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The other Just Energy Transition

De Vos is a director with strategic consultancy QED Solutions.

The energy transition will profoundly change our energy landscape in ways that none of us has yet fully grasped.

One of the more interesting aspects of the broad renewable energy sector is how quickly things have changed in just 10 years. One result of this is that the worthwhile debates surrounding renewable energy change as quickly.

This presents a problem: governments, incumbent utilities, policymakers and regulators invest resources, time, energy and their lobbying efforts to win the argument, to draft new laws and regulations, but as these efforts culminate in some sort of outcome, the real debate has moved elsewhere. Yet, debates that ought to have been settled, rage on.

Consider this: Already in the 1980s a consensus was building among climate scientists that greenhouse gasses, especially carbon dioxide, from human activity was warming the earth’s atmosphere, that it would induce climate change and this change would be harmful. The establishment of the Intergovernmental Panel on Climate Change (IPCC) under the auspices of the United Nations, followed up, in 1992, by the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol, agreed in 1997, committed signatory countries to reduce greenhouse gasses to combat climate change.

South Africa’s own commitments in terms of the Kyoto Protocol informed its own first electricity planning process, the Integrated development Plan in 2010 (IRP2010). The procurement of the initial rounds renewables through the well-known REIPPP programme was enabled by commitments made under the Kyoto Protocol. The IRP2010 used “reasonable” assumptions for the fall in the price of renewable energy, which for the purposes of comparing with traditional electricity generators, use a stylised Levelised Cost of Electricity (LCOE) – or the price of each kWh to be produced by a generator throughout its lifespan (accounting for different lifespans).

What has happened since then?

  • In 2011, the first round of renewable projects bid in, the tariffs were between double and four times the then retail price of electricity – but below the IRP2010 projections;
  • In 2012/13, second round projects produce tariff outcomes close to the retail price;
  • In 2013/4, third round projects come in below retail and renewable energy establishes itself as the cheapest way to procure new generating capacity;
  • In 2015 – 2018, the long delayed fourth round sees renewables with tariffs below Eskom’s cost of generating electricity (wholesale).

South Africa has not procured new renewables (for a lot of very bad reasons) but the rest of the world has continued without us and prices for renewable energy continue to fall well beyond the most optimistic projections. The IRP2019 is significant in that carbon emissions or a carbon price were not part of the calculations. Renewables are least cost without considering greenhouse gas emissions. The provision for new coal-fired capacity in the plan is only there because politicians decided to include them in a departure from least cost principles. 

Recent prices achieved in renewable auctions in several countries have breached another threshold: it is now cheaper to procure electricity from new renewable plants than it is to buy and burn coal in an existing power plant. And this changes everything.

The fall in the price of renewables is so dramatic that it has boomeranged back into the world of climate change modelling. The Business as Usual (BAU or base case) scenario which models what future global greenhouse emissions will be without mitigation measures (also known as the RCP8.5 scenario) is now widely considered to be ludicrous and that focus should be on more likely scenarios in a context of very cheap renewable electricity. The current (let alone the future) economics simply don’t support continuing with our current energy mix into the future. Why bother, some climate scientists ask, with modelling a scenario which continues with an energy mix anything like the present?

Even under the Trump presidency in the US, which has an overt policy of supporting the coal sector and is hostile to global efforts to fight climate change, there is less coal-fired electricity generation now than when Trump became president in 2016. Low carbon nuclear energy is also in retreat. This is not about issues surrounding climate change, it is about the awful economics of coal-fired and nuclear energy.

However, we should not fool ourselves. An electricity supply system dominated by renewables is quite different to the centralised coal-fired system we have now. A good way to start to understand this is to look at the system from the point of view of the last customers in the system – the household.

Absent load shedding, we get our electricity delivered in the following format: around 230Volts of alternating current (AC) of around 60 Hertz through 20 Amp circuit allowing a 4,6KW load (three phase systems triple that). Using this set up, we can run anything from heavy loads required by ovens or washing machines to LED lights. We can have as much (within the limits of the circuit) or as little as we want at any time. For all this, we are charged by the amount of energy (kWh) we consume in a given period or the amount of KWhs (units) we pre-purchase. The tariff setting process run by Nersa, the electricity regulator is roughly a process of forecasting the number of kWhs that will be sold and the costs to produce them.

The kWh charge is really just a gigantic fudge developed over time and which everyone has come to accept. It is only very vaguely connected to the cost structure of supplying electricity, either to households or large industrial or municipal customers higher up the customer hierarchy. To be clear, larger customers are subject to more complex tariff structures that take account of the maximum permitted capacity to be used as a separate charge as well as different seasonal and time of day consumptions charges together with a range of other fixed charges such as the distance from the main generators (to account for losses in transmission). But by far the largest component of these customers’ monthly bills is made up of the kWhs consumed.

Introducing renewable energy upends all of this fudge. To use one example: coal-fired or nuclear power stations work by boiling water and having the steam turn a turbine to generate electricity. Gas-fired power stations turn a turbine directly. These turbines spin at about sixty times a second (or 60Hz), the same speed as a car’s internal combustion engine when it is at 3,600 rpm. From these thermal power stations, you get the kWh and if you keep all of them in-phase, they introduce electricity into the system at the desired 60Hz frequency and then maintain that frequency (maintaining the so-called Power Factor). Most renewable power stations don’t provide this “ancillary service” – it has to be sorted out separately. How does one think about charging separately for a service that is inherent or inseparable from its primary function?

As renewables became competitive on a LCOE basis, fossil fuel adherents started to point this and other problems out. Of course, when renewables are still a small fraction of the total energy produced, this argument does not make sense. There is enough frequency control to accommodate the introduction of renewables. Going forward, in a system with a much larger share of ultra-cheap renewable kWhs, one would address frequency management separately but far more efficiently, say with spinning flywheels, much closer to the load or where electricity is actually consumed.

There are several other important ways that a system based on renewables will be technically different covering issues of variability, the need for back-up, storage, the ability to ramp up and down to meet demand. With cheap and abundant kWhs and cheaper storage (long and short term) all of these problems are solvable and are being solved. Indeed, a renewables dominated electricity sector starts to solve other pressing climate change problems such as the largely oil-based transport sector (it solves it by electrifying almost everything and making synthetic fuels) and even thermal industrial processes such as steel making (by making cheap hydrogen).

To secure all the benefits, a renewables-based system will be more local, more distributed, open, smaller-scale and more digital. This is at odds with the highly centralised system we have now. To replace the coal fired generating capacity that is set to be retired, South Africa will need to double the amount of capacity it allocated in each bidding window of the REIPPP Programme and do that every year – starting from now.

At the same time, South Africa will need to change the way electricity is supplied and charged for. We need to understand what the fixed or access charges ought to be and then what proportion of the bill should represent actual consumption. This means time of use metering and a different billing system. The unpicking of the existing system will reveal a whole raft of subsidies, cross-subsidies and inefficiencies beyond those that we know about through the free basic electricity allocation and the inclined tariff structures. How do we ensure that the benefits of electricity that is cheaper than it otherwise would have been do not also result in increasing the energy poverty of poor people? This, more than anything else, is at the core of a Just Energy Transition.

The subsidies in the system are not just between rich and poor. Consider two neighbours living side by side. One neighbour consumes say, 2,000kWh of electricity a month from the municipal supplier; the other neighbour, perhaps because she has installed a PV system, only consumes a net 500kWh supplied by the municipality (after injecting some of the PV electricity back into local grid) and draws on the municipal electricity supply mostly only during the morning and evening peak period. Without an appropriate line charge and a tariff to reflect time of use, the first neighbour is subsidising the second one.  It just doesn’t “feel” that way yet. Again, a Just Energy Transition issue.

Our system needs to start producing the correct pricing signals so that any money, whether public or private is invested to improve the outputs of the system and all its users but also to keep as many users as possible, especially high value customers, within the system. Falling prices of PV panels and batteries might make going completely off-grid possible but a stand-alone off-grid system will always be sub-optimal. First, it has to be completely over-spec’ed to deal with different day parts and different seasons (do you spec for summer or winter?). Second, you lose the benefits of multiplexing (a group of people will have different consumption patterns and can therefore be addressed with less capacity than if every person was to be provisioned on an individual stand-alone basis).

If pricing signals were right, perhaps the tariff schedule of your electricity provider (one that you were able to select yourself) would incentivise you to install a battery in your basement instead of PV panels on your roof? Perhaps, it could go beyond that – your provider could sell you a share in a much larger and per/kWh cheaper battery installed next to the substation feeding your neighbourhood. The necessary technical requirements alongside viable business models for micro/mini-grids are just around the corner.

While investing in a renewables based future will allow South Africa to meet its existing and climate future climate change commitments (and not have its exports carbon-taxed in countries that meet theirs), we should also know that we don’t really have a choice. Further, while funders and investors cite their own commitments to addressing climate change and pressure from their stakeholders as the reasons why they won’t finance new coal fired power stations, it is more likely that their refusal to consider is because coal-fired power stations are no longer an investible proposition economics. It is not as though South Africans, saddled as we are with our two catastrophes, otherwise known as Medupi and Kusile, don’t already know that.

At the same time, we should not underestimate the scale of the transition required and the difficulties associated with the transition. The energy transition will profoundly change our energy landscape in ways that none of us have yet fully grasped. If we are to be successful and secure a Just Energy Transition, the only thing that will remain the same is that we’ll still draw a 220V 60Hz alternating current from the wall sockets in our homes and businesses. Everything else will be transformed, engineering wise, the commercial arrangements, regulations, ownership but especially our mindsets, whether at government level, the public sector, the business sector and as consumers. This is much more than just replacing coal-fired generators with renewables.

To quote what a wise Chinese man might once have said, “the best time to have started the energy transition was 20 years ago, the second best time is now”. DM


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