DMRE Gas

We missed the green energy boat big time when the powership deal sailed in

Original article by Roland Ngam in Daily Maverick here

The South African government’s recent Independent Power Producer (IPP) contracts have sparked much debate in the country (Such a big contract to Turks!… Corruption is going to run rampant!… The plants are 100% not going to be delivered on time!).

While many have spent a lot of energy bashing this specific round of awards as if it was just a one-off, I once again want to look at it from a more long-term angle — in other words, what we need to do to get better deals when the next round happens.

You must have heard by now that on 18 March 2021, South Africa’s Minister of Mineral Resources and Energy Gwede Mantashe announced the winners of the 2,000 megawatt Risk Mitigation IPP Procurement Programme (RMIPPPP) as follows:

  1. Acwa Power Project DAO;
  2. Karpowership SA Coega;
  3. Karpowership SA Richards Bay;
  4. Karpowership SA Saldanha;
  5. Mulilo Total Coega;
  6. Mulilo Total Hydra Storage;
  7. Oya Energy Hybrid Facility; and
  8. Umoyilanga Energy.

The biggest winner of the award process by a country mile was Karpowership SA, a subsidiary of Turkey’s Karadeniz Energy Group, which stands to make an eye-watering R218-billion or $15-billion over the 20-year contract period. The Council for Scientific and Industrial Research calculates that annual project costs will be in the region of R10.9-billion.

You may also have heard Gwede Mantashe claim at the announcement that the deal was a very good deal, a cost-effective deal and a big deal for South African jobs and transformation. However, and as energy expert Chris Yelland asked Sakina Kamwendo on Morning Live last week, DMRE is selling this as a cheap deal based on what exactly – because it certainly is not cheap?

In seeking quick fixes for South Africa’s energy problems, the Department of Mineral Resources and Energy (DMRE) probably adopted the same posture that departments of finance all over the world have when they need to raise cash for government business. You know, they go to money markets, listen to offers and pick a winner. Straightforward. The people do not need to be bothered by the granular intricacies of such complex transactions.

DMRE could have done better. But let’s just pause for a minute and calculate the real cost of this deal. First, emissions. The annual emissions for the Karpowership project component were presented by Tony Carnie here in Daily Maverick on 14 March as follows:

  • 19.5 million tons of carbon dioxide equivalent over 20 years;
  • Local emissions of about 1,354 tons of nitrogen oxides per year;
  • Over 270 tons of PM10 particulate dust pollution; and
  • 54 tons of sulphur dioxide emissions per year.

These calculations do not factor in methane, ethane and propane leaks typically associated with such projects. Keep in mind that in terms of greenhouse potency, methane is 30 times more destructive to the environment than CO2. South Africa does not have enough liquefied natural gas (LNG) for the plants, therefore it has to import. So, for two decades, the country is probably sponsoring a fracking boom somewhere… as well as emissions during liquefaction and transportation.

Now, how do you square the fact that Environment Minister Barbara Creecy is at war with Eskom right now to install flue-gas desulphurisation units at its plants while across town, her colleagues are blowing up the country’s carbon budget? Remember that South Africa plans to cut its emissions by 28% by 2030 and for that, it will need international support of about R120-billion.

The second real cost relates to jobs. This award very specifically promised to create 3,800 job opportunities in the initial phase and an additional 13,500 jobs over the 20-year life cycle. Job opportunities are not real jobs. Furthermore, what effort is going to be made to train and transition former Eskom employees for these positions and industries? No concrete announcement has been made about this just-transition priority. Are we just postponing rolling mass action by unions?

Finally, the duration of the contract. Before this deal, Karpowership had never signed a 20-year contract anywhere in the world, so why did South Africa hand them such a long deal? The costs of renewables are dropping every year. They will probably be much cheaper than what Karpowership SA is offering the state within the next decade, but the country will be locked into an unfavourable deal for another 10 years beyond that. That is just stunning. Remember: fuel costs within the contract are variable and the markets will therefore dictate the true cost of this deal.

Now imagine how South Africa could have transformed its grid with R218-billion. Forget the local component of the Karpowership deal for a minute and go along with this scenario – it does not involve Oracle holding a knife to Eskom’s neck.

The DMRE could have gone down another route of course. This IPP award was a major opportunity to lay down a marker, to go big on green energy and really show everybody that when President Cyril Ramaphosa delivered his State of the Nation Address on 11 February this year, he meant business on the just transition.

The government could have announced that for the foreseeable future, all energy IPPs and not just the Renewable Energy IPP Procurement Programme (REIPPPP) will be from renewables. It should then have announced what is being invested to prepare workers for jobs in new power companies.

It could also have set up a massive subsidies programme to help low- to medium-income households, farms, businesses etc buy and install solar panels or even small wind turbines. With the right incentives, hundreds of thousands would have become energy prosumers (simultaneously producer and consumer) just like in western Europe.

In England, new laws also empower more than one million homeowner prosumers who install new rooftop solar panels to lower their bills by selling the energy they do not need to their power company. In Ireland, thousands of individuals, farmers, businesses, sports organisations and community groups will be able to sell renewable electricity into the national grid later this year.

What is the cost of providing subsidies for homeowners to buy and install green energy capacity compared to every round of load shedding? South African families would have generated more energy for themselves and sold the rest to Eskom. This would undoubtedly have created scale and skills and distributed more wealth to more families – at least R218-billion over 20 years. A good post-Covid growth strategy.

For this kind of thinking to prevail though, I have argued consistently that CSOs, trade unions, businesses, etc, need to start pushing government for greater participation in IPP deals. They need to start making a lot of noise about working with Eskom. This debate cannot be left to the Stellenbosch Municipality alone.

It is not too late. DMRE will release another request for proposals within the next 12 months. This planned round has allocated 3,000MW for gas and 1,500MW for coal. Communities, labour and homeowners should step forward and claim that 4,500MW coal/gas component.

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