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Will Eskom avoid the utility death spiral?

Eskom is looking to cut its use of private power and has proposed nuclear as the final solution, but it may be making a major business model mistake, write Graham Schwikkard and Aaron Burton of Datta Burton & Associates.

Since 2008, average electricity prices have increased by a massive 160% (after adjusting for inflation) and yet there are still no clear answers as to when this enormous growth will end. South African households are under continuing pressure to pay for basics, and businesses are finding their competitiveness being eroded. Eskom is looking to cut its use of private power and has proposed nuclear as the final solution, but it may be making a major business model mistake.

New builds of huge power stations go against recent and future trends in utilities. The rapid decline in renewable pricing is pushing them past the need for government subsidies and ‘feel good’ imperatives to become a real alternative. Critically, large-scale battery production and new technologies are driving down the price of storage, which will make renewables feasible on a larger scale within 15 years.

Committing to a 30-year trillion-rand investment will lock up scarce funds and close out optionality. It is a decision based on existing technology and an old business model, and does not consider the future energy landscape. Funded with debt, it will very likely continue to push up tariffs and this, combined with a decline in renewables and storage costs, will put Eskom into a utility death spiral.

The declining price of renewables

Since 2007, solar module costs have decreased 80% with the price falling 26% every time output doubles (wind-power is also falling fast – 19% per doubling).

South Africa’s successful REIPP (Renewable Energy Independent Power Producer Procurement) programme has already experienced the positive cost trend of renewables. The measure used to analyse and compare tariffs with the cost of new power is the Levelized Cost of Electricity (LCOE). Simply put, it is the cost of installation, financing, and running, divided by the total energy output. We can use it to compare builds and tariff schemes.

In 2015, the round 4 tariffs dropped 25% to as low as R0.57/kWh for wind and an average R0.79/kWh for solar. This is compared to LCOE of R1.05 for coal-fired Medupi and Kusile, and R1.75/kWh for Britain’s new Hinkley nuclear plant. Even CSP, which priced relatively expensively at R3.94/kWh, came out cheaper than alternative peaking supply from diesel and gas turbines. This is why Deutsche Bank has already placed South Africa at grid parity for solar prices.

Analysts have looked at the recent trends and projected future costs based on a steady learning curve as total capacity increases. If these continue and solar module prices reduce 40% over the next 5 years, renewables will easily beat out growing Eskom tariffs (1).

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