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Rapid municipal energy supply diversification will light way to a much brighter economy

Rapid municipal energy supply diversification will light way to a much brighter economy
The author writes that South Africa needs 35-50% more electricity generation capacity for development and job creation and the rapid deployment of renewables for cheaper, increased electricity supply (Photo: iStock)

Rolling blackouts aren’t our only serious electricity problem. South Africa urgently needs additional sources of electricity that are as low-cost as possible to permanently shift the economy onto a higher development path.

Access to electricity is critical for supporting economic growth and development: almost all economic activity requires reliable and affordable electricity. Rolling blackouts, though most visible, aren’t our only serious electricity system problem.

So, while reducing the frequency and intensity of rolling blackouts will give the economy significant relief, it won’t automatically mean enough electricity to support a substantial economic expansion.

To rapidly increase development and create large numbers of new jobs, South Africa needs to increase its electricity generation capacity by between 35% and 50%. That is, even if our coal fleet produced at optimum levels, it would still not produce enough electricity, and at a low enough cost, to permanently shift the economy onto a higher development path.

The quickest way to increase (cheaper) electricity supply is through the rapid deployment of renewables. Municipalities can both increase the supply of electricity — which will end rolling blackouts and support socioeconomic development — and reduce the cost of that supply.

  • Municipalities can increase their total electricity purchases to match actual (and potential) demand by purchasing additional electricity from non-Eskom sources; and
  • Municipalities can reduce their overall cost of supply by purchasing that power from renewable electricity generators and investing in battery storage technology.

South Africa has failed to take advantage of the global renewable power opportunity, notably in solar photovoltaics (PV). Utility-scale solar PV is the fastest and cheapest way to significantly increase South Africa’s electricity supply.

The International Energy Agency forecasts that renewables (this excludes nuclear energy) will contribute more than one-third of global electricity supply by 2025, replacing coal as the largest source of supply.

In manufacturing and heavy-industry-intensive China, renewables now make up just over 50% of total installed electricity generation capacity. Australia, with a mining sector larger than South Africa’s, produced 38% of its electricity from renewables in 2023 and has a target of 82% by 2030.

In contrast, South Africa has a measly 7% renewable share in electricity production, despite enormous local potential, particularly for solar PV.

Read more in Daily Maverick: SA’s energy revolution — we’d better put plans into action… fast, expert warns

The government intends to build a nuclear power plant to address supply constraints. However, the average time between starting construction and grid connection for seven reactors that were connected across the world in 2022 was nine years. The comparative time period for a solar PV farm is one year.

Nuclear build programmes are also notorious for being behind schedule: over the three years from 2020–22, only two of 18 units connected to the grid in seven countries started up on time.

Given South Africa’s extremely poor track record of managing large-scale electricity generation projects — Medupi was completed six years behind schedule and Kusile is now eight years behind schedule — there is a strong possibility of a 12–15-year wait for any electricity from a nuclear plant.

Economic growth and social development not only require sufficient and reliable electricity — which we do not have — but also that it is affordable. While the supply of electricity has been declining, electricity tariffs have increased significantly over the past 20 years, way above the increase in inflation or average wage increases.

The rise in municipal electricity tariffs has been driven by:

  • Substantial growth in the tariff increases allocated to Eskom by Nersa, which has resulted in rapidly increasing bulk charges that municipalities must pay. Using Eskom data, we have calculated the average Eskom wholesale electricity price (WEP) applicable to a typical metro demand profile. The average WEP was 63.52 cents/kWh in the 2018/19 year, which increased by 81% to 114.99 cents per kilowatt hour in the 2023/24 year. We forecast that the average WEP tariff for metros will increase to R2.16 per kWh by 2030; and
  • Eskom’s time-of-use tariffs (which impose a very substantial surcharge on electricity supplied to municipalities during peak demand times — morning and evening) have been particularly onerous for municipalities as they are significantly higher than the average tariff and higher than almost any tariff that a municipality could charge its customers. The high demand peak tariff charged by Eskom to municipalities for the 2023/24 year is R4.79 per kWh. By 2030, we estimate the high demand peak tariff could be close to R9 per kWh.

While the cost of the electricity supplied by the Eskom coal fleet rises, the cost of electricity generated by utility-scale solar PV is rapidly declining. Figure 1 below compares the Eskom average WEP tariff for a metro municipality, compared to the levelised cost of energy (LCOE) for wind and solar PV. It shows actual costs to 2024, and estimated costs to 2030.

(Source data: Eskom, Meridian Economics, own calculations)

Eskom tariffs versus wind and solar PV costs

Source data: Eskom, Meridian Economics, own calculations

In 2023, electricity produced by solar PV was 35% cheaper than that produced by Eskom. In 2024, the difference was 43%. It is estimated that by 2030, the cost of electricity supplied by solar PV will be less than one-third of the cost of that supplied by Eskom.

In addition, if municipalities include battery storage as part of their renewables diversification, they can provide part of peak demand from that storage, making significant additional savings by not paying the full peak demand rate charged by Eskom for that portion of supply. This will further reduce the municipal cost of supply.

Figure 2 below maps the average peak tariffs that Eskom charges municipalities against the cost of one example of potential battery storage (BESS).

Source data: Eskom, Meridian Economics, own calculations

Eskom tariffs versus the cost of battery storage

The LCOE of nuclear is heavily influenced by the cost of building the plant. That is, the less efficiently the capital project is managed, the longer the construction takes and the larger the cost overruns (exactly what happened with Medupi and Kusile under Eskom’s management), the more likely that the eventual tariff that needs to be charged to cover these costs will be significantly higher than the cost of electricity from solar PV.

At discount rates above 5.4%, nuclear power is always more expensive than renewables. At a 10% discount rate, nuclear is approximately four times more expensive than renewables. The discount rate commonly applied to South African electricity projects is 8.2%, indicating that nuclear will never be the cheapest option.

Instead, a combination of Eskom’s already-expensive coal fleet and new expensive nuclear will almost certainly guarantee future electricity prices that are unaffordable for the majority of South African households, and which will present a significant barrier to development and employment growth.

What South Africa urgently needs are additional sources of electricity that are as low-cost as possible, not more expensive.

The cost benefits for both consumers and municipalities of having a share of the supply provided by renewables are significant: households and businesses would have access to cheaper electricity, and municipalities would see a significant reduction in their bulk purchase costs.

Our research indicates that at a 22% – 24% share of renewables, combined with battery storage, the eight metros would have saved a combined R5-billion per annum on bulk purchases — including the cost of battery storage — in the current financial year and largely eradicated rolling blackouts.

Given that the cost from Eskom is projected to increase and that of renewables to decrease, the quantum of this saving will increase in each future year. Much greater benefits would accrue — to the wider economy as well as the municipality — because of the end of rolling blackouts and an increase in electricity supply. DM

Dr Tracy Ledger leads the Energy Transition programme at the Public Affairs Research Institute (Pari). This article is based on her latest municipal energy policy brief.

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