Eskom's recent application for price increases is a watershed.
This is important because South Africa's industrialisation was built on cheap and abundant electricity supplies, cheap and abundant coal reserves and the low cost of building coal-fired power stations back then.
The future will be different. Nersa, the electricity regulator, has calculated that the likely "levelised" costs (or the all-in price of electricity from a project over its lifetime, including operating expenses) of generating electricity from Eskom's two new power stations will be in the region of 97c/kWh. Eskom claims it is 80c to 90c/kWh. Whereas Eskom's wholesale price was just 44c/kWh in 2010, 97c/kWh is the new benchmark.
Eskom's other problem is its environmental record. Gas is far more efficient and cleaner: a typical coal-fired station operates on a Rankine cycle with an efficiency of just more than 30%. Current carbon-capture systems reduce efficiency because of parasitic loads of as much as 30% of final output. Newly developed combined-cycle gas-fired power stations operate at efficiencies of at least 65%. This reduces the amount of fuel energy needed to deliver a given amount of electricity.
Coal is effectively 100% carbon, so if you burn one tonne of coal you produce 4.4 tonnes of CO2. Natural gas (methane) is CH4 (one carbon molecule and four hydrogen molecules) and because more heat is released from the combustion of natural gas you only need 0.69 tonnes of methane for each tonne of coal. The CO2 from that 0.69 tonnes will only be 1.82 tonnes.
We also need to price in carbon taxes. South Africa will come under increasing pressure from its peer countries to do something about its emissions. We will face pressure to change from both the developed and the underdeveloped world to do so. South Africa's current energy roadmap, the Integrated Resource Plan 2010 to 2030, recognises this and the treasury is examining the feasibility of carbon taxes.
Becoming less carbon-intense looks hard to do. There is an old Irish joke about a tourist asking a local for directions to Dublin; the Irishman's response is: "Well, sir, if I were you, I would not start from here." Our first step is the introduction of renewable energy. The resource plan said 42% of new investments in energy would come from renewables. South Africa has some of the best renewables resources, sun and wind, in the world. Right now, onshore wind is delivered at 89c/kWh and solar photovoltaic at R1.65/kWh (and the latter has good potential to fall further). Still, by 2030, only 9% of generating capacity will be from renewables. Moreover, renewables do not provide baseload power – electricity that is produced around the clock.
After the new Medupi and Kusile power stations, new baseload capacity was supposed to have been met by more nuclear power plants to be sited on the coast. Nearly all Eskom's existing and prospective power plants are concentrated in two areas around Mpumalanga and the Waterberg in Limpopo. Thus the electricity consumed in coastal provinces has to travel enormous distances. By the time electricity is "delivered" to, say, Cape Town, as much as a third of it has been lost in transmission.
Injustice
There is a significant degree of injustice here too. If you live near an Eskom power station you suffer the effects of both coal mining and the effects of coal-fired generation, but you pay the same price for electricity as users on the coast.
The various cost overruns we are seeing with the Medupi and Kusile projects should worry us all – but they should also provide the reasons why nuclear is not feasible. The price tag for Medupi and Kusile is roughly R91.2-billion and R118.2-billion respectively, but finance charges will push the total financing charges of Medupi closer to R116.2-billion and those of Kusile to R158.2-billion. Given a generation capacity of 4800MW, Medupi will cost us a towering R33-million per megawatt even before the first lump of coal is burnt.
Nedbank's analysis of wind generators in Kenya showed that wind came in at a capacity of R11-million a megawatt. Even if one factors in the actual capacity factor (that is, the times that the wind generator is generating), the like-for-like installation cost for wind is about R37-million per megawatt. Thereafter the wind is free, whereas coal will cost you.
A benchmark study by the International Energy Agency of the levelised costs of different generating technologies in 2010 produced different results depending on the discount rates used (cost of financing), countries studied and whether the fuel had to be imported or not. The findings were that coal-fired power plants cost between $1000/kW in countries outside the Organisation of Economic Cooperation and Development and $2 500/kW in member countries, but take about four years to build.
The price of coal varied widely, depending on whether coal had to be imported. But levelised costs could range from $25/MWh to $80/MWh. Countries with their own coal reserves were on the low end of the scale. It is worth examining why Medupi and Kusile are that much higher than the International Energy Agency benchmarks.
Nuclear is much worse. Its budgeted capex costs start way too high and, moreover, completed projects invariably overshoot budgets – by far. This explains why nuclear's order books remain slim.
Construction costs
Gas-fired power stations produce different economics. The International Energy Agency's benchmarks show that the construction costs of a gas-fired plant range between $400/kW and $800/kW and are completed in a time frame of just more than two years. Gas-fired plants can be smaller and their operations and maintenance costs are significantly lower too. The key driver of economics here is the gas price: using a gas price of between $3.50/GJ and $4.50/GJ, the fuel represents 73% of total levelised costs.
South Africa does not have much in the way of proven natural-gas resources, which has prompted the controversial moves by Shell to procure exploration licenses for fracking in the Karoo. Leaving aside serious environmental questions on the merits of this, fracking looks uneconomic in the light of significant natural-gas finds off the East African coast.
Recent reports include discoveries of 100-trillion cubic feet of natural gas off Mozambique. ENI, an Italian hydrocarbon major, confirms total reserves off Mozambique at 70-trillion cubic feet. Tanzania has proven gas reserves of just less than 30-trillion cubic feet. Mosgass was built on just one-trillion cubic feet.
In the extraction of gas, whether natural or unconventional (fracking), resources are one thing – the downstream infrastructure to use it is another. Yet transporting gas is a problem. Either pipelines are needed, or it must be liquefied and transported in special tankers. Methane liquefies at -162C, but as a liquid it compresses to one 600th of its gaseous volume. A Massachussetts Institute of Technology lead study tried to model the cost of the full cycle of liquefaction, shipping and regasification using United States market metrics and found that this added $4 to the well price.
Fracking, which uses new technologies and globally scarce skills, must now compete with natural-gas extraction using proven technologies just across our border. Because gas from Africa's East Coast is far in excess of the current needs of either Mozambique or Tanzania, most of the gas will need to be exported as liquefied natural gas, if these reserves are to be exploited. Fracking is controversial enough, but having to subsidise the process in the face of falling gas prices would be a bitter pill to swallow.
Supply-side shocks
Instead, South Africa should now develop its own liquefied natural gas infrastructure and commission the construction of gas-fired plants adjacent to liquefied natural gas import facilities. This would allow us to build a maritime industry from nothing. Eskom would then sell the electricity generated by its family of coal-fired stations only to the inland provinces. Almost immediately, South Africa's carbon intensity would be reduced.
Gas can do something else for us too. It can protect us from the regular supply-side shocks we suffer from crude-oil price fluctuations. Gas can also be used as a transport fuel.
For all its benefits, gas is still a non-renewable fossil fuel – but it can make renewables more viable. Gas is most efficiently used when generating electricity. Smart grids, batteries and smart meters are the next technical revolution. Once electric cars become commonplace, they will transform the storage of electricity in batteries. Here, gas displaces oil through electricity. Once this happens, the argument against renewables and their intermittent power generation profile falls away. Renewables become just another power source contributing to the grid when the sun shines and the wind blows.
All these initiatives will require big changes in our thinking about energy, including the role of Eskom, the role of markets, the need to separate electricity generation from transmission and distribution, closer integration with our neighboring countries and more. It is high time gas moved to centre stage in the South African energy policy framework. If it does, our children and grandchildren will thank us.
Dirk de Vos runs QED Solutions and consults in the renewable energy and information communication technology sectors