by Clyde Mallinson –
This article demonstrates the true cost of electricity when large power projects are built and connected to the grid sequentially. One could argue that the renewable energy independent producers’ procurement programme (REIPPPP) is a large project which comes online sequentially, bid window by bid window, and can be compared to Eskom’s Medupi coal-fired power plant, the units of which are completed and connected sequentially.
It turns out, purely by chance, that the first unit at the Medupi coal-fired power station came online in 2015, the same year that wind and solar from the renewable energy independent producers’ procurement programme (REIPPPP) Bid Window (BW) 1 came online. Since 2015, additional units from Medupi have come online at an average of one per year. The sixth and last unit is due to come online in February 2021, five and a half years after the first unit.
In 2016 and 2017, renewable energy projects from BW 2 and 3 achieved full commercial operation, and the cumulative wind and solar fleets grew in size. It is well known that the signing of power purchase agreements from BW 4 was stalled for over two years, and projects from that BW – which were originally meant to come online in 2018 – are only now being connected to the grid, having been further delayed by Covid-19 lockdown restrictions.
Had the REIPPPP proceeded as originally intended, projects from BW 6 would now be approaching full commercial operation, and we would be expecting BW 7 projects to be completed in 2021, with BW 8 preferred bidders already declared. The commissioning of the six units at the Medupi power station would more or less have coincided with the first six bid windows.
Table 1 shows data for Medupi. It includes operational data such as how many MWs worth of units were functioning each year, as well as annual electricity output in TWh. It also includes cumulative capital cost expenditure, as well as estimates of future capital costs. The 2020 capital cost to date of approximately R160-billion comes directly from Eskom, which supplied the information on request.
This represents the cumulative spend as of July 2020. Cumulative spend for the years prior to and post 2020 were estimated. The final figure of R220-billion excludes sulphur emissions control retrofits. This estimate does not come from Eskom.
The row showing cumulative effective MW installed takes into account the timing of each new unit by factoring in the number of months per year in which any specific unit became operational. Figures on operations and maintenance costs (O&M) as well as fuel costs received from Eskom have been smoothed over the period, to equate to the same total amount as the actual figures.
For example, in the data received from Eskom, Medupi in 2015 generated very little electricity, but a large amount was spent on coal. This reflects the building up of coal stockpiles, and may well have also included take-or-pay coal purchase penalties as the startup of the first unit was well behind the contracted coal delivery schedule.
As with any large coal-fired power station project with multiple generating units, the units are brought online sequentially. In the case of Medupi, an average of one additional unit became operational per year. Although the generating units came online in sequence, much of the balance of plant needed to be in place before the first generating unit could start generating electricity. This includes coal stockpiles and handling facilities, water treatment plant, shared emissions stacks, and in fact, everything else that is shared by the six generating units. The result of this is that the electricity output from the first of the generating units was very expensive on a cost per kWh basis because it had to shoulder the full capital cost of the shared balance of plant infrastructure on its own.
Figure 1 shows how the output from Medupi ramps up over time as each additional generating unit is added. Medupi should achieve full expected capacity of approximately 30 TWh/year by 2022. Figure 1 also shows increased output from wind and solar PV additions over time. In order for solar PV and wind annual output to equal that of a fully completed Medupi, 5,5 GW of solar PV and 3 GW of wind would need to be added each year during 2021 and 2022. In the case of solar PV, this quantum of build would be technically possible, whereas with wind it would only be possible by 2022 and 2023, allowing for a longer two-year build period.
Although the required new solar PV and wind build is theoretical, the annual quantum recommended would result in an immediate end to load-shedding, as well as a ten-fold reduction in the use of open cycle diesel turbines, which are extremely expensive to operate.
Annual output for PV and wind from 2015 to 2020 as per the first four REIPPPP bid windows. In order for PV and wind output to equal Medupi output by 2022, 5.5GW of additional PV and 3GW of additional wind would be required in each of 2021 and 2022.
Table 2 shows a comparison of the cost/kWh from Medupi, and from the REIPPPP for solar PV and wind. The data for Medupi is the same as in Table 1. In the case of solar PV and wind, annual pricing is as per each of the bid windows, with the tariff shown reflecting the average cost in that year. This factors in CPI inflation for tariffs from previous years. The tariff is thus a blended weighted average tariff for the year in question and may be directly compared to the cost of production from Medupi.
Note that annual average wind tariffs are always significantly lower than the costs of production from Medupi, and that those of solar PV are only higher than Medupi costs over the three-year period when the REIPPPP stalled. Thereafter, average PV prices continue to drop to well below those of Medupi.
The average wind and PV tariffs increase at CPI in 2018 and 2019 when there were no new additions of wind or PV. The large additions of PV and wind in 2021 and 2022 required to match the output from Medupi by 2022 have a far lower PPA price tag. In the case of PV, R0,70/kWh and R0,60/kWh were used for 2021 and 2022 respectively. These PPA tariffs are regarded as conservative. In the case of wind, the tariffs used were R0,70/kWh and R0,65/kWh for 2021 and 2022 respectively, likewise on the conservative side.
The reduction in the cost/kWh for Medupi over time is directly related to the sequential additions of generating units against a backdrop of already sunk balance of system capital expenditure. On the other hand, the reduction in cost/kWh over time for PV and wind is a reflection of growing fleets, with incremental additions having significantly reduced prices.
By 2022, Medupi will have stabilised at R1,32/kWh, solar PV at R0,95/kWh, and wind at R0,90/kWh. All three of these tariffs will increase at CPI in the future. However, coal price increases have tended to exceed CPI, exposing Medupi to additional cost increase risk as compared to the envisaged PV and wind fleets.
The declining cost/kWh for Medupi and the envisaged PV and wind fleets are shown in Figure 2. The effect of the stalled REIPPP programme on average tariffs in 2018 and 2019 is clear, especially in the case of PV.
Much has been made of the expensive early rounds of the REIPPPP. There are ongoing discussions and negotiations to lower the impact by way of restructuring or refinancing early-round PPAs. This analysis shows that the high-cost early rounds can best be dealt with by additional procurement at much lower PPA pricing. These need not necessarily be via the same REIPPPP vehicle. For example, greater cognisance of full system costs and requirements could be factored in, resulting in enhanced overall value.
The fact of the matter is that the costs per kWh from Medupi were similarly much higher in the early stages when only one unit – equated to bid window one – was operational. These costs decreased over time, as more units came online, sharing in balance of system costs. Our current integrated resource plan (IRP 2019) calls for significant (and yet wholly inadequate) new PV and wind build. As shown by this analysis, by the time the PV and wind fleet has the same annual output as Medupi, the average cost per kWh would be about 30% lower than that from Medupi.
As wind and solar make up more and more of the future generation, it will become necessary to ensure that additional flexible generation is constructed in tandem. This can be achieved by a combination of gas (mainly hydrogen) and energy storage systems. At current costs of generating electricity from wind and PV, and storing electricity, it is possible to ensure adequate security of supply in South Africa for very high levels of renewable penetration (>70%) for a wholesale “factory gate” price of less R0,95/kWh. This price is set to reduce in future in line with ongoing technology improvements and economies of scale, thereby stabilising the electricity price trajectory in South Africa.
Clyde Mallinson is a trained geologist who supports the use of renewable resources, rather than depleting ones.
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