IPP RE REIPPPP Tariffs

Opinion: If renewables are so cheap, why are we paying so much for them?

Opinion: If renewables are so cheap, why are we paying so much for them?

5th April 2019 BY: TOBIAS BISCHOF-NIEMZ
Average tariffs of South Africa’s Renewable Energy Independent Power Producers

Photo by: Tobias Bischof-Niemz
Average tariffs of South Africa’s Renewable Energy Independent Power Producers

Hardly a week passes without a statement being made about the high costs of renewable energy in South Africa. Typically, the argument is made on social media and is framed to suggest that Eskom is buying electricity at R2.22/kWh from renewable-energy independent power producers (REIPPs) and that this is proof that renewables are much more expensive than other forms of electricity generation.

The proposition is at odds with the alternative narrative of onshore wind and solar photovoltaic (PV) being the cheapest form of new generation. It also conflicts with various analytical reports indicating that a new-build combination of wind, solar and flexible generators represents the least-cost electricity expansion scenario for South Africa.

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That such starkly divergent positions are able to coexist is obviously perplexing and is also resulting in a good deal of confusion about what direction South Africa should take with regard to its future electricity investments.

To answer the question about why South Africa is currently paying so much for renewables when they are meant to be cheap, it is important to clear up a few basic facts about domestic renewable-energy costs.

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Firstly, it is factually incorrect to attribute the R2.22/kWh average IPP payment in FY2017/18 to REIPPs, as the figure reported is the weighted average of renewables plants and the diesel-fuelled IPP peaker stations. Since the peaker plants are meant to provide emergency capacity, or kilowatts, and not energy, or kilowatt-hours, it is misleading to report them in the per-kilowatt-hour category. Be that as it may, separating the REIPPs from the peakers still translates to about R2.01/kWh in FY2017/18 (R2.11/kWh in 2018/19 prices).

Secondly, these admittedly high tariffs arise from the fact that South Africa made a conscious decision to procure renewable energy into its coal-heavy power system at a time when wind and solar PV costs were far higher than they are currently, and it was decided to buy relatively expensive concentrated solar power (CSP) too. Since the first renewables projects were procured in 2011, the cost of solar PV has fallen by 80% and wind by 60%.

Therefore, the reason South Africans are currently paying so much for ‘cheap’ renewables is a direct consequence of the timing and scale of the initial procurements. Crudely, South Africa bought too much too early and, therefore, displays a mild form of the subsidy era out of which a number of countries are currently transitioning.

These high costs arose despite a well designed and executed procurement framework based on competitive bidding and notwithstanding considerable interest in South Africa’s inaugural 2011 renewable auction. During that bid window, an allocation of just over 1 400 MW was set aside and the Department of Energy selected 28 preferred bidders from an initial list of 53 bidders. The tariffs for wind of R1.67/kWh were already acceptable, but for solar PV they were R4.02/kWh, and for CSP R3.91/kWh. This outcome reflects both the fact that the cost tipping point had not been breached for solar PV in 2011, as well as the natural risk aversion of IPP investors in a market that was yet to prove itself.

By the second bid window, solar PV tariffs had fallen to R2.40/kWh, while those for onshore wind had declined to R1.31/kWh and the decreases continued into bid windows three – to R1.28/kWh for solar PV and R0.96/kWh for wind – and four, when tariffs fell to R1.00/kWh and R0.82/kWh for solar PV and wind respectively.

In an ironic twist, however, the cheapest renewables projects bid were never procured, as a result of Eskom’s refusal, in 2016 and 2017, to sign legally procured IPP agreements. The utility’s obstructionist stance arose despite the fact that prices of only R0.68/kWh were bid for both solar PV and wind projects in late 2015.

Based on those bids, it became apparent that solar PV and wind are 40% cheaper than new baseload coal-fired power stations, which a separate bidding process showed carried costs of R1.13/kWh. This represented a significant change over a relatively short period, with new coal having been seen as considerably cheaper only five years earlier. Nevertheless, South Africa will continue to carry the costs of those initial high-priced renewables projects for the residual 15-year duration of their 20-year contracts, driven by Bid Window 1 of solar PV and by CSP.

The good news is that the “school fees” have been paid and that, with every new wind and solar PV project coming online, the weighted average cost of renewables in the South African system will fall steadily. In FY2020/21, the weighted average renewable-energy cost will already go down to R1.71/kWh, thanks to projects of Bid Window 4 coming on line. The average tariff of operational wind projects alone will already be down to R1.10/kWh in FY2020/21.

The other piece of good news is that South Africa’s relatively more potent wind and solar resources will result in comparatively lower-cost electricity than in most other countries also transitioning to systems based on variable renewable energy. If the transition is well managed, the country has every chance of reclaiming its once heralded status of destination of choice for all electricity-intensive commercial activities, from smelting to cybercurrency mining. 

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