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CSIR responds to Eskom claim of R9bn renewables-related economic loss in 2016

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CSIR responds to Eskom claim of R9bn renewables-related economic loss in 2016

11th January 2017

By: Terence Creamer
Creamer Media Editor

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The Council for Scientific and Industrial Research (CSIR) has responded to Eskom’s claim that buying power from the country’s renewable-energy plants resulted in a net economic loss of R9-billion in 2016 – a trend that could persist for the next five years, owing to the country’s surplus supply position.

To reach its conclusion, the State-owned utility used a CSIR-developed methodology, which offsets the benefits associated with reduced load-shedding and avoided coal and diesel burn, against tariffs paid to the renewable independent power producers (IPPs).

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From January to December 2016, the utility purchased 6 TWh from solar photovoltaic (PV) and wind plants, which Eskom said translated into total financial benefits of R3.2-billion. However, this saving was offset against a tariff cost of R12.2-billion, leading to the assessment of a R9-billion net loss to the economy.

Eskom argued that this trend of net losses would persist until 2021, owing to its assessment that South Africa will continue to have surplus capacity until that date.  It, therefore, argues that new renewable IPP plants should only be introduced at a “pace and cost the country can afford”.

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The utility has, since mid-2016, steadfastly refused to conclude power purchase agreements with IPPs for the most recent projects selected under the country’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), leaving 26 projects, with a combined investment value of around R50-billion, in limbo.

The uncertainty has been reflected in a recent BMI Research industry analysis, which says the outlook for the South African renewables sector remains clouded by the contradictory messages from the Department of Energy and Eskom regarding the country's renewable-energy policy.

“If the ongoing disconnect between the government and Eskom results in prolonged uncertainty with the REIPPPP and delays to new bidding windows being implemented, it will serve to dent investor confidence in the market,” the Fitch Group company said in its early January note.

In its response to Eskom, CSIR stresses that its methodology, which measures only the immediate fuel-saving effect on the existing fleet and underestimates the value of new investments, had been developed for a constrained power system and for when the use of diesel generators was high.

“When the power system is less constrained and diesel turbines are not operational most of the time, the methodology underestimates the diesel-fuel savings. It needs to be adjusted to give the correct fuel-saving value.”

The CSIR also notes that only the most expensive REIPPPP projects, mostly from bid windows 1 and 2, were operational during 2016, with the lower-cost projects of the latter rounds still to be introduced. The average solar PV tariff fell from 356c/kWh in bid window 1 to 62c/kWh in bid window 4, while onshore wind fell from 151c/kWh to 62c/kWh over the same period.

“South Africa effectively got a discount on these expensive projects for the first three years when the power system was constrained. The discount stems from avoided load-shedding and from diesel-fuel savings.”

However, CSIR argues that these effects were not anticipated when the decision was made to implement the REIPPPP, which proceeded on the basis of a policy decision to diversify the South African generation mix and with the knowledge that the first renewables projects were likely to be expensive. The fact that their introduction coincided with a constrained system meant that the plants provided an “emergency supplement” and the country received a “discount on their cost for the first few years”.

REAL VALUE

The real value, the CSIR argued, of the projects arising from the first three bid window lies in the cost reductions achieved for solar PV and wind to 62c/kWh, which is 40% cheaper than new coal. These reductions would not have been possible in the absence of the competitive bidding associated with the REIPPPP.

“While the operational solar PV and wind projects triggered tariff payments of roughly R12-billion in 2016 and produced roughly 6 TWh in the same year, the entire bid window 4 solar PV and wind projects (original, additional and expedited) will trigger tariff payments of merely R6.6-billion a year, while they will produce more than 9 TWh a year. That means 45% less annual payments for 50% more energy compared to the currently operational solar PV and wind projects. These new projects will, therefore, be almost cost neutral from a pure fuel-saving perspective.”

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