Following the previous draft Integrated Resource Plan (IRP) update released in November 2016 (which outlined a base case for allocations until 2050), the latest update, released in August 2018 by Energy Minister Jeff Radebe, has a much clearer focus on the period to 2030. Decisions on the energy mix beyond then will be subject to more detailed studies to be undertaken closer to the time.
WRITER: PAUL SEMPLE, PORTFOLIO MANAGER
Revised input assumptions
The assumptions used in IRP 2018 have been updated to reflect the materially different drivers of demand and supply, compared to those in the original IRP released in 2010. At that time, there was an energy supply crisis in the country due to inadequate Eskom capacity to meet the growth demands in the economy. There was almost total reliance on Eskom and, in particular, its use of coal sourced power.
Since 2010 there has been a global shift away from coal towards renewable energy. South Africa was at the forefront of this, with the roll out of the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme until about three years ago, when it stalled. Over the period, industrial, commercial and private consumers have also moved to reduce their reliance on Eskom by exploring alternative sources of power.
Accordingly, the revised IRP input assumptions for new energy procurement scenarios have taken the following key changes over the past eight years into account:
- lower economic growth outlook;
- improved energy efficiency by consumers;
- increased own generation and/or cross-border relocation of power sources (industrials);
- the decreasing cost of renewable energy vs other forms of power generation;
- higher awareness of the externality costs of carbon emissions; and
- the shorter remaining life span of existing coal plants.
Thankfully, a least-cost approach to new power generation has been embraced in IRP 2018 and, together with the lower demand trajectory, the urgency to roll out prohibitively expensive nuclear energy has been pushed out to beyond 2030. The impact of the updated assumptions on the energy mix for the period 2030 to 2040 and beyond will be reviewed by government closer to that time.
Updated energy mix until 2030
Looking ahead, IRP 2018 continues to grow the allocation to renewable energy, and will largely constitute the replacement of 12 600 MW from existing (and to be decommissioned) Eskom coal plants between 2025 and 2030.
In the interim, until 2025, the already committed REIPPPP projects, Medupi and Kusile (Eskom coal plants) and recently announced independent coal plants are expected to provide more than sufficient capacity to cover the projected energy demand requirements. This includes the necessary increase to Eskom’s minimum capacity reserve margin.
New procurement over the next seven years will include 2 650 MW from REIPPPP projects that are currently under construction, a further 5 732 MW from the operational ramp up of Medupi and Kusile, and up to 1 000 MW from two new independent coal plants.
From 2025 until 2030, IRP 2018 plans new generation capacity - allocated entirely to hydro (2 500 MW), solar PV (5 670 MW), wind (8 100 MW) and gas (8 100 MW) as follows:
The 2 500 MW allocation to hydro in 2030 is expected to be sourced from the next phase of the Grand Inga Hydro Power Project located on the Congo River in the Democratic Republic of the Congo. The existing Inga hydroelectric dams are to be expanded, but development was recently delayed following the withdrawal of funding from the World Bank due to political concerns in the DRC. Apart from the completion of this project, a transmission line to South Africa would need to be constructed and it is uncertain at this stage whether this will ever materialise.
The updated energy mix, including the decommissioning of existing Eskom coal plants, will result in coal comprising around 45% of generation capacity by 2030 and renewables (solar PV & wind) around 26%. New capacity beyond 2030 will continue to be dominated by renewables and gas and are projected to comprise between 50% and 90% of installed capacity by 2050.
Impact on the REIPPP Programme going forward
The construction and commissioning of the 27 projects that recently closed under Round 4 will bring about 2 476 MW of new power on line over the next two to four years. In terms of IRP 2018, no new renewable energy build is planned to come on line in 2023 and 2024, but will recommence annually from 2025 until 2030.
Given that a bid window can take up to four years from the request for tender proposals to the Commercial Operation Date (COD), it is possible that the next bid window (Round 5) may only be opened in three years' time (i.e. 2021), with construction starting in 2023 and COD taking place in 2025.
IRP 2018 plans for two new plants (up to 1 000 MW) under the independent coal producer programme to come on line in 2023 and 2024. If this does not materialise (e.g. due to ongoing delays in signing these contracts and reaching financial close), we consider it likely that procurement of renewable energy under REIPPPP will recommence earlier, and Round 5 could achieve financial close in 18 to 24 months (i.e. 2021).
Given that renewables are officially acknowledged as the lowest cost of new energy procurement, it is likely that the tariff trend has bottomed out in the last bid window (Round 4). Although the cost of renewable technology continues to decrease internationally, the increased numbers of new projects, the projected ZAR depreciation and the limited capacity of the local capital market (which still relies largely on commercial banks to originate the finance), should collectively limit any further material decrease in tariffs. In turn, decreases in yields earned on the project investments should also be limited.
- Scale-down: Given the revised drivers for energy demand in South Africa, the pace and scale of new development has been curtailed, compared to the original IRP 2010. As there is a low degree of certainty around assumptions beyond 2030, IRP 2018 focuses primarily on the next 12 years, to 2030.
- Clean energy: This is a dominant theme in IRP 2018 and is clearly set to replace coal over the long term. Subject to more detailed studies on the viability of nuclear beyond 2030, renewables and gas may comprise up to 90% of installed capacity by 2050. The cost of gas supply is noted as a risk and at this stage only international sources are considered.
- Renewable energy optimal: Renewables are explicitly acknowledged in the report as the cheapest source of energy. We have an abundance of natural resources in South Africa and a geography that ensures a dispersion of wind (Eastern and Western Cape) and solar PV (Northern Cape and Limpopo) sites across the country. Renewables can also be commissioned in a relatively short time compared to other technologies such as coal and nuclear power. In sum this makes renewable energy the most flexible and efficient option for the future.
- Investment opportunity: With more projects expected to be developed further away from the existing national grid, more investment will be required to extend its geographic penetration and capacity to connect the multiple new power producers that are anticipated.
- New technologies: IRP 2018 introduces a much more pragmatic national energy plan, but an inevitable game-changer for the future is the rapidly advancing international development of battery storage. Given South Africa’s diverse and abundant natural resources, we are ideally placed to utilise this new technology to enhance the benefits of renewables and in turn radically transform our energy sector.
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