Electricity Generation Technology Choice: briefing by Parliamentary Budget Office

Standing Committee on Appropriations

07 September 2016
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Parliamentary Budget Office (PBO) provided a presentation on the costs and considerations of electricity generation choices. The briefing by the PBO was very technical looking at the costing and comparison measures utilised to draw assumptions.

Many countries in the world engage in energy planning. Electricity is not like other resources as it requires long-term planning to build the capacity to meet future needs. We need, therefore, to take a long-term view to energy planning.

In the process of energy planning, it is important to strive to towards certain outcomes: ensure the affordability of electricity infrastructure, affordable cost for consumers and households, a responsive electricity system, an environmentally friendly approach; and meeting industrial policy and regional development and integration objectives.

South Africa is in the process of adding significant electricity generation capacity to its fleet. Over-investment in the pre-1994 period, followed by poor planning and insufficient investment after 1994 resulted in electricity prices being low by international standards with several years of real price decreases. This led to an energy-intensive industrial base.

Demand for electricity increased in the 90s along with South Africa’s social policies of household electrification and free basic electricity (FBE). By 1999 access to electricity was provided to an additional 2.5 million households with additional connections to rural clinics and schools. This increased the electrification level from 36% in 1994 to 75% by the end of 1998. South Africa’s electricity demand therefore increased by 43% between 1994 and 2004 and by 2007 electricity demand had increased by 63%.

In response, South Africa embarked on a big investment and renewable energy programme. This was an imperative which unfortunately started too late. South Africa is now in the process of considering which energy generation technologies to invest in, including amongst conventional technologies the prospect of nuclear energy.

The Committee expressed concern and hesitation about the nuclear option saying that South Africa, realistically, does not have the funding to implement nuclear plants nor the capacity to deal with the potential disaster risk posed by nuclear technology. Members asked for not only the cost of nuclear energy but that the cost factor in the transition costs to nuclear energy. They asked for the difference in cost of implementation and construction of all the respective technologies such as green energy and gas emitting technologies and to include costs of maintenance and operation.

The PBO agreed the terms of reference of the study would be reviewed and an altered document would be presented to answer these specific concerns. It was proposed that a joint sitting of the Portfolio Committee on Energy and the Standing Committee on Appropriations scrutinise the updated PBO document. Committee members agreed to this proposal.
 

Meeting report

Opening remarks
The Chairperson stated that an adequate supply of electricity and energy is essential for economic growth and that any choice that we take should be a quality choice that would take economic growth and development to new heights. It is critical that the technology mix chosen is optimal and able to cater for long term future needs. She encouraged participation and welcomed the Parliamentary Budget Office.

Electricity Generation Technology Choice: Parliamentary Budget Office (PBO) briefing
Prof Mohamed Jahed stated that the report sheds light on the factors that go into considering the best choice of technology mix as necessary for economic development and growth. Most of the statistics in the report are recent based on Electric Power Research Institute (EPRI) 2015 reports.

Mr Rashaad Amra, PBO Economic Analyst, said that there is a strong correlation between economic growth and development. The amount of electricity consumed by an economy varies according to population size, the size of an economy and its level of economic growth.

As economies develop from being dependent on subsistence agriculture towards more secondary and tertiary sectors and as populations urbanise and industrialisation intensifies, the demand for electricity increases.

The electricity-intensity of growth presents the change in electricity consumed by an economy relative to the size of the economy over a period of time. What is interesting, however, is that in developing economies and advanced economies such as Japan, Sweden and the United Kingdom there are negative indicators which point to a decrease in electricity demand. This decrease is largely linked to adequate electricity infrastructure and established usage trends that have, over time, been catered for.

South Africa’s electricity-intensity figures for the period between 2002 and 2011 is low as a result of supply constraints. Had the supply been better there would have been a slightly higher number.

Many countries in the world engage in energy planning. Electricity is not like other resources and requires long-term planning to build the capacity to meet future needs. We need, therefore, to take a long-term view to energy planning. In the process of energy planning, it is important to strive to towards certain outcomes: ensure the affordability of electricity infrastructure, affordable cost for consumers and households, a responsive electricity system, an environmentally friendly approach, and meeting industrial policy and regional development and integration objectives.

The implications for the legislature is that all the considerations involved in energy planning pull in a number of directions. For instance, if the pursuit is to yield lower carbon emissions it becomes necessary to focus on industrial policy whereas if the pursuit is one in favour of affordability it becomes necessary to focus on the role of public funding. Either way, policy makers are challenged with the balancing of these considerations and should do so in a way that regards this dynamism.

South Africa is in the process of adding significant electricity generation capacity to its fleet. Over-investment in the pre-1994 period, followed by poor planning and insufficient investment after 1994 resulted in electricity prices being low by international standards with several years of real price decreases. This led to an energy-intensive industrial base.

Demand for electricity increased in the 90s along with South Africa’s social policies of household electrification and free basic electricity (FBE). By 1999 access to electricity was provided to an additional 2.5 million households with additional connections to rural clinics and schools. This increased the electrification level from 36% in 1994 to 75% by the end of 1998. South Africa’s electricity demand therefore increased by 43% between 1994 and 2004 and by 2007 electricity demand had increased by 63%.

Lack of investment in generation and infrastructure resulted in the country’s electricity supply struggling to meet the rapid increase in demand. In 2004 the government had agreed to finance the building of new generation capacity but this came too late, which resulted in country wide black-outs from December 2007 up until May 2008.

In response, South Africa embarked on a big investment and renewable energy programme. This was an imperative which unfortunately started too late.

South Africa, like many other countries, determines its electricity generation capacity path through an Integrated Resource Plan (IRP) which is based on forecasts and assumptions. These are, however, very uncertain and require constant updating to ensure relevance and applicability. In addition to the IRP, energy choices are made through ministerial determinations authorised by the Electricity Regulation Act which requires consultation by the Minister of Energy with the National Energy Regulator (NERSA).

The first IRP was completed in 2010 but published without consultation and with only a month for comment. An updated version was completed in 2013 but was not approved by Parliament. A new IRP is expected in 2016.

Since the last IRP was adopted South Africa has seen significant developments related to energy generation. South African energy planners expected the economy to grow rapidly but in reality the growth has been much more gradual and slower than expected which means a slower increase in energy demand. The assumption that was integrated in the 2010 IRP has therefore not played out. The Department of Energy plans to table the next IRP soon with special consideration for affordability, efficiency, availability of financial and fuel resources and trends in demands.

Admittedly, there are challenges in a study such as the one put together by PBO. Challenges which arise in using international studies because there are inherent differences amongst countries and their specific policies. The PBO uses country specific estimates and draws from the 2010 IRP and the 2013 IRP update.

Mr Brandon Ellse, PBO Finance Analyst, said that to ensure stable and healthy finances to promote economic growth it is important to consider the costs of the technology available to meet needs.

The technology mix should try and meet the country’s electricity needs. When we compare technologies it is necessary to standardise costs so that they are comparable. There are two methods used to do this:
• ‘overnight capital costs’ which represent the total capital costs to construct a power plant divided by the capacity of the plant and expressed in Rands per kilowatt of capacity to indicate the general affordability of a technology and
• ‘levelised cost of electricity (LCOE)’ which is the standard costing measurement used to compare energy costs amongst countries.
It is necessary to bear in mind that while they are useful measurements, both have merits and limitations. Moreover, each cost component is adjusted against inflation.

In terms of LCOE ratings, hydro, gas and coal are the cheapest options across conventional and renewable technologies. Nuclear technology and coal are the most expensive conventional technologies. However, on average, renewables are more expensive that the conventional technologies.

The lowest cost option may not always adequately take account of the policy goals and externality costs such as environmental and health costs and thereby not yield the greatest economic benefits. It is thus necessary to rationally apply one’s mind in considering the available technologies and energy mixes. There is a trade off that needs to happen in deciding which options. The additional costs need to be weighed up in relation to the benefits for the country.

Furthermore, the energy sector is responsible for around two-thirds of the global greenhouse gases. Electricity systems emit harmful pollutants such as S02, NOx, CO2 and particulates when the technology involves fossil fuels. South African has made commitments to reducing its CO2 emissions and so it is critical that the correct instruments and policies be applied. Such instruments should provide incentives for carbon reductions such as the carbon tax policy proposal in 2013.

Moreover, uncertainty over future electricity demand requires an adaptable capacity expansion path to ensure that supply actually matches demand and overall system adequacy.

In conclusion, South Africa will have to increase electricity generation capacity despite economic growth and electricity demand being much slower than assumed in the 2010 IRP. This necessitates an adjustment to the country’s electricity generation capacity plans and careful consideration over any new procurement.

Mr Ellse concluded that South Africa faces a challenging economic situation and it is critical that the technology mix chosen is one which is optimal with respect to public finances and economic growth.  

Discussion
Mr Gordon McKay (DA), member of the Energy Portfolio Committee said that there is currently a lot of information regarding the cost of nuclear energy but no clear cut cost for the transition to nuclear energy has been put forward as an assumption in this presentation. He asked what the final calculation for nuclear is and what comparisons can be drawn across countries. He requested a clearer presentation on the nuclear option. He added that there is a need for further study. He stated that the assumptions put forward are not substantial enough for policy makers to rely on.

Moreover, the McKinsey report indicates that the capital costs of gas are lower than other technologies but South Africa’s gas infrastructure is minimal. He asked whether the cost of getting and utilising gas has been considered.

Further, he criticised the levelised cost of electricity (LCOE) for not being an adequate measure for assessing comparative technology because it cannot be used to assess the variability of costs over time. He recommended that the PBO go back and look at the World Nuclear Industry Status Report 2016, specifically regarding nuclear costing and provide the Committee with an assessment of lifespan costs.

Mr Amra replied that the various measurements on costing (page 10 of the full presentation) is the most reliable and useful for the purpose of the study.

He added that the Department of Energy and the Energy Portfolio Committee decide on the energy mix and not the Standing Committee on Appropriations. Lastly, he proposed a joint sitting with the Energy Portfolio Committee with a review of the terms of reference given to the PBO.

Ms S Shope-Sithole (ANC) said that the economy shows great resilience and asked whether the presentation would be different if this trend continued.

Mr Amra responded that the most recent census shows that the number of households accessing electricity has improved significantly over the years. The history and trends in South Africa’s electricity demand and consumption has been considered in the calculations and this approach will be continued.

Dr M Figg (DA) asked what steps could be taken towards achieving the objective of affordability.

He added that a good budgeting technique is to include all costs. Therefore, the presentation needs to include maintenance so that the Committee is best informed. It does not help that we procure the equipment but then do not consider the costs of maintenance and operation.

He stressed that the prospect of the nuclear fleet cost is concerning because of the fact that South Africa cannot afford it. South Africa not only relies too much on debt which could be disastrous but we need to consider the disaster that could potentially result in the implementation of nuclear technology and we should therefore consider denying the proposal to move toward nuclear technology.

Mr Amra said that the costs include maintenance. In South Africa, most of the generation plants are contracted into by the government. The cost of maintenance has thus historically been included in the agreed cost.

Ms E Louw (EFF) said she shared those sentiments with regards to hesitation towards nuclear energy and its relative costs. She asked if there is any research comparing the cost of coal, wind and solar energy mix in the context of South Africa, and if so, what would the cost of this mix amount to annually?

Mr N Ggcwabaza (ANC) asked if green energy or gas emitting technologies would be more expensive and what is the difference in cost of implementation and construction of the respective technologies.

Mr Amra responded that the mandate of the PBO was to respond to the request from the Committee to look at energy costs. The PBO is not authorised to give substance to questions other than those seeking clarity on what has been presented.
 
The Chairperson admitted that a very rational and considered approach must be taken in securing investments for energy given the current economic challenges in South Africa.

The Chairperson opened the floor to a vote on the proposal put forward for a joint meeting between the Standing Committee on Appropriations and the Portfolio Committee on Energy for the purpose of making the best informed decisions on electricity generation technology and the appropriation of relative funding.

Prof Jahed said that the PBO is not against the Committee and its decisions but that the terms of reference need to be clarified because he had noticed that the questions and concerns raised fell outside the scope of reference that the Committee gave to the PBO. The PBO would go back with the updated terms of reference and prepare a more suitable document to answer the concerns of the Committee.

Committee business
The previous committee meeting minutes and the third term programme was adopted without amendment.

The meeting was adjourned. 

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