Jeremy Wakeford
The Department of Energy’s “Integrated Electricity Resource Plan 2010” (IRP2010) aims to guarantee security of energy supply, diversify the country’s energy mix and reduce carbon dioxide emissions over the next 20 years. After a round of public consultation, the DoE presented a revised plan to cabinet, which approved it on March 17.
The latest publicly available version, a “revised balanced scenario” (RBS), is based on a string of deeply flawed assumptions and means the country is being steered further down an unsustainable path towards economic contraction, social dislocation and environmental degradation.
This is a critical juncture in our country’s history, where energy investment decisions can play a pivotal role in the transition to a sustainable socio-economic system.
The RBS displays a worrying lack of appreciation of the global and domestic energy and resource contexts, includes problematic economic and social parameters, and shows a callous disregard for several critical environmental factors.
To begin with, several assumptions underlying this scenario are highly problematic in the face of the imminent decline in global oil production and its probable impacts.
Most obviously, diesel to fuel new – not to mention existing – open cycle gas turbines (OCGTs) will most likely be prohibitively expensive by 2020, if not earlier.
More generally, the costs of the build programme are likely to escalate substantially as oil prices drive inflation and interest rates higher.
The assumption of 4.6 percent annual economic growth is highly unrealistic in the context of continuing oil price shocks and looming supply constraints.
Deteriorating economic conditions could also jeopardise imports of coal and electric power from neighbouring countries.
Over the coming years, our transport system will need to be progressively weaned off oil and powered by electricity instead. Replacing our current fleet of more than 8 million road vehicles with electrified transport will require several additional gigawatts of power capacity.
But oil is not the only fossil fuel that is rapidly depleting. Global and South African coal production cannot keep pace with voraciously growing appetites from the likes of China and India for much longer. Research published in the academic journal Energy last year suggests that world coal energy output could peak this year, sparking a dramatic rise in prices.
According to several scientific studies published in the past year, South Africa’s own rate of coal production is likely to peak this decade.
Thus, whether sourced from home or abroad, the coal needed to feed new – and possibly old – thermal power stations will become increasingly expensive and at some point simply unavailable. This flies in the face of the RBS’ projection that coal costs will decrease from R300 to R200 a ton.
Other economic parameters contained in the IRP2010 revised scenario are equally tenuous. For example, assuming the exchange rate will hold at R7.40 for $1 is unrealistic in the face of looming oil shocks, which historically have triggered capital flight and sharp currency depreciation.
Furthermore, the RBS projections exclude the potentially enormous costs of decommissioning power plants and of storing and safely disposing of spent fuel (if that is even possible).
From a social equity perspective, the assumed real discount rate of 8 percent is much too high, as it effectively writes off the welfare of future generations. It contrasts starkly with the much lower discount rates assumed in the Stern Review on the Economics of Climate Change (0.1 percent) and our government’s own Long Term Mitigation Scenarios.
We cannot assume that future generations will be wealthier. In fact, the greater likelihood – given fossil fuel depletion, environmental degradation and climate change – is that they will be economically poorer than we are today. Thus, consumption by our children will be even more valuable than it is for us, which should be reflected in a zero (or even negative) discount rate.
Environmentally, too, the IRP has major shortcomings.
Water scarcity seems to be totally disregarded, and could impose a tough binding constraint on energy production.
Negative environmental and social externalities – like air and water pollution, and associated health impairment from coal combustion – are not sufficiently incorporated into the costs.
A recent peer-reviewed academic study calculates that the hidden costs of coal mining and use in the US amounts to approximately $345 billion a year – enough to nearly treble the price of coal-fired electricity.
The rate at which carbon dioxide emissions are reduced in the RBS is much too slow, and ignoring the carbon content of imported coal is arbitrary.
And has anyone in the government considered the possible impact of sea level rise on coastal nuclear power plants, which are supposed to last at least 40 years? Perhaps the tragic events in Japan will provide a needed jolt.
Grounding the IRP on these realities has some profound implications.
First, the levelised costs of the various energy sources change significantly. Taking into account the likely trend of rising coal prices, as well as incorporating the external costs of coal, means that coal-fired electricity is no longer a cheap option. Power from OCGTs will quickly rise off the scale of affordability. Incorporating full life-cycle costs into nuclear calculations would substantially change its economic profile.
Economies of scale in the production of solar and wind technologies will reduce their average costs over time. Thus, renewables are actually much more economically favourable than presented in the RBS.
Second, there is a major risk of power shortages down the line, unless the economy contracts substantially. If we remove the new build options from the RBS that are likely to be unaffordable, unavailable or undesirable, we are left with a meagre net increase in national power capacity of just 9 gigawatts by 2030.
Three major strategies should be followed to meet the laudable goals of the IRP.
First, our country needs a much more ambitious energy conservation and efficiency programme that aims to eliminate wastage of energy, alleviate bottlenecks in the roll-out of the solar water heater programme, and provide simple and cheap solar cookers, especially to low-income households.
Second, several critical institutional reforms must be accelerated. The renewable energy feed-in-tariff (REFIT) must be implemented urgently so that small and large-scale independent power producers have the certainty needed to undertake investments. Electricity distribution must be extricated from Eskom’s monopoly power. And residential consumers and small businesses should no longer subsidise multinational mining companies that pay discounted rates for bulk electricity.
Third, government must lead a massive, crash programme of investment to scale up local renewable energy production capacity. As in a war-time mobilisation – for that is the urgency we face – car factories should be retooled and workers retrained to manufacture solar photovoltaic panels, concentrated solar plants and wind turbines. This will boost local employment and incomes, and reduce reliance on imported energy and equipment.
The so-called Integrated Resource Plan lacks an integrated vision of the present and future based on a realistic assessment of resource availability and the waste-absorption capacity of the environment.
We are at a critical turning point in the history of our country and indeed our species: either we make a successful transition to a sustainable socio-economic regime, or we face a painful disintegration of our partially industrialised civilisation.
Energy is the paramount resource sustaining any complex society. Let us choose our energy path wisely to ensure a peaceful and prosperous future for ourselves and our children.
l Wakeford is an independent economist specialising in energy and sustainability. He is chairman of the Association for the Study of Peak Oil South Africa (www.aspo.org.za) and research director of the South African New Economics (SANE) Network (www.sane.org.za).