This week, the reporting on the ANC NEC statement was no different: it came out in its usual leaden ANC-speak, the press conference was uneventful and the commentary afterwards pedestrian.
But buried quite far down in the nine-page statement was a remarkable game-changer, with major implications for the future of our energy system. It is worth quoting in full:
“The NEC affirmed the approach of a balance between national development goals and global obligations with regards to climate change, particularly in the energy sector. The Integrated Resource Plan should articulate the lowest-cost option for the future energy mix for South Africa, with increased contributions from renewable energy sources. The NEC agreed to develop a strategy on a just transition to a low-carbon path of development that takes into account the interests of workers, communities and broader society. This should include such new technologies as fuel cell applications which require platinum group metals (PGM) which South Africa has in abundance.”
Read carefully: climate change acknowledged, the IRP must articulate the “lowest-cost option” for our “future energy mix”, and the NEC is going to develop a just transition strategy!
The decision that the Integrated Resource Plan (IRP) must articulate a lowest-cost option is seemingly nebulous and obvious, but it is a major game-changer. It is a repetition of the same idea that appeared a few weeks ago in the National Treasury policy document on an economic strategy for South Africa — but that was not ANC policy, it was merely a proposal in a Treasury document. Now it is the ANC policy. Why is this such a big deal?
Well, the reason why we have not been able to approve an updated IRP since 2010 is that there was no consensus about what the future energy mix should be precisely because the cost was not the dominant criterion.
Back in 2010, the government signed the World Bank loan to build Medupi, subject to the condition it would also build a Concentrated Solar Power plant for $100-million (which never happened).
Despite the incredible arrogance and certainty of the World Bank modellers who assured the Minister of Finance at the time, Pravin Gordhan, that this was a good deal, it was a deal that was totally unjustifiable because there were cheaper alternatives, and it is the deal that has landed Eskom and the country in a serious debt crisis. Eskom’s debt is now 9% of GDP. Knowledgeable experts, including myself, warned then that the World Bank models were flawed.
Then, during the Jacob Zuma years, energy policy was manipulated to justify Zuma’s determination to force through a signed deal with Vladimir Putin to build a fleet of Russian nuclear power plants. Again, the cost seemed irrelevant. Nuclear energy is the most expensive form of energy. No Russian nuclear power plant has been built on budget and in time. However, Zuma’s nationalist political project required a big and shiny iconic mega-project to legitimise the notion of “radical economic transformation”.
The draft IRP that was supposed to be approved at the most recent Cabinet meeting recommends an energy mix that is not the lowest-cost option. The CSIR did the modelling work for the IRP and recommended a lowest-cost option. This effectively meant investing in renewables, not coal and definitely not nuclear. The end result, as reflected in the IRP, would be 70% of the nearly 400 TWh needed by 2050 would be supplied by renewables. No new coal-fired power stations would be needed. The other scenarios are, of course, also presented.
The lowest-cost option did not suit the policy-makers, resulting in an arbitrary policy decision by the Department of Energy to cap renewables at 40% for most of the other scenarios that were considered — all of which are more expensive, with the scenarios that include nuclear being the most expensive. In other words, the department does not favour a lowest-cost option. It favours an option that includes additional coal-fired power stations, plus renewables supplying the rest.
The obvious question is this: why does the lowest-cost option result in no new coal-fired power stations, no nuclear and a massive expansion of renewables?
The answer is simple: renewables now cost 60c/KWh over the life cycle, while coal costs R1.30/KWh and nuclear is between R1.70 and R2.80/KWh. Former Eskom CEO Matshela Koko and his funded social media army will pump out fake news claiming that renewables are more expensive (in order to keep alive the nuclear option for their paymasters), but they are wrong.
They are referring to the levelised cost of renewables over the four bid windows, and back in 2011 renewables were more than R3/KWh. That is no longer true. But we are still paying those old prices now. That is what technological learning is about — costs go down over time thanks to innovation. The facts are indisputable: renewables are the lowest-cost option. This is what the ANC NEC has effectively accepted.
By adopting the lowest-cost option policy this past weekend, the ANC NEC has effectively endorsed the lowest-cost option in the IRP which provides for no new coal-fired power stations. This really is a massive game-changer, and yet it went unnoticed by the media. Telling South Africa that it must break its addiction to coal is like telling the Catholic Church to convert to Protestantism. For many South Africans, this really is a cultural shock — we think that if you can’t dig it out of the ground and ignite it with a match, it simply can’t fuel the economy.
Well, the world is changing. The president knows this very well. In the message he sent to the Climate Summit in New York last week, he made it clear that South Africa wants a just transition to a renewables-based economy. His ministers in attendance, Barbara Creecy and Naledi Pandor, said the same thing. The ANC NEC statement has now endorsed this position, making it clear that the next step is for the ANC to work out what the just transition looks like.
There are, of course, those who think that coal mining jobs must be protected by building more coal-fired power stations so that the coal mines can stay open. This idea is now totally outdated. The coal-mining sector faces two big challenges: energy costs and carbon taxes. The cost of energy for the average coal mine as gone up from 11% of operating costs to 25% in a decade. And there is no security of supply, and no way of knowing whether costs will drop.
The carbon tax means coal mines pay carbon taxes on the energy they use, which is why many are building renewable energy plants. The Minerals Council has made it clear, they need cheap energy and energy that is lower-carbon to reduce their carbon taxes. What is going to deliver both of these? Of course, renewables! With cheaper decarbonised energy inputs, coal mines can be re-oriented to export coal. The greenies might not like this, but it is a reality that may actually convince the minister of minerals and energy to support renewables going to scale.
What it means is South Africa’s century-old coal industry becomes decoupled from energy production. The era of the mineral energy complex is over.
But let’s be pessimists for a moment. Let’s assume that there are some power players who do still think that a lowest-cost option includes investing in more coal-fired power stations. And let’s assume that the pension industry will have a legal right to oppose the imposition of prescribed assets to force them to invest in what everyone knows will be stranded assets within a decade or two — coal-fired power stations. Then we need investors. But who is investing in coal these days?
As far as sources of funding are concerned, according to the highly respected Institute for Energy Economics and Financial Analysis, some of the largest financial institutions in the world had announced by February 2019 that they are withdrawing from investments in coal
These are summarised by category below, but include some of the most well-known brand names, such as World Bank, European Investment Bank, Asian Infrastructure Investment Bank, Asian Development Bank, International Finance Corporation, European Bank for Reconstruction and Development, KfW (Germany), BNDES (Brazil), FMO (Netherlands), AFD (France), Allianz, Lloyds, Swiss RE, Munich RE, Nippon Life, Morgan Stanley, Societe Generale, BNP Paribas, ING, Deutsche Bank, ABN Amro, HSBC, Barclays, Standard Chartered, Banco Santander, Rabobank and many others.
Since February 2019, a dozen or so more financial institutions have made similar commitments, as have some of the major mining companies. The exit from coal mining by South 32 via a sale for $1 to Seriti would only be because long-term Net Present Value calculations reveal that these mines will soon be stranded assets. Indeed, according to a report on South Africa’s coal industry by the Climate Policy Initiative funded by the World Bank, French Development Bank and DBSA, South Africa faces the threat of stranded assets during the period 2013-2030 worth $120-billion, or $1.8 trillion. Stranded assets are quite simply assets that cannot generate the required returns on investment.
It follows that if South Africa wanted to replace its current coal-fired power stations that must be decommissioned with new ones, the funding required will be almost impossible to source. And even if it was sourced, the cost of capital would be extremely high. The result would not be cheap energy.
This contrasts with renewables. Total annual investment globally in renewables has exceeded the investment in fossil fuels every year since 2009. By 2019, total investment in renewables was nearly $300-billion, which is double the total invested in fossil fuels and nuclear combined. Renewables are the fastest-growing energy sub-sector. The world is changing. Even in the US, with a coal champion as president, renewables are about equal to coal now. Germany is planning to close all its coal and nuclear power stations.
In short, this is why the reference in the ANC NEC statement to “lowest-cost option for the future energy mix” is not just a lot more humdrum. It is a game-changer of note.
It will mean slightly adjusting the IRP before it is adopted to reflect a preference for the lowest-cost option. It will mean upscaling the Renewable Energy Independent Power Producers Programme and reinforcing the Independent Power Producers Office (IPP Office), including opening the fifth bid window with immediate effect. And it will mean positioning the Development Finance Institutions to play a lead role in an investment programme to construct the renewables infrastructure that will be required, including grid modernisation.
The total investment required just for the renewable energy plants only would be about R500-billion over 20 years. This, in turn, will catalyse much larger investments in South Africa’s biggest industrialisation programme since 1994, thus fulfilling many of the other commitments described in the ANC NEC Statement.
Wake up, everyone. Buried within those seemingly innocuous words — “lowest-cost option” — is a real new dawn for South Africa. DM