rural households

rural economies stimulated

38.13

Biogas digesters for cooking gas

each 3x 700W heat, fed by 5 cattle (equiv)

75,000 30 - 2.3 158 570 LPG replacement for 225,000 rural households,

methane "kicker"

70.00

Biogas digesters for electricity

each 70kW electricity, fed by 500 cattle (equiv)

3,000 3,100 - 9.3 210 760 3,000 agricultural incomes, methane "kicker"

22.58

Landfill gas (MW) 150 10,080 4,300 1.5 150 600 methane "kicker" 99.21

Combined Renewable Energy and Efficiency 119.4 4,461 29,344 At least 20MtCO2/yr saved, traded @R100/tCO2

= R2bn/yr carbon income

37.37

Nuclear 1 (MW) PWR 3,500 34,286 15,290 120.0 3,500 500 +1000(?) jobs in uranium mines, 70% of capital imported

29.17

Defer aluminium smelter

Coega (example) 1 -2,000,000 - -2.0 1,300 -1,050 avoid R2bn Eskom infrastructure investment, lose 4.5Mt coal export via grid @ domestic

prices of R120/t = R0.54bn/yr

-650.00

Low-Carbon Development Plan 117.4 5,761 28,294 49.09

Kusile (MW) Supercritical PF 4,788 25,063 9,980 120 4,788 4,788 more CO2 than 20 least-emitting African countries combined,

70% of capital imported

39.90

*Estimates by Phambili EnergyDirect jobs estimate based on 100 units installed per employee per year for 5 years (3x as many indirect jobs) Government/Eskom targets or estimatesBased on Agama Energy estimatesBased on UNEP/ILO central estimates, assuming similar intensity for wind and CSPBased on latest costs quoted in the press and assuming (generously) that cost of Kusile = cost of Medupi

Spending R120bn betterKusile Pro-Poor, Low-Carbon Development

Rising fuel cost Eskom coal bill:

08/09: R19.6bn 09/10: R25.6bn 10/11: R33bn 11/12: R40bn

No fuel cost

30Mt CO2/yr = 30 lowest-emitting African countries combined >> economic risk

R2bn/yr in carbon revenue (CERs or certified emissions reductions)

R120bn@10% over 30yrs = R12.7bn/yr on capital

+ R3.3bn/yr on fuel =

R16bn/yr cost

R120bn@10% over 30yrs = R11.7bn/yr on capital

– R2bn/yr from CERs + R0.54bn/yr of deferred coal export = R11.24bn/yr cost

70% imported 70% local (at scale)

Difficult to finance, additional costs (eg. Flue-Gas Desulphurization) for multilateral finance

Cheap, preferential multilateral finance – equity on balance sheet, not from tariff (IPP’s)

Temporary construction jobs Long-term manufacturing jobs x 6

On-grid consumers only 300 000 energized (electricity and heat)

Coal mine, limestone mine, ash dams >> impact on water, air, tourism

Rural development, tourist attractions

Published in Proceedings of Solar World Congress 2009

Affordable clean energy

From WWF report: “Cheaper Electricity with Renewable Energy”

Proposal

I. Grant the increase necessary for Eskom to build Medupi

If consumers don’t pay for it, tax payers will have to.

We will regret it in future, but because the cart (contracting) was put before the horses (planning), this is a horse that has already bolted.

Proposal

II. Do not grant an increase for the building of Kusile unless and until it has been demonstrated:

* in an Integrated Energy Plan

* developed in accordance to the law

…that it is a cheaper option for the country than IPP build and/or a combination of co-generation and large-scale solar and wind power.

“Cheaper” should cover at least a 20 year perspective (Energy Act) and include quantifiable externalities (Energy White Paper)

Proposal

III. Ensure that the build plan meets or exceeds South Africa’s targets for:

1. universal access to basic electricity (rural electrification)

2. greenhouse gas mitigation (stabilization and 34% reduction from BAU by 2020)

3. IPP participation (30% of all new build by value)

4. renewable energy share (4% / 10 000GWh / 1 320MW by 20139-15% by 2018 [2009 RE Summit, currently under review])