Assessing the financial viability of renewable independent power production in South Africa

Abstract

The cost of energy and national power utility Eskom, is currently under heated debate after the cost of electricity has more than doubled over the past three years, with another five annual increases of 8% approved by the National Energy Regulator of South Africa. The state owned utility has a monopoly on electricity production in South Africa having sole ownership over the transmission and distribution of electricity. Eskom produces 95% of South Africa’s electricity, predominantly from coal fired power stations, which is one of the leading causes why the country is one of the highest carbon dioxide emitters in the world. The question of independent power production and the use of our abundant renewable resources for electricity generation have been at the forefront with critics arguing against the heavy increases absorbed by industry and consumers. Although the renewable energy space is a well discussed topic, it is not well scientifically documented from an economic standpoint. The primary objective is to determine if renewable energy is price competitive with Eskom, or non-renewable electricity generation, by not only looking at the current scenario but also the future price projection and point where renewable energy is on parity with the grid price. For this purpose the Levelised Cost of Energy calculation method was used. Four different measuring instruments were produced for each technology namely, biogas, biomass, solar and wind and a financial model developed to determine the levelised cost, taking into consideration more complex financial structures, tax incentives, revenues and costs associated with by-products. From the literature it is clear that wind and solar, on a large scale, are competitive with the levelised cost of Eskom’s new build coal power plants and particularly wind, is lower than the grid price in 2017. The empirical study focused on a smaller scale of 1 to 5 megawatt and concluded that the levelised cost of wind energy is lower than Medupi coal fired power plant, currently under construction. The study also determined that biogas and biomass, under certain conditions relating to feedstock costs, are able to compete with Medupi and offer real and sustainable benefits in long-term energy supply.