The Financial Impact of Renewables on South Africans

The Great Energy Debate recently entered the stadium and a few worthy contenders are lined up on the starting blocks. However, newly appointed Energy Minister, Jeff Radebe appeared to have adorned a winner before the starter’s pistol was fired.

Although much is spoken in the media around renewables and energy efficiency, the absence of adequate forethought over collateral damage is blinding.

The energy race is not a short, straight-line sprint but rather a 20 year, energy-intensive marathon with many influencing factors to be carefully planned, routed and considered.

Let’s place a few facts on the table first;

Fact one; SA is well endowed with abundant coal reserves – more than 400bn tons of the stuff.

Fact two; The previous government used this cheap energy to ignite and develop an industrialised sector on par with most other countries in the world, if not better.

Fact three; Cheap energy provided the incentive to develop SA’s mining sector into a world leader which has created hundreds of thousands of jobs since the mid 1900’s. This incentive resulted in an average growth rate of more than 1% pa from the mid-1950’s onwards, reaching over 7% in some years.

Fact four; Since 1994, when the restraints of trade embargoes and sanctions were removed, annual GDP has faltered inexplicably. Since 2007, the SA economy has been on a self-inflicted nosedive with jobs lost every year.

Fact five; Coal power from the “old fleet” costs less than 40c/kWh – even after the Gupta corruption which this Government has yet to reverse.

Fact six; The average of the renewables Bid windows, already approved as at 1 January 2018, is more than R1.88/kWh

Fact seven; Once the current capacity expansion is completed, SA will have in excess of 55GW generating capacity against a demand profile of less than 30GW – which is predicted to fall further and faster if the DOE’s Energy Efficiency strategy is successful.

Against the above background, Minister Radebe wants to sign approval for yet more energy – citing the now widely discredited 2010 IRP – a document drawn up by a corrupt Zuma ANC administration, which included more than 9GW of nuclear to boot!

Rumours are now that Nuclear has been killed off, the door is open for green energy – and it just so happens that Radebe’s brother-in-law, as well as the President’s brother in law has announced their intention to be leading players in the renewables market, along with Ramaphosa’s Shanduka Energy.

Under current DOE renewables regulations, Eskom will be forced to buy and distribute this additional (and variable power) – which raises questions as to why nobody has done calculations to assess the impact on you and me – the end customers.

A quick calculation reveals lost sales to Eskom will be at least R20bn per year (escalating) for the next 20 years as renewables have been guaranteed that Eskom must purchase all their power. On top of this Eskom has to absorb the cost of distributing, administrating and recovering payment for this renewable power, as the IPP’s will have zero bad debts.

Lastly, to add pain to the suffering, Eskom is also the supplier of last resort and will have to keep its coal plants running to supplement unpredictable periods when the renewables cannot supply. Furthermore, Eskom needs to gear up for the morning and evening peaks, which the solar plants cannot fulfil. Running coal plants as free standby for renewables will push down Eskom’s already precarious efficiency stats by at least another 20% which by my estimate, will surpass R5bn per year.

For the consumer, this is really bad news. On top of the 30% RCA claim which Eskom is currently applying for dating back to excess expenses and under-recovered costs between 2013 and last year, the renewables will impact consumers by at least a further 30-40% increase in Eskom tariffs.

The primary reason demand has fallen to below 2007 levels is the massive increases in electricity costs of over 500%. This follows the basic economics rule – the more expensive the item, the lower the demand.

Basic electricity prices have ballooned from around 15cents/kWh to an average of over 100c/kWh, and in some cases to over R3.00/kWh, dependant on the demand profile.

This massive increase has created a “profit umbrella” – as Eskom’s cost of coal power is below 40c/kWh – the balance going towards a bloated headcount, corruption and inefficiency.

Outsiders seeing this, and knowing that government has taken control of a broken Eskom, are queuing at the door with energy projects that are guaranteed to make money.

“The consequence of this recipe spells disaster for SA consumers and business”, forecasts Blom. “It will lead to a 20-year depression as electricity tariffs get blown sky high to compensate a dying Eskom and inflation-linked Renewables with guaranteed off-takes. ”
“If the renewables had such a compelling story, Government should just have opened the grid to competition – and that would have benefitted everybody”.

“Mixing socialism and government intervention with capitalism will always result in a loose-loose situation for the consumer and workers”, Blom continues. Even NUMSA, the metalworkers union, has seen through all the noise and publicity that this is just another scam to boost votes in next years election and ignore the reality of the current supply surplus.

“We plan to take this further”, promises Blom, who was previously the Energy Director at OUTA and has since split away. The truth about the consequences of this nightmare must surface to save SA’s already embattled consumers.

The above scenario is clearly unsustainable for the SA economy and will plunge our people into a further 20-year depression, or until sanity prevails.

Ted Blom
Partner: Mining & Energy Advisory
www.miningandenergy.co.za

Tel 082 857 2534