South Africa has an energy intensive economy, highly reliant on fossil fuels, and sees economic growth based on energy intensive industries a key means to development.
In the field of renewable energy resources, wind energy is the technology with the lowest production cost of electricity. This form of energy generation has increasingly becoming established in Europe, the USA and India. As South Africa is blessed with abundant wind energy, especially along its coastline, it makes sense to develop and apply existing technology to local conditions and needs.
Currently Eskom (state owned company) has a total installed generating capacity of some 42,000MW (net 36,200 MW, peak 34,200 MW) with already new peak capacity in demand since 2007. 93% of its power production capacity is of coal based (10 large plants), 5% nuclear and 2% hydroelectric. 22 small power stations and back-up gas-turbines represent less than 1% of the national output, another 3% is used for own consumption by independent power producers.
Considering the economic development of South Africa an additional 40’000MW production capacity has been planned by Eskom over the next 20 years due mainly to upcoming large mining and metal industry. In the mean time the FIFA-World Cup will increase the demand for peak power. The total electricity sales from Eskom went up from 207’921GWh in 2006 to 218’120GWh in 2007 or an additional 5%.
If the future power mix is not yet precisely defined a clear orientation towards additional nuclear and renewable energy production is expected.
The Government believes that renewable energy can in many cases provide the least cost energy services, particularly when the social and environmental costs are included, and will therefore provide focused support for the development, demonstration and applications of renewable energy. Furthermore, renewable energy would lead to the introduction of a new technology and possibly new industry into South Africa with a high potential for job creation (Wind Power having the greatest potential on that matter compared to the other), an important goal of Government.
The energy crisis has led to the current legislation with Eskom being forced to buy all power produced by IPP’s, and a goal of 30% share of IPP’s in power production.
50% of the electricity produced is sold directly to the consumers by Eskom, the balance is sold to municipalities which generates additional incomes through the distribution and resale to end customers. This market organization has a direct impact on prices and price disparity from one region to the other. To solve this issue, the government has planned to unbundle the industry by consolidating the distribution industry in 6 independent regional electricity distributors (RED) which will purchase generation and transmission services by means of a wholesale pricing system.
Eskom generation surplus was expected to end by 2008-2010 but has already ended at the time of this article; therefore it is inevitable that electricity tariff will increase. It has already started in December 2007 with a price hike of 14% (from march 2008) and further yearly hikes of 20% for the 5 years to come are forecasted. This situation paints a completely new and different picture giving a whole range of generation technologies and IPP (Independent Power Producer) competitiveness.
Eskom controls the transmission network with some 26500km high voltage lines (400 and 275kV) and 365,000km of low voltage lines; Eskom will continue to invest in the refurbishment and upgrade of its distribution network. Regarding the access to the grid the government supports a non-discriminatory open access (white paper on energy – 2003)
The government is currently addressing unbundling after having commercialized and corporatised Eskom in Eskom Generation, Eskom Transmission and Eskom Distribution (6 RED’s), the split has the aim of easing the opening for IPP to enter the power generation business.
Tariffs are controlled, negotiated and set by the NERSA organization (National Electricity Regulator of SA – acting under the Department of Mineral and Energy DME), an independent government body also in charge of licensing and arbitration. Feed-in tariff for IPP’s are still to be designed.
Eskom after several years of arguable maintenance of its equipments has seen its investments life time shrink and faces today major on-going repairs and new investments; as a matter of consequence, the plants are running flat-out to face current demand, leaving little space for preventive maintenance and increasing the number of already frequent blackouts. Eskom, in order to face its own challenge will have to hike considerably its costs to bring new infrastructure on stream. Main issues beside the considerable size of investments required are the delivery of additional installations as well as the ability of Eskom to finance the same (S&P has placed Eskom's rating on "credit watch with negative implications" – business report January 13th 2008).
Government (white paper -2003) has stated that it wants to generate 10,000Gwh from renewable energy sources by 2013 – an equivalent to 4% of the forecasted power demand, which is equivalent to one 1,200MW power station. Within the next decade, close to 70% of the country renewable energy needs to come from wind.
In the short term Eskom has to meet the urgent demand for power, shortened lead-time and related expenses force to look for other alternative than coal-fired or nuclear power stations making today renewable very competitive in that regard along with gas turbines.
The SAWEP, an organization for the promotion of wind power working closely with the DME (Dept of Mineral and energy) is currently trying to address the remaining issues linked to IPP’s in general and Windpower in particular, this in order to give equal chances for new private investors in the IPP business.
For now IPP’s use Eskom distribution network through a designed wheeling agreements where the amount of electricity fed into the grid is monitored on both producer and user side, discounted at a later stage from the user Eskom-electicity-bill.
Article by AfriWEA contact
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Gary Moore, BA LLB (Witwatersrand) LLM (London), is an attorney practising in energy, mining, commodities, international trade and corporate services. He drafted the model windpower-purchasing contract, and its accompanying drafter's guide, for the United Nations Development Programme as part of its wind-energy programme for South Africa. Gary is a partner at the law firm Hofmeyr Herbstein & Gihwala Inc (Hofmeyr). Hofmeyr is one of the ten-largest law firms in South Africa, with offices in Sandton, Cape Town and Athlone, and offers a full range of legal services.
contact: South Africa, Tel: (011) 286-1111, Fax: (011) 286-1258 www.hofmeyr.com
Wind farm development; wind energy development; wind energy strategy www.genesis-eco.com
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