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Eskom’s CEO Brian Molefe has thrown the cat among SA’s R200bn renewable energy industry’s pigeons with his reluctance to commit the State-owned parastatal to any fresh purchase agreements. Molefe’s argument is based on a belief that renewable energy is too expensive and delivered at inappropriate times. Cynics believe Molefe’s off-beam directives are a crudely disguised attempt to promote President Jacob Zuma’s unaffordable nuclear power build project. In this fascinating interview, Futuregrowth Asset Management investment manager Iqeraam Petersen explains why the Eskom CEO’s approach is irrational. – Alec Hogg
Iqeraam Petersen who is Investment Manager with Futuregrowth Asset Management joins Alec Hogg on the line from Cape Town. Iqeraam you put together a report last month about Eskom’s decision on renewable energy. It seems as though the powers that be at Eskom are balking from supporting the programme.
Yes, that’s right. At some point, it does come as a bit of a surprise to us but not that much of a surprise. If you look at Brian Molefe’s comments throughout the year, he’s always commented about renewable energy and the cost of electricity is way too high and it’s actually useless, or it’s been produced at low demand times which the country doesn’t need. But when you look at it, the actual reasons for being against it doesn’t quite make sense to us. For example, the electricity being produced at low demand periods isn’t something new to Eskom.
For example, their coal power plants, they’re being produced at a base low. That means that they are produced at a fairly even rate throughout the day and that means that even at midnight they’re still producing. Eskom has taken that power and they’ve moved it using pump storage and stored it as a sort of a battery and then during the peak times, they release that energy. We don’t actually understand the reason why they can’t use that same mechanism to transfer power of the renewable energy to the high demand times in the evening.
He is also quite outspoken on price.
Yes, the price of renewable energy was high in round one and round two but with any competitive process, that price has come down significantly. For example, in the round 4 transactions we see wind and solar in the low seventies and upper 60 cents per kilowatt hour and if you look at the electricity cost of Medupi and Kuslie, that according to Eskom is about 70/75 cents per kilowatt hour but according to an industry calculation it’s closer to R1.20, R1.30 per kilowatt hour. I think that’s as it stands now.
The more important thing is that Medupi and Kasile and all the coal fire power stations, the cost of electricity won’t escalate at CPI as we’ve all seen over the past few years with 20 plus increase in electricity because the cost of coal doesn’t increase at CPI whereas the cost of renewable energy, according to the power purchaser’s agreement, the increase is going to always be at CPI. Therefore, at some level you can depend on the tariff over the next few years.
Let’s just go back to the beginning because this is a very successful project being internationally applauded. Why did South Africa need to start with a renewables project where it brought in independent power producers? What was the theory behind this?
When the renewable energy programme was developed, South Africa was in a crisis as far as electricity was concerned and we needed electricity to be delivered quickly to the grid and renewable energy is one of the quickest forms of getting that energy to the grid. For example, the time it takes to build a solar PV plant, it’s between one year and two years whereas we all know that Medupi and Kasile takes much longer than that, so we need quick power to the grid, we need a fairly cheap power to the grid and renewable energy was the answer. Over and above that the international pressures regarding the emissions on coal and our heavy reliance on itl wasn’t helping matters. Therefore, renewable energy was the answer.
It was done in a very innovative way where the international players were attracted to the country and given the opportunity to bid. Iqeraam, did they try then to bid against each other and presumably the one with the lowest bid in each of these rounds, and then we’ve had four of them so far, were the ones that got the contracts?
Absolutely, the reason why the renewable energy programme has been so successful, there are a number of factors but the main factors are that there’s competition. Competition causes all developers that are there and wanting to submit a project to sharpen their pencils to give the best value proposition to the country. Over and above that the underlying documents for the power purchase agreement, the implementation agreement, those were developed prior to those bid submissions and they were done in a consultative manner with the industry.
Thus we’re not sitting with agreements that the entire industry hasn’t bought in and as a result all of us have bought into those agreements and we can bid on a fair basis and we know exactly what we’re getting into. Another major success factor was the consistency and the clarity as to what’s the long-term plan for renewable energy. We knew that it wasn’t only going to be one round, we knew that it’s going to be at least four rounds of 6000 megawatts, and then there was a long-term plan of getting up to 16 gigawatts of power.
What has happened is the first four rounds have been successful but now we’re getting this kickback, particularly from Eskom. Is it really just price related?
Yesterday we actually had a meeting with Eskom management to discuss this very issue and about the board of Eskom business, and we posed that question to them. Why exactly are they pushing back on this, is it a price issue, or is it something else? What Brian essentially said was that “Yes, the cost of renewable energy is higher than the current cost of coal energy but the bigger reason is that the electricity is getting produced at low demand times”.
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For example, solar gets produced at noon and during the peak sunlight hours and the peak demand is early morning when people are getting up and showering and getting ready for work and when they come back from work and cook. The problem is that they feel that they’re forced to buy this so-called expensive electricity and they can’t actually use it because they can’t move that electricity from the low demand periods to those high demand periods, so either way they feel that they need the coal power as backstop.
The argument is it’s too expensive on the one hand and secondly it comes through at the wrong time. Let’s just unpack those individually. The price in the latest bidding round was around 75 cents per kilowatt-hour. How does that compare with what Eskom is going to be producing at Kusile and Medupi?
You hit the nail on the head, that’s exactly it. The cost isn’t that much different, actually it’s pretty much the same if you take Eskom’s lower calculations into account. If you take the industry’s calculation into account renewable energy at, let’s call it 70 cents per kilowatt-hour is much cheaper than the R1.30 or R1.20 of Medupi and Kusile. That being said, I need to put all the ducks on the table, Medupi and Kusile can produce at this peak period whereas renewables can’t. Therefore, we need to take into account a level of storage but even with a level of storage, if we had to put in a pump storage scheme, I think that it would come out at roughly the same price.
The important thing is that the beginning point is price. The second part is the issue that you’re touching on now where the coal fire power stations can produce consistently 24/7. Of course solar and wind, you don’t always have the sun shining and you don’t always have the wind blowing. Is there not any way that solar and wind could, or the power that’s generated from these renewables, could it not be stored somewhere?
Absolutely, it’s definitely in prospect for the future and there’s lots of research being done to find out the best way to store electricity from wind and solar. Obviously, we’re totally ignoring another renewable technology called solar CSP and that has inherent storage capability through molten salt, but obviously, that comes at a higher price and I think it’s better suited (a better comparative between the solar CSP) and the diesel, gas turbines is a better comparative. If you compare the two, the solar CSP is much cheaper.
What is this molten salt that you have referred to? Is that new technology?
It depends what you define as new. It’s been around for a few decades and essentially what it is…let me give you a brief overview of what Solar CSP is first. Solar CSP as opposed to PV is using the heat of the sun to generate electricity instead of a chemical reaction in the PV panels. You heat up this oil, or molten salt to 300 to 500 degrees Celsius and then you store those salts in a big tank and once you’re ready to generate electricity you release those salts and transfer that heat and create steam. That steam in turn generates a steam turbine. That way you’re storing electricity, or storing energy, and releasing it at the peak times.
Whereas PV will be a different process?
Yes absolutely, PV is a chemical reaction within the panel, but that’s only while the sun is shining and that chemical action releases electricity directly and that’s the problem in that South Africa doesn’t necessarily need the electricity only during midday, we need it once the sun sets and it seems that’s really the issue that Eskom has is that they don’t know how to store that electricity and release it when they need it. I still don’t see the reason why pump storage isn’t the answer. When that electricity gets generated, just like any coal power station, the electricity is put into the grid. If there’s excess electricity, we can either sell it to our neighbouring countries or we can use a pump storage system to pump that water up a hill and when we’re ready to generate electricity, we release that water down a hill, through a hydro turbine and electricity comes out.
It’s just a little bit of innovation, interesting talking about the CSP or the Concentrated Solar Power Project. A few of those have been introduced in South Africa. What happens now because presumably with the way they’ve been constructed, which is exactly to be able to produce power even though the sun isn’t shining, they too are being rejected, it appears, by Eskom.
The ones that have been built haven’t been rejected. Everything up until around 4 or around 4.5 are still fine, the PK has been signed and it’s business as usual and Eskom went to great lengths to reiterate that they said that ultimately they’re committed to buying electricity from any PV plant, any CSP plant, any wind plant that they’ve signed up to. On the new plants, I think the big issue that they find there is price. They feel uncomfortable being locked into price of let’s call it R3 per kilowatt hour, when at the moment they have excess coal capacity, which they’re saying on the old coal technology they’re paying close to 20 or 30 cents per kilowatt hour.
Well that is a huge difference but are the new renewables plants coming on at R3, is it as high as that? I thought it was the 75 cents that we were talking about earlier.
Yes, the CSP is still at R3.00, it is quite an expensive technology, but that’s because we haven’t capitalised on any economies of scale. Those are 50 to 100 megawatt sized plants and obviously, there’s a level of fixed costs whether it’s 50 megawatts, 100 megawatts, it’s still a large size of the plants. With improved research and with the ability to upscale those projects maybe you can get to 500 megawatts or a gigawatt plant that will be able to get the economies of scale and reduce that price per kilowatt hour.
It’s pretty complex but if I understand you correctly the normal sun or wind-fired renewable energy will deliver energy into the grid at 75 cents, the new technology unless it’s a big plant, which we don’t have any of yet will be much more expensive and Eskom is kicking back against that.
Yes but again it’s all about a mix of energy. Coal is great in that it’s generating 24/7, it’s a base load power but a base load power 24/7 is a double-edged sword. It’s generating at all points in time even when we don’t need it whereas CSP can generate when we need it, so with an addition of peaking power which solar CSP can be, that means that we need less coal or need less base load. Let’s put numbers to this. If we need 32 gigawatts of power to generate at our peak, if all of that was base load that means that we need 32 gigawatts of capacity of base load power because it’s constantly generating 24/7. Whereas if our lower end of our demand is 20 000 gigawatts then we just need 20 000 gigawatts of base load and at our peaking times, we just need the CSP plants to come in and generate additional capacity to get us up to 32 gigawatts.
As you said earlier, it’s a bit like the diesel engines that had to be switched on when there was a shortage of power in South Africa.
Exactly, but the CSP plants will be much cheaper than the diesel plants.
All right, so we now know where they fit into the energy grid but there are two issues. The first is the World Bank is now pulling out of the Inga Power Project, the hydro project. If you have a look at the long-term plan for South Africa, Inga is supposed to deliver quite a big slug of that. Is this throwing a cat amongst the pigeons, is that perhaps why Eskom is trying to reassess things?
It’s not necessarily the Inga project that’s concerning me, it’s more a case of the plan that you’re referring to is a concern because the plan you’re referring to is obviously the IRP 2010 plan and that’s out of date. It was supposed to be updated every two years, we’re in 2016, and it hasn’t been updated. What we’re finding now is, I personally feel that Eskom’s view and Eskom’s stance is just a symptom of the bigger problem and that bigger problem is really that we’re an industry without a plan. We’re an industry with a six year old plan that needs to be updated urgently and the private sector and the public sector and Eskom doesn’t know what exactly the future holds, so we’re really waiting for DOE to release what the IRP 2010 or more specifically what the new energy mix will be.
That’s a good one point. The second point is, just today we heard that a company from Germany SMA Solar is pulling out of South Africa because government is no longer committed to its renewable energy programme, which has all of these plaudits from around the world. Is that fair, do you think it’s a rational decision?
I think it’s a bit premature per se, that government isn’t supporting the programme. After Eskom came out with its view, Minister Tina Joemat-Pettersson came out with quite strong support of the programme, over and above that the Minister of Finance, Pravin Gordhan also came out saying that Eskom has no rights to set policies, they’re not in power to set policies, so I don’t think that’s the real reason why SMA is leaving. In all fairness, the solar PV market has been more competitive in South Africa after round one and round two as a result, maybe some players feel that it’s not economically viable for them anymore.
It’s a nice excuse if you like and as you say, it has become more competitive because there are a lot more players, nearly R200bn in investments that have been brought in.
Yes, what I’ve heard is that if you have a project that you bid at Round One, you probably have less of a ten percent chance of winning, so that just shows you how competitive it is out there.
Iqeraam, the sceptics are saying that Eskom is forwarding a hidden agenda which is to promote the nuclear programme that has caused so much controversy in this country, A is it affordable, B is it the right technology, C have the Russians got the inside track and so on…Do you think there’s much rational argument that would support that?
In our meeting yesterday, they didn’t pull any punches with respect to their preference for nuclear. There wasn’t any views expressed as to a certain technology but the view was that nuclear is something that needs to be explored with respect to further base load given that coal isn’t viable anymore, or that we’re quite heavy in coal. That being said they also mentioned gas but nuclear was definitely counted as something that would be preferred and that Eskom would like the conversation to be started soon with respect to procurement of nuclear.
Why this obsession, the UK has put its plant, the Hinkly Point Plant on hold because its new Prime Minister thinks it’s too expensive and there’s all kinds of other counter opinions towards it. Why is Eskom so strongly camped in this direction?
That’s a loaded question. As far as nuclear is concerned I understand the merits but I also understand the cons. The issue with nuclear is that it’s a big upfront cost and that upfront cost needs to be financed in some way but then you have a 30 to 80 year plant. There’s some estimates of 80 or eight years at least and the cost of generating a kilowatt-hour of nuclear then as far as variable cost is concerned is only five cents. I think that’s the reason why Eskom wants nuclear because the cost of electricity in their mind at least would be lower. I’d prefer not to comment on the political issues regarding procurement and whether the Russians have it or not or if anyone is in anyone’s pocket, but that being said I think nuclear or gas needs to be explored as far as base load is concerned. Coal has run its course. The international community does not like coal for good reason because of the environmental concerns.
From your perspective, as an investor and as a South African taxpayer would you like to see a transparent process at the very least surely.
Absolutely, you want a transparent process just like the renewable energy process was. You knew exactly what you’re getting, you knew exactly that, you knew that it was a competitive process, you knew the broader market bought into the underlying agreement and everything was above board and you knew the process, you got the best value for money as a South African.
As long as that’s the case, nobody will really gainsay it. One final point, when one has a look at the arguments that have been put forward by Eskom and we have dealt with the price one, primarily the one they’re not buying that you said could be or is the one they should be looking at is this whole issue of storage. What would change people’s minds in that regard?
As far as storage for renewable energy is concerned?
Yes, obviously CSP is something that needs to be explored further as far as the only renewable energy technology that has renewing storage capability and that needs to be explored further. Maybe some R&D needs to be put into place into that area so that we can understand what the issues are regarding scaling up these projects in order to make them larger instead of 5200 megawatts, how can we get them up to 500 megawatts or even a gigawatt of power. Then as far as wind and solar PV is concerned, the question still lingers for me that why can’t we use pump storage to solve that problem regarding storage. When the PV plants are generating electricity, why can’t we move that electricity using pump storage to the peak demand times?
What is the response from Eskom to that?
It was a flat-out “No, you can’t” because you can’t predict how it’s going to generate and with pump storage you need to plan ahead in order to pump that water up and to know when you can release it. The unpredictability of solar, PV, and wind really seems to be the problem for Eskom.
Iqeraam Petersen is an Investment Analyst with Futuregrowth Asset Management.
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