Eskom’s attempts to get co- generation agreements off the ground might be hampered by low electricity prices. Co-generation is the term for electricity that is produced as a co-product of an industrial process.
And, even if new capacity is added to the grid, it will be comparatively small. The prospect of the world’s cheapest electricity is dangled before investors, even as the same low prices deter those who would potentially invest in new generating capacity.
South Africa’s cheap electricity comes as a result of dirty, coal-fired power stations, with next-generation clean-coal solutions being much more expensive. Because the price is so low, the concept of energy efficiency is much harder sell. The same low price also means that it has not been economical to invest in new power capacity.
It’s as though a rubble removal service, determined to undercut its peers, quoted a price based on covering cash costs, but forgot to charge for the maintenance of its trucks and the future capital investment it would have to make one day in buying a new truck. As a savvy buyer you go with the lowest quote, but the bargain-basement service can’t fulfil its promise because the truck, after years of neglect, simply doesn’t work any more.
That lack of foresight is a common mistake for new entrepreneurs, but it’s less forgiveable when governments are involved.
Eskom’s chief executive, Jacob Maroga, said last week that the utility had received a number of co-generation proposals that were ‘promising” and that it was in the process of evaluating.
He said as much as 2 000MW could be added to the grid through co- generation. But research analyst Jeannot Boussougou,of Frost & Sullivan, said co-generation would produce only about 1 000MW in the next three years. Low prices do not reflect the cost of new power, which deters capital investment and alternative sources of electricty.
Boussougou said the current tariff negotiated between Eskom and energy regulator Nersa is 18c/kWh (kilowatt hour), which is about half of the actual cost of generating new power at 36c/kWh. He said Eskom, the sole buyer of power, is negotiating with energy-intensive users to establish a model purchasing power agreement. Tariff discussions could well form part of this.
An annual subsidy would meet the shortfall between the buy-back price and Eskom’s avoided costs. The avoided cost represents the amount Eskom would have to spend to produce the extra power itself. However, since Eskom buys low-grade coal at an artificially low rate, it seems unlikely that other entrants would be able to match this price.
Although the National Energy Policy Paper of 1998 advocated for renewable energy, co-generation has not attracted many investors, he said. ‘This is due to the fact that co-gen plants are particularly costly and generate relatively low output [5MW to 50MW]. ‘As a result Eskom might have to pay a premium on the purchase of this electricity. This is unlikely,” said Boussougou.
Mondi, which has a gas-turbine project in KwaZulu-Natal, Mittal Steel and Sasol also are involved. Only a few companies, among them Sasol and Mittal Steel, have the in-house skills to build co-generation plants locally. Private company AES has won the tender to construct two independent gas-turbine plants in the country.