JOHANNESBURG (miningweekly.com) – Demand already foreseen is providing South Africa with the far-reaching and very welcome opportunity to create sufficient new jobs – “and then some” – to ensure a just energy transition away from the country’s current climate-threatening carbon intensity, Mining Weekly can report.
South Africa’s R100-billion-plus renewables industry has already been able to recruit highly skilled people from all sectors of South Africa, including from the coal sector, and the transition is providing South Africa a nice-to-have entry into a once-in-a-generation opportunity.
This involves moving out of a carbon-intensive sector, which has a finite horizon, into a new clean energy era, which has an infinite horizon in that it is largely based on the generation of power from sunshine and wind, which are delivered perennially with no price tag attached.
Moreover, the majority of the people working in the renewables industry are South African, Mainstream Renewable Power Africa GM Hein Reyneke told Creamer Media’s webinar on Advancing South Africa’s Energy Transition, which was held earlier this month.
EY Parthenon executive director Paul O’Flaherty facilitated a panel made up of Eskom Holdings Group CEO Andre de Ruyter, Impala Platinum (Implats) executive sustainable development Dr Tsakani Mthombeni and Reyneke, who reported that 100 % of the employees of Mainstream Renewable Power, for example, are South African – personnel who are delivering on their own energy future.
Mainstream Renewable Power had, he said, been able to recruit highly skilled people from all sectors of South Africa – from Eskom, from the coal sector, from the banking sector.
“We do foresee a challenge, maybe in the medium term, of getting enough human resource to deliver on the scale and demand that we foresee, but we view that as a nice problem to have, and it provides an opportunity for the renewables energy industry to deliver on our obligations in terms of job creation and the just energy transition," said Reyneke.
In terms of financing the projects, local debt from local banks dominates the funding of local renewables projects.
In addition, there is also a considerable volume of foreign capital flowing through, with webinar attendees hearing that South Africa’s renewables industry has not experienced any significant challenges in raising the capital to deliver the projects that South Africa needs to bring back energy security, which Mthombeni emphasised as being pressing.
In opening, O’Flaherty drew attention to the fact that Europeans are driving their recovery from Covid through green investments and raising money to do that.
“Working back towards home, when I have been speaking to the government set-up and Presidential Climate Commission that became operational in January of last year, their first priority was to understand the Nationally Determined Contribution (NDC), and assist in landing that NDC, which has set significant new targets for South Africa to reduce its [emmission of] greenhouse gases from 2025 going through into 2030.
“We’ve got the Integrated Resource Plan 2019 in play. So, there are lots of dynamics in South Africa. We had COP26, it was called the finance COP, and South Africa has a commitment that we will be provided $8.5-billion.
“Then we’ve got the energy-intensive users who sit in the mining industry in South Africa,” said O’Flaherty, a former Eskom financial director.
In posing the first question to Mthombeni, O’Flaherty spoke of the Energy White Paper of the 1990s and the regional electricity distributors, or Reds, of the 2000s.
“We now talk about the unbundling of Eskom, we have an Integrated Resource Plan, which has a specific trajectory of reducing the coal content of the energy mix from more than 70% to 44%.
“Lots of intent, lots of good thought. But when you look at it, Tsakani, Implats is a major user of energy. It has 24/7 production, shareholders, employees, investors, communities and the supply chain who rely on Eskom. How do you think about it? Is this doable?
“You split transmission, that's the system operator, that's the blood of the balance of the generation through the distribution. When you sit as a corporate team and understand what's happening in the energy space, how do you view it? How do you manage it? How do you make sure that you're delivering 24/7 production at Impala Platinum?” O’ Flaherty asked
In his response, Mthombeni said he would first like to thank De Ruyter and his Eskom team for their increased levels of willingness to engage with stakeholders, and for being as transparent as they have tried to be in the last few years. "But I think a huge congratulations for getting the unbundling conversation going."
“That is long overdue,” added Mthombeni, “probably some 13 or 14 years since the first time this was introduced".
He identified the biggest challenge as being Implats’ 24/7 demand profile.
“If you look at underground mines, they have a significant baseload, we consume a lot of power, even when we are not producing, because we have to keep the areas safe, we have to keep the areas ready to enter. But what I think is disappointing in the conversation at the moment is we've forgotten energy security as an objective.”
SHOVEL-READY RENEWABLES PROJECTS
O’Flaherty drew attention to a survey done by EY for the European Climate Foundation last year, which sought out the shovel-ready projects in the renewables space, “and we identified close to 18 000 MW of shovel-ready projects if all the regulations, if all the blockages, were unblocked”, and put the question to Reyneke on how the new chunk of renewables can be attracted?
“The short answer is that the renewables industry is definitely ready to deliver on the needs of the South African market going forward," said Reyneke.
Forming an integral part of the webinar was De Ruyter’s responses to questions posed by Engineering News editor Terence Creamer:
Creamer: You are on record as saying that the global electricity industry and the value chain therein is evolving rapidly and Eskom needs to adapt to the four Ds of Decarbonisation, Digitalisation, Decentralisation and Democratisation. How should South Africa and Eskom develop into these changes?
De Ruyter: The reality is that the world’s largest economies, our trading partners, have embraced this evolution, which is perhaps better described as a revolution. If we ignore these global trends and if we do not modernise our power system in keeping with these trends of the four Ds, particularly coming out of the impacts of the economy of Covid-19, we are just going to hamper the economic growth of South Africa. We are going to fall behind from the perspective of addressing poverty, unemployment and inequality, which are systemic threats to the stability of our society. Electricity is the lifeblood of the modern industrial economy and we have to keep pace with those international trends. In our opinion, we’ve got to implement projects that will rejuvenate an industrial economy to catalyse job creation, provide decent jobs, particularly in manufacturing. From a position today of a lack of energy security in South Africa, as is best evidenced by this terrible thing called load-shedding, we’ve got an opportunity for using this crisis for a pivot into a clean energy industry through bold new generation capacity wherever we can to address energy insecurity, to create jobs through smart industrial policies, and to enable us to address the very legitimate and well-founded fears of the just energy transition that exists in the coal value chain fraternity, in particular, and we should not dismiss those. We think there’s an opportunity for us to develop capacity in Mpumalanga, specifically in the heart of the coal belt, where we’ve got existing transmission infrastructure. We’ve opened up 36 000 ha of land and we are working rapidly to try and open that for grid connections by investors using the 100 MW capacity opportunity. Mpumalanga has got the highest youth unemployment in the country so [there is] a real opportunity for us to play our part and use this energy revolution as a pivot to address this. There will be direct benefits and co-benefits if we implement such a plan. We also think that we can’t afford to wait. We have to now display urgency, we have to get moving, otherwise we are going to lose this opportunity and fall further behind compared with global trends in the electricity supply industry.
Creamer: That really brings me to my second question. What are the operational, financial, structural or regulatory and policy decisions that need to be taken immediately today, to ensure that South Africa and Eskom are able to respond effectively to the changes and to take up some of those opportunities?
De Ruyter: First of all, from an operational perspective, we have to ensure that our current plant performs as well as it can with regard to the age and condition of the plants. But we all know that the Eskom generation fleet - with the exception of Medupi and Kusile, and if we get approval from the National Nuclear Regulator to extend the life of Koeberg - the balance of the plant is really either mid-life or end-of-life. We need to, therefore, address the looming generation capacity shortage, which currently is already at about 4 000 MW to 6 000 MW. From a structural perspective, Eskom needs to continue its legal restructuring. We’ve successfully delivered legal separation of our transmission business. We’re awaiting licensing approval from the National Energy Regulator of South Africa (Nersa) and that is really a catalytic step in the right direction to unlock additional private sector investment in new generation capacity. From a regulatory and a policy perspective, it would be hugely beneficial if we can get policy alignment and complementarity between four major policy streams – energy, environmental, industrial and fiscal policies. There was a study done by Wood McKenzie which states that governments that are committed to meeting net-zero carbon targets generally promote positive impact on the economy, owing to the investment and job creation the energy transition brings. If we can have an energy policy that recognises the need for a greater role for market forces to take account of the fact that our manufacturing industry, and particularly the minerals and motor industry, as well as our exported mined commodities, that these are at risk of carbon border taxes. So, decarbonising our electricity industry and supplementing the resulting gap, will make us more competitive, and that will become, in my view, a sine qua non for participation in the global economy, to reduce the carbon intensity of our economy. From a fiscal economy point of view, I think we do need to relook at our procurement processes, in particular. I’ve voiced my frustration at some of the very onerous requirements that add very little value in terms of governance that are manifested, not so much in the Public Finance Management Act (PFMA), but in the regulations and the practice notes attendant on the PFMA and also the triple PFA. But we do need to reduce reliance on government guarantees. I think it is important that independent power producer (IPP) investors should accept their fair share of the risks. There is no exceptionality for investors in IPPs compared with other industrial investors. Whether you build a factory that makes widgets or whether you build a solar farm, in my view, you should be able to take a view of the market and take investment risk and be rewarded for that risk. Furthermore, on fiscal policy, I think appropriate tax incentives, possibly subsidies, I say that with hesitation, but support for, for example, special economic zones, which seques quite nicely into industrial policy, where with smart policy, we can drive additional local content. And I think we've got to be very strategic in how we do this. It can't be a brute force percentage requirement for local content. It needs to be a targeted, strategic policy that first of all drives demand for locally manufactured goods, gives certainty of the demand for a sufficiently long period and, overtime, supports local investors by appropriate industry master plans, specific policies, analogous to the Motor Industry Development Plan, and also drive supply chain development. As an example, we believe that electric vehicles are a very important part of driving demand for electricity going forward. However, we still have significant import duties on electric vehicles, and that leads us to a position where we don't have adequate local demand to justify investments in electric vehicles. By first of all allowing demand to grow, initially satisfied by imports, [and] over time seqeuing into a higher local content that will then drive local job creation and also keep a very important part of our manufacturing industry, and the motor industry globally, competitive. If we don't have this alignment, I think will have what Churchill said. If you have 10 000 regulations, you destroy all respectful for the law. I don't think we should stifle the industry, we should enable the industry by appropriate and smart regulation.
Creamer: And obviously, we've got this backlog in investments and the transition itself is going to require a lot of investment. What is the sort of scale of investment that we're going to need between now and say, 2035, and what role is there for Eskom, the private sector, other stakeholders in rolling out those investments?
De Ruyter: The numbers are simply staggering. Globally, it's estimated that the required investment in our supply infrastructure alone is at $50-trillion. Now, that's a number that I struggle to get my head around. But the alternative, of course, is that we have the catastrophic consequences of climate change and that's why this is really something that we need to pursue globally. From an Eskom perspective, we require about R400-billion rand just in the next 13 years, and we want to apply that R400-billion to invest in about eight gigawatts (8 GW) of clean generation options, bearing in mind that during the same period of time we will retire about 22 GW of coal-fired capacity. So, we will definitely have a smaller role to play in the generation sector, which means that we want to encourage, incentivise and attract private sector investment to generation. Then, we also need to strengthen our grid, we need to invest in about 8 000 km of new transmission lines. In order to access the best solar and wind acreage in South Africa and connect that to the market. We need to upgrade our grid, we need to build new substations. We require more than 100 new large transformers. We also need to upgrade our distribution grid and enable embedded generators to connect to the distribution grid. All of this requires a lot of money and we will need to access climate funding, which I think, after the $8.5-billion deal analysis, it is clear that we can access that and that is available. But then we need to move with speed and we need to move with agility, all the while maintaining good governance.
Creamer: So, if government is able to convert that offer of $8.5-billion into transactions, what do you think that should be applied to? In other words, what do you think a just energy transition transaction looks like in South Africa and what sort of template does it provide for the world?
De Ruyter: From my perspective, I obviously want to access as much of that $8.5-billion as possible for Eskom. We have a pipeline of projects across generation, transmission and distribution for which we can apply for this money. Other projects are under consideration, for example, for the hydrogen economy, for other green transition projects, but I think it's fair to say that those projects are not nearly at the same stage of maturity as the Eskom projects, which are in some instances shovel-ready and good-to-go. We would really like to see that these transactions, and they will be probably different transactions, are implemented speedily, and that we can start getting access to that money in order for us to avoid running into a time crunch, like we've seen in the past with Eskom with Medupi and Kusile, where we really started construction far too late, and then made a number of mistakes in the process. If we can put this transaction together, it's already regarded as an example of the type of concessional financing that rich countries are prepared to make available to middle-income developing countries on the basis of commitments to accelerated decarbonisation. There's a quid pro quo there. There needs to be a strict governance framework in place, and I think that that creates an exciting opportunity for this to be replicated all over the world. But again, to emphasise, there's no specific intellectual property (IP) to this blueprint. Indonesia can copy it, Vietnam can copy it, and if we delay, if we hesitate, then those countries will gladly step into the vacuum that we create by inaction and take advantage of it. So, there is a need for us to get our act together and really respond quickly and start serious negotiations. That we put those facilities in place, that we can access the funding, is really important.
Creamer: Then finally, if there was one thing you could magically command in 2022 to accelerate South Africa's energy transition and Eskom’s restructuring, what would that be?
De Ruyter: If we could have an integrated policy approach, aligning energy policy, environmental policy, fiscal policy, industrial policy, so that we, as a country, can all pull together to make this transition to a lower-carbon economy. That we can start to attract investors, that we can start building projects, so that it's not only talk but actual delivery on the ground, that we can create jobs, and that we can also start building those factories that will employ the people, hopefully all the people and then some, that will be displaced by decarbonisation as we move from a huge reliance on coal to a cleaner and greener energy future in South Africa.
SOUTH AFRICA’S SOLAR, WIND AND STORAGE ADVANTAGE
As reported earlier by Mining Weekly, an Integrated Resource Plan comprising only solar, wind and storage (SWS) would not only deliver a load-shedding-free electricity supply industry but also create the platform for new industries to be built on near-zero-marginal-cost excess green electricity, a South African energy expert shows.
Detailed modelling undertaken by Clyde Mallinson outlines that this alternative SWS IRP would involve the deployment, between 2021 and 2040, of 40 GW of new wind, 230 GW of solar photovoltaic (PV) and 35 GW/290 GWh of storage, comprising mainly battery energy storage and mechanical gravitational potential energy storage.
Such a system would cost $90-billion to build over the period at a yearly investment rate of about $5-billion, or about 1.5% of South Africa’s current gross domestic product.
It would deliver electricity at the factory gate at a cost of $0.03/kWh (R0.45/kWh in rand at prevailing exchange rates), well below Eskom’s current wholesale tariff of about $0.07/kWh, which is poised to rise to $0.15/kWh by 2030.
The SWS IRP deviates materially from the current IRP 2019, which envisages a mix that is also dominated by wind and solar PV, but still includes new coal, gas and imported hydro.
Mallinson’s alternative IRP allocates far more to solar PV and storage than is the case in the IRP 2019, with the wind and the storage designed to “see us through the night” and the capacity of the storage calibrated to the country’s current peak demand of about 35 GW.
The actual ratios of wind to solar PV could vary, depending on future cost reductions, with the SWS IRP assuming a steeper decline in solar PV costs relative to wind over the period, reflected in the preponderance of solar PV in the IRP.
Such a system would not only adequately supply at least 231 TWh of conventional demand yearly but would also deliver a further 461 TWh of “superpower”, a term coined by independent US think-tank RethinkX, or near-zero-marginal-cost clean electricity.
This ‘superpower’, Mallinson argues, could be used to bolster the competitiveness of existing economic activities such as mining and smelting, while opening prospects for new activities such as electric mobility, the low-cost desalination of water, or the production of green hydrogen for use in hard-to-abate sectors.
The large-scale output of the SWS fleet would be three times that of the current coal-dominated system, based on Mallinson’s reinterpretation for South Africa of the ‘Clean Energy U-Curve’ used by RethinkX to model a 100% clean-energy system for America.
That U-curve shows that the lowest-cost system, or “sweet spot”, for South Africa would involve building an SWS fleet that produces 1.67 times the annual output of South Africa’s current fleet, at a cumulative capital cost of $71-billion.
Such a system would deliver 155 TWh of so-called superpower, while meeting yearly conventional demand of
However, Mallinson’s IRP is premised on a system that by 2040 will produce three times that of the current system, as it would deliver 461 TWh/y of near-zero-marginal-cost surplus green electricity for an investment only $25-billion greater than the least-cost solution.
“For only 38% more investment above the least-cost sweet spot, you get a disproportionate amount of superpower,” he explains, describing it as the 2040 target for which South Africa should be aiming.
MARSHALL PLAN-TYPE EFFORT
Mallinson argues that the disruptive changes under way in the electricity supply industry – facilitated by the precipitous decline in wind, solar PV and, more recently, storage costs – are irreversible and that instead of continuing to debate the mix of technologies, South Africa should turn its attention to accelerating SWS investments.
“South Africa’s combination of wind and solar is among the best in the world,” Mallinson asserts, adding that leveraging these resources through a system that offers both security of supply and superpower could unleash massive growth and job creation.
“We really need to be building wind and solar resources as if our lives and livelihoods depended on it.”
“The time for talking is over; we need a Marshall Plan-type push to overcome the logistics and construction capacity constraints to implementation, because we can only retire the coal fleet once we have created new generation headroom – you can’t scrap your old car before you buy your new one if you are a travelling salesperson,” Mallinson quips.
To fully exploit the superpower that will arise, however, will require a shift from a demand-driven electricity system to one where the generation profile becomes the “kingmaker”.
“The generation profile will dictate what the demand profile morphs into, with new demand adapting itself to those periods when the near-zero-marginal-cost excess green electricity is available.
“Clearly, then, if you have an electric vehicle in future, you will probably be charging it in the middle of the day because there is going to be a surplus available at lowest cost, whereas currently if you are charging your vehicle from the grid you would probably be encouraged to charge at night.”
Likewise, the other sectors that will be electrified will adapt themselves to the generation profile of the future.
“This is what is so exciting: there are going to literally be hundreds of new business cases that become available when we have low-marginal-cost electricity throughout the day,” Mallinson explains, likening it to the Internet, which has rapidly transitioned from consumers paying for a few minutes of dial-up to uncapped Internet at a fixed monthly charge.