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By Felicity Duncan
In a recent piece on the Eskom disaster, The Economist suggested that SA could solve its electricity crisis by switching to a system that prioritises independent power producers (IPPs) and renewables. Eskom, says the magazine, should give up on coal and cut its losses on some of the big projects it has underway. Instead, the government should open up the market for IPPs and encourage renewable energy projects.
There are two reasons to think that this approach could work, and two big problems with it.
The biggest reason to support a switch to renewables is that renewables now generally have a meaningful cost advantage over fossil fuel energy.
First of all, the upfront cost of setting up a renewable energy project is steep – but not as steep as setting up a coal plant in SA.
A large-scale solar energy system in America costs about $2,000 per kilowatt to build, while an onshore wind project costs around $1,600/kW. Estimates vary wildly on the cost of coal in the US – the US Energy Information Administration puts the cost at over $5,000/kW, while Penn State puts it at between $500 and $1,000.
In SA, we know that the combined cost of building Kusile and Medupi is estimated to be R447bn. The two will have a combined capacity of 9,600 megawatts. That puts the capital cost for that capacity at around $3,300/kW.
So, on a capital cost basis, setting up solar or wind is a lot cheaper than building coal capacity.
Renewables also have a major cost advantage over fossil fuels when it comes to running costs. Coal plants require, well, coal. Lots of it. That coal has to be dug up and transported to the plant, and then sorted and fed in. All of that is expensive. Solar and wind plants, however, just need the sun to rise and the wind to blow. No one has to mine for daylight, and the wind moves all by itself. The maintenance costs of renewable plants also tend to be much lower than those of fossil fuel plants.
Thus, overall, renewables tend to be net cheaper than fossil fuels these days. Using levelled cost of energy (the unit cost of electricity over the lifetime of a generating asset), Lazard estimates that wind costs $30-$60 per megawatt hour, the cheapest solar option costs $43-$48/MWh, and coal costs $60-$143/MWh.
From that perspective, renewables are a no-brainer.
Eskom is, by many measures, a sinking ship, with its debts vastly outweighing its capacity to repay them. But IPPs have taken note of the fact that, while Eskom is a mess, there is strong demand for electricity in SA. Renewable plants can be built relatively quickly and there appears to be a decent appetite for investment on the part of IPPs. Many have participated in the competitive bidding process under the government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) and many more would like to.
In other words, opening up more space for renewable projects may attract capital, something the SA electricity system clearly needs.
But… the cost story isn’t that simple
It’s true that, on average, renewables are less costly than fossil fuels. But that’s not the end of the story. Renewables are inherently unreliable. The sun doesn’t always shine hard enough to make power and the wind doesn’t always blow. When they falter, the power shuts off, so a reliable renewables system needs one of two things: expensive batteries to store surplus power or fossil fuel backups. Those both add costs that must be considered as part of the broader picture.
In addition, you can’t just build a renewable plant anywhere you find cheap land or a good connection to the grid. You have to find a good sunny or windy spot. SA is rich in such spots, but those spots aren’t always well-connected to the grid. Therefore, setting up a new plant in a remote location may mean building a lot of new transmission capacity, which can further raise costs.
Only solving half the problem
Another major objection to the renewable IPP plan is that, at best, it would only solve half of the problem when it comes to Eskom. The Eskom issue is two-fold. On the one hand, the utility doesn’t produce enough electricity to keep the lights on in SA. On the other hand, it has built up an enormous stockpile of debt and now threatens the country’s credit rating and long-term fiscal sustainability.
Adopting the renewable IPP plan could perhaps solve the first half of the problem. It could boost power production and help prevent load shedding. But it would do nothing to solve the financial toxic swamp that is Eskom’s balance sheet. It may even make things worse for Eskom, which may struggle to sell expensive Kusile power if there were cheap solar power available.
The plan also ignores the power of vested interests, especially trade unions, to derail any attempt to switch from labour-intensive fossil fuels to low-labour renewables. The direction of the country’s energy grid is not only an economic issue, but also a political one. And any plan that ignores the political side of the Eskom crisis is doomed to fail.
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