Remember the California option – John Joslin's alternative to Eskom - a proposal delivered to NERSA arguing the tariff increase is not necessary if Eskom pursues renewable energy? The story was one of our top ten stories for 2009.

John Joslin has now submitted his fourth of four submissions to NERSA regarding ESKOM's revised revenue application.

IN A NUTSHELL

The revised calculation (45% to 35%) was hastily done and did not examine all realistic alternatives - it was done in a few weeks based on an inadequate strategy...

The latest revenue application though better than the 45% one is still completely inadequate and falls short of a smart, professional Strategic plan for the South Africa energy future. It is not only an ESKOM issue but a government issue and the Departments of Energy, Public Enterprises, Environment and NERSA. But the only “de facto” national energy policy is reflected in this “hastily” made new Revenue application.

A more complete critique of the planning done by ESKOM for the previous 45% request and the current 35% one than that required for a well informed modern plan which is conscious of the issues of climate change ( with carbon tax and Carbon Capture and storage), renewable, electricity generation and most important an aggressive energy efficiency thrust, is argued in this submission.

The revised application is better that the original 45% one
We must appreciate that the revised plan is better than the original. It gives more credence to DSM (Demand Side management), and mentions the Power Conservation Programme. It gives a bigger role to private capital and Independent Power Producers.

The first will reduce the electricity sales and the second introduce some competition and new sources of capital. But ESKOM does not make policy in this area and these issues though a step in right direction is only a tiny step. The government and the relevant departments have to perform the most essential policies and execution to make the overall strategy advocated in this submission to succeed.

Take climate change seriously
Climate change is the most serious threat facing all life on the planet. The greatest contributor to climate change is the burning of fossil fuels. ESKOM and the government on the basis of this application-including the revised one shows no real concern about impacts on carbon emissions from the return to service and new coal-fired plants.

Both the Government and ESKOM are in the dock. With this plan they are letting South Africa down. If they had taken climate change seriously then we could have got a far better and less expensive energy future.

It is clear that ESKOM has been working in a policy vacuum, right throughout the revised report they stress that Department of Energy, Department of Environment and Department of Public Enterprises , NERSA, the Provinces and the National Road agency and Transnet must carry out their responsibilities. So my criticism in the submission is not merely with regard to ESKOM but also to Government Departments, parastatals and agencies.

It is clear that if the overlapping government entities and ESKOM had taken climate change seriously they would have examined the alternatives far more realistically. At the top of the list would have been Energy Efficiency ( Energy conservation).

All over the world the knowledge were doing scientific research on energy and energy policies. The International Energy Agency was making sensible recommendations. Germany, Denmark, Japan were practicing new energy and energy efficiency. California is an outstanding example. All of these forward thinkers were challenged by Climate Change and energy security.

A substantial reduction in the increase in tariff is realistically possible without retarding economic growth

The ESKOM case for massive tariff increases (including the revised 35% application) has been presented as either accept the increases or the country will be plunged into “blackouts” and economic growth will be greatly retarded.

Much commentary by radio, press and TV and many economists have said we simply have to build more power plants so we must accept the increase. Even the cabinet agreed to this.

None of these addressed seem to have been aware of the issues and realistic alternatives available. Very different and realistic strategies and plans are possible all reasonable alternatives are evaluated.

Different combinations of energy efficiency, fossil and renewable electricity generation, climate change scenarios, private and public capital, utility reform by calculating ESKOM’s revenue in different ways, including decoupling revenue from electricity sales, alternative ways of funding, and dealing with depreciation and rate of return (including no profit for the government). We need a comprehensive and realistic computer model like the one used for the LTMS reports.

ESKOM according to its outgoing CEO, Mr Maroga, is simply trying to raise the funds for an expansion programme which was virtually unilaterally ordered by the coal-fired plant electrical engineer specialists.

DSM was included simply as a way to increase the “reserve margins”. It was never seen as an alternative to building more plants. IPPs have been part of the policy since the whitepaper on energy in 1998. No real progress has been made in 10 years. Maroga admits there was not a comprehensive planning process. Nothing like the times demanded.

Consider California’s example
For the last three decades California has hardly increased its electricity consumption yet it has doubled its economic production! The users paid about $60billion less in electricity bills, the building of a dozen giant power plants was avoided, a million or so extra jobs were created and the privately owned power utilities got a reasonable return on their operations.

If this is true surely we can learn from it.!! It is true.

Application for three years of 35% increase in tariff- this can be improved. We can save R billions more.
ESKOM is now to apply for a rate increase of 35% for the next three years. This on top of the recently agreed 31% increase.

This is to pay for a capital expansion program to increase the capacity from 43GW by additional 16GW. Further funding will be required to add another 4GW capacity by 2020. It will also increase the ”reserve margin” to 15%.

The rate increase is based upon the Electricity Price Policy which calculates rates based on a rate of return on assets (ROA) and covers operating cost, maintenance, replacement depreciation and infrastructure such as contributions to new coal mines, roads, water supply.

ESKOM is looking for a 10% rate of return.

Reform the method of tariff calculation - reward for “sales avoidance” via energy efficiency
This traditional formula is out of step with the best “Climate Conscious” methods of tariff calculation. Rapidly spreading tariff calculations reward promotion and sale of energy efficiency.

This decouples the revenue from electricity sales. Some formulas provide rewards for efficiency targets, and penalties if not met. Others provide for monthly adjustment of rates so that a more efficient consumer though paying a higher rate pays a lower total bill.

The utility gets rewarded by getting a higher rate without advancing efficiency. The customers pay less and the utility gets a good return. In some cases the utility gets a larger rate of return on avoided sales due to increased efficiency and a normal rate on sales.

To get ESKOM to place “Energy Efficiency” at the top of its priorities a change in the electricity price formula needs to be made. This is a key parameter to reduce the capital expansion program and hence reduce the tariff increases.

Evaluating alternative technologies - choose discount rates that favour future generations
When evaluating alternative technologies to provide new generating capacity or working out the next three years replacement depreciation alternative technologies should be evaluated on the full cost including externalities. This will include health costs of pollution, cost of water infrastructure, roads, seed capital for new mines, CCS with piping and storage as well as Carbon tax.

When working out the “levelised cost” where the discounted life costs of a technology electricity system, divided by the total electricity generated with due regard to the load factor, the discount used must be low thus putting more value on the future than a high one that puts a low value on the future.

Discount rates used are arbitrary. Very often 7% to 10% discounts are used. The Stern Review supports the use of lower values. This is common practice for large common wealth public projects. The same logic applies to energy supplies at a time or real concern for the potential disastrous impact of climate change on the future.

We recommend using a 3% discount in the “levelised cost” calculation.

A more realistic way to work out replacement depreciation
We agree that historic depreciation is not the best way of doing it. The MEA way, which applies a formula to the assets, is also better but only a better guess. The higher the depreciation the higher the rate of return on total assets.

Because we are talking about a limited number of electricity generating plants at a time of rapid technology and environment change it is possible to do an individual replacement cost evaluation of every plant if it is to be replaced within say 5 years.

Replacement depreciation is setting aside capital for replacement. For each new replacement plant a “levelised cost” for each of the viable replacement technologies should be evaluated. The full evaluation model, which considers all the variables, including avoidance of replacing the plant due to energy savings and reduced demand, externalized costs, carbon taxes etc. A low discount rate should be used as argued above.

In this way we can keep a systematic evaluation of the changing technologies and legal environment. Because the plants have long lives there might be years where no replacement take place.

For smaller equipment like substations, local distribution etc the MEA formula for replacement depreciation can be used. This comment focuses on large generating plants.

Because the Replacement depreciation is such a large amount and it plays an important role in the tariff setting it should be reviewed regularly by NERSA and discussed with the big users and the public.

Rate of return on electricity sales and reduced sales due to efficiency
The ESKOM application (revised) states that the main and only shareholder, the State, does not need dividends and the main purpose of for agreeing on a tariff that will give a return is to accumulate for expansion. The rate of return can also be used to set salaries and bonuses for all employees.

The rate of return can be set at say 5% of electricity sales and 15% on avoided sales due to energy efficiency. Thus the performance, the salaries, the bonuses will all be tied to both sales and efficiency. ESKOM will get more for selling efficiency than selling electricity.

Obviously a more detailed evaluation of the numbers used must be analysed.
A similar formula must be used for the REDS and municipalities. All of us should be rewarded to push efficiency.

Energy efficiency is the cheapest source of electricity
Far too little emphasis is placed on sales avoidance via increased user efficiency. The plan includes the traditional energy efficiency styled “Demand side management”. But this is still seen as a means of improving the reserve margin of fossil fuel based supply.

Energy efficiency is by far the cheapest source of power. Typically it is 20% to 25% the cost of new supplies.

ESKOM’s own calculations support this. ESKOM expansion costs about R25 billion for 1 GW capacity. They are building 16GW and it will cost about R400 billion. It costs only about R5 billion to save 1GW. Thus it will cost R80 billion to save 16GW capacity. This amounts to paying R80 billion to avoid building 16GW capacity plants at R400 billion.

We pay R80 billion to save us paying R400 billion. Is that not a good investment? It is phenomenal!! This is based upon the real experience of California and Japan. It is based upon a detailed report by McKinsey and Company. It is based upon the recommendations of the International Energy Agency.

Many energy utilities are now being mandated to follow “least cost” solutions. Efficiency is the least cost solution. The European Union has a directive to energy utilities to “spend on efficiency first”. The International Energy Agency in its report to the G8 stated that all governments should make energy efficiency an imperative. This applies to developing countries for there are many areas where it pays to improve efficiency.

McKinsey report
McKinsey&Co Global Initiative in a famous and well researched report detailed hundreds of ways to increase energy efficiency, most at a profit.

It calculated that the world could reduce energy usage by 50% by 2030. South Africa uses about 200TWhs a year. With Economic growth it is expected to “need” about 350TWh by 2020. If this were reduced to 250TWhs by 2020 it would only need about 50GW plant capacity which is half the additional capacity ESKOM is seeking.

But 50% reduction would involve a major effort. Weatherize all houses and buildings. Refit all buildings. Upgrade all factories. Increase the efficiency of ESKOMs plants. It is quite feasible to aim at saving not 50% in ten years but say 30%. This would reduce the demand to 250TWHs/a from 350TWh/a in 2020 and will need only 50GW.

This means that instead of adding 16GW in 10 years we only add 7GW in 10 years. This will reduce the capital cost of expansion from R400 billion over 5 years to R240 billion over about 10 years.

We will have to add 20% of the expansion costs to fund the energy savings initiatives. This will be R40 billion. Thus we save R120 billion. This reduces the cost from R400 billion to R280 billion.

The current plan will cost about R80 billion a year. The recommended plan of efficiency, coal and renewables over a longer period will be about R28 billion pa. The expenditure is spread over ten years because the demand will be systematically reduced. If the some renewable are used to provide capacity the units can be built in modular fashion and thus reduce capital needed.

Independent renewable power producers
In addition Independent Power Producers could provide a growing amount of the new power. This requires a feed-in tariff of from 80 to 100c/Kwh. ESKOM told us in the recent past that they produce at 33c/Kwh. But with their planned expansion this was to rise to 80-100 c/Kwh.

All over the world governments and utilities have built wind and solar power plants. They have become practical and economic. The IPPs will be a source of capital. The less will be required by ESKOM.

Combined heat and power
To the IPPs we must add Combined Heat and Power sources. Many factories burn coal or gas for energy to drive furnaces. Much of the heat is wasted. With incentives and a feed-in tariff many could be converted to generate electricity for their own use and for feed into the network.

Renewable energy is evaluated falsely
ESKOM only proposes a 100MW wind plant in its current Revenue Application. It says that renewables are too expensive.

My main report gives numerous examples why this is not true. If you take the full costs including health, pollution, CO2 emissions and extra coal mines and infrastructure into account for coal-fired plants and you compare their future levelised costs with wind or solar then with a low discount rate the renewable are less expensive in most cases.

The typical coal supporter uses discount rates of 7% or more to compare coal-fired plants with renewable power. The higher the rate used (which is completely arbitrary) the lower value is put on the future cost. Renewables require no fuel. The fuel of coal and gas fired plant will continue and will no doubt increase every year.

If a discount rate of 3% (as advised by many economists and the Stern Review) is used to compare the levelised cost of coal vs solar or wind, the renewables generally win because the low running cost into the future dominate.

When adding all the externalities and the CO2 tax, all of which cost the society the renewable win hands down. These are all real costs why are they not taken into account by ESKOM?

A government led campaign to incentivise the mass deployment of solar water heaters,insulation, compact fluorescent lights, heat pumps and photovoltaic panels-two-way meters but become universal
There has been some activity by both government and ESKOM. But it has been stop and start and has not provided the funding and organization to pursue it on a big scale. Most of the capital will come from the householders and commerce but it needs to be repaid over long period of time like a house bond. This will reduce massively the need for ESKOM to expand. It will save billions.

Government led policy, regulations and campaign to create new energy efficiency standards
This has been tried successfully in many countries. There are numerous examples and they work well. This is only a short list. We need efficiency standards for buildings of all sorts and ages.

• Weatherisation and better insulation should be sponsored and incentive for all home including e RDP homes
• Government departments and parastatels should buy hybrid and electric vehicles
• Efficiency standards should be made for all home appliances like TV, refrigerators, washing machines and air conditioning
• Ground based heat pumps should be widely used in place of air conditioning
• Efficiency standards should be made for all types of office equipment. Computers, air conditioners, printers, communications etc.
• All existing buildings should be retrofitted by 2025 to create more efficient users and even carbon neutral. All new buildings built after 2025 should be carbon neutral or carbon positive.

Industry, mines and ESKOM itself can create massive savings in electrcity use
Industry and the mines use 100 000 electric motors and hundreds of thousands of water pumps. The vast majority are inefficient. Most can increase their electrical efficiency by 50% thus saving many GW capacity.

Details are given in my full submission (you can email John on johnjoslin at mweb.co.za for the full submission).

ESKOMs own coal-fired plants can increase efficiency from about 30% (which means that they are discarding 70% of the power they are burning) to 40% or 50%. One way of doing this is to change the turbines. Modern turbines are far more efficient than the old ones ESKOM has.

If ESKOM has 43GW capacity now a 20% increase in efficiency will give it 52GW by increasing the efficiency of its current operations. This will save R billions.

Efficiency Standards for all equipment must be developed, agreed to and executed. We are fortunate because his is being implemented all over the world and many imported products will have to meet efficiency standards

Recycling materials
Recycling materials uses about one fourth (1/4) of the energy compared to creation of new materials. Consider aluminium cans. We use and discard millions a day. Manufacturing aluminium from bauxite is probably the most electricity intensive process.
Recycling instead of manufacturing will save millions of Gwh.

If the whole economy is examined and all reasonable amounts of recycling of materials (iron, steel, plastics etc) the electricity and energy needed will be reduced by many GW capacity.

Biomass can provide electricity
The methane from much agricultural waste and the methane from landfills can generate electricity. This could be financed by local governments with loans from CDM or World Bank. They will need guaranteed prices on feed-in to the grid to give a return.

The power networks must be independent of ESKOM and smart
The power networks must be run independently of ESKOM. This was recommended in the 1998 white paper. 12 years later it is still not implemented. If ESKOM owns and runs the network it will abuse its monopoly just like Telkom has. The feed-in tariffs must be set by an independent NERSA.

ESKOM must renegotiate its long term contracts with industry, which sells energy much cheaper. Billiton was subsidized to the extent of R9Billion in 2008-2009. There are many similar instances but hopefully not as bad. This will all help to reduce the tariff increases.
ESKOM and the new owners must work on an upgrade to a smart network to support smart meters, intermittent input from wind and solar power stations, feed-in tariffs, better load balancing and a more efficient network with less power loss.

Green jobs
All studies whether in Germany, USA or South Africa demonstrate beyond all doubt that many more jobs are created using renewable power and energy efficiency than the traditional coal-fired monopoly.

Prepare the economy for the green industrial revolution and global green competition
A lot of evidence is submitted in my main submission to NERSA that the world is embarking on a new green industrial revolution. Most of the stimulus packages launched to deal with the financial crisis had a significant green support. This applied to the USA, Europe, South Korea, Japan and China. They have all announced a “green new deal”.

Many economies are gearing up to supply the world with green products and services. This applies to emerging economies like China in a big way. ESKOM and its shareholder should be preparing for the new deal. South Africa and ESKOM are missing out.

ESKOM and its sole shareholder/government should redo the Revenue Application. The requested rate increases can be realistically reduced by:

• Reform of the tariff and revenue calculation method to reward “sales avoidance” via energy efficiency as much as sales of electricity.
• Embark on a massive energy efficiency program to reduce the increase in demand of electricity. This will cover all sectors, energy, mining, industry, commerce, agricultural and households.
• Evaluate Renewable energy suppliers with 3% or so discount rates in working out “levelised costs”. Externalities and carbon tax or CCS should be included in evaluating coal-fired and gas plants.
• Fix an attractive feed-in tariff for IPPs. This should cover smaller suppliers. It will assist in raising capital.
• Guarantee feed-in tariff and incentives to encourage industry to create Combined Heat and Power plants.
• Recycle materials.
• Massive reductions in electricity usage by industry and mines is feasible. ESKOM can increase the efficiency of its own operations by 10-20% and add 10GW capacity without building new power stations.
• Power networks, transmission and distribution must be independent of ESKOM.
• Many more jobs created with green energy and a green economy
• The new approach will prepare the economy for a green economic revolution with competitive exports.

Contact John Joslin on 082 969 2497 or johnjoslin at mweb.co.za

pic: green-the-world.net