By Professor Owen Skae, Associate Professor and Director of Rhodes University Business School
It highlighted that we need to think about how to plan for the dramatic change in the global energy sector that is coming – and coming faster than most think.
#NEO2016 essentially states that any major investment which is expected to produce returns beyond 2030 will run the risk of being stranded at some stage. Hence new coal and nuclear are not wise choices at this stage.
The opening paragraph hits you right between the eyes.
“By 2040, zero-emission energy sources will make up 60% of installed capacity globally. Wind and solar will account for 64% of the 8.6TW of new power generating capacity added worldwide over the next 25 years, and for almost 60% of the $11.4 trillion invested”.
The article explains that wind and solar energy will keep getting cheaper.
Solar’s precipitous cost decline, for example, “sees it emerge as the least-cost generation technology in most countries by 2030. It will account for 3.7TW, or 43%, of new power generating capacity added in 2016-40 and for over $3 trillion of new investment. Small-scale solar makes up a bit more than a third of this new capacity, starting with Europe, Australia and the US but quickly spreading to India and other countries, with households and businesses adding solar PV on the rooftops to offset retail power bills almost everywhere.”
The Eskom board has a lot to think about, as does the Department of Energy and National Treasury.
Reading #NEO2016, I couldn’t help thinking about the Giant Flag project being planned for outside Graaff-Reinet in the Karoo. Covering a surface area of 66 soccer fields, comprising millions of desert plants in the colour of our national flag and incorporating a 4MW solar farm, it will be seen from space. Clearly 4MW is a drop in the ocean compared to what we need, but it highlights the point that demand forecasting for large utilities is becoming increasingly difficult as micro projects start emerging and gaining momentum, ushering in a new green innovation era that tangibly brings people, profit and planet together.
Which brings me back to Eskom. There is a rising chorus claiming that Eskom’s comparisons of the cost of one form of energy with another are fallacious, and simply part of Eskom’s persistent campaign to try and prove that electricity procured from IPPs is more expensive than coal or nuclear in order to justify their current structure. It doesn’t take much examination to work out that Eskom’s so-called strategy for sustainability is, in reality, extinction accounting.
Eskom’s sustainability has been questioned for a long time. Professor Brian Kantor and David Holland spoke about this at the NERSA public hearing in Cape Town on 15 January 2013 when they tore Eskom’s case apart in 25 minutes. They widely circulated their recommendations, titled: Electricity Pricing – Principles that should apply to Eskom.
What did Eskom’s board decide to do? One can only assume they carried on as normal, which makes one wonder which questions, if any, their non-executive directors are asking.
Are they asking why Eskom is still chasing a revenue model when this does not foster prudence? Chasing tariff hikes and applying to NERSA for clawbacks through the Regulatory Clearing Account (RCA), does not promote effective, efficient and economic optimisation of the national electricity supply. Compounding the woes are municipalities who hold onto the electricity revenues they have collected, to balance their own shortfalls.
This revenue model approach creates a perverse incentive which, in short, will eventually price Eskom out of the market, if it hasn’t already done so. Which is why Eskom does not want the IPPs to expand because it compromises their revenue model. If they allow more IPPs to come on line, it is going to reduce their inflated revenues.
Kantor and Holland made it very clear that if Eskom continues to demand unsustainably high rates of return on non-productive assets in their fleet, the cost of electricity in South Africa will not be sustainable. This will compromise all electricity consumers, including commerce and industry, with Eskom ending up as a beached whale.
What has also came to light is that we seem to be obsessed with focusing on the supply side, without adequately considering what the demand equation for electricity might look like in the future.
In an opinion piece written in Business Day on 17th August this year, Leon Louw of the Free Market Foundation argued there is a direct correlation between electricity consumption and economic growth and that if South Africa doesn’t start generating huge amounts of electricity we are going to be in trouble.
Arguing against this, Dr Roger Silberberg in his letter to the Editor on Friday 19 August, said that traditional models of equating economic growth to electricity production are obsolete because the world is getting smarter and using electricity in far more energy-efficient ways.
Hence, the call for huge investment in nuclear, based on traditional use projections might not be properly considered. As Silberberg points out, the rate of projected electricity use is now less than half of the economic growth rate in the US because of the shifting of economies towards less energy intensive industries or a mix of energy provisions.
In this regard I was intrigued to see Old Mutual’s advert as of 31st March 2016, about responsible investing initiatives and their R14billion investment in renewable energy. It cited that out of a total of 6187.9 Megawatts (MW) of renewable energy in South Africa, comprising a mixture of solar, biomass, landfill gas, hydro and wind, Old Mutual’s R14bn investment is for 2,715MW. The biggest proportion of this is in solar (1,185MW) and wind (1,518MW).
The R14bn investment appears to follow good capital budgeting theory, it presents us with a lot less risk and uncertainty and the renewable energy independent power producer programme has been hailed as a success of public-private partnership.
South Africa is at critical phase of our socio-economic development and we need to use the opportunity to take stock of what is really good for South Africa, and we need far more public debate and transparency about what Eskom is doing.
If we do not demand this of Eskom’s board, then if the proposed nuclear plants are approved, we will carry the cost of them for many years before any power is generated, and we all know that Eskom’s development costs have a knack of doubling, tripling and more.
If we do not keep up the pressure, as tiresome as it might be, then, as it states in When Money Destroys Nations by Philip Haslam with Russell Lamberti, we will find ourselves diving down suicide gorge without any opportunity of turning back.
This article appeared in Leadership Edition 375, October, 2016. It is reproduced with their permission.