Energy Security and Sovereignty (Rob Jeffrey) South Africa

Developing countries and regions are being denied opportunities of economic growth by electricity generation policies being imposed on them

Rob Jeffrey Economic Risk Consultant

The international movement that is slowing economic growth and undermining employment generation • • • •

•

•

•

•

•

Many emerging nations and regions within nations must address three fundamental issues: inequality, unemployment, and poverty.

These problems can be remedied only by raising the economic growth rate. A higher growth rate is dependent on correct public policies coupled with an adequate and growing supply of affordable electricity.

To ensure economic growth these economies must develop their goods producing industries. In order to do that it is essential to supply secure electricity at the lowest possible cost.

The choice between growth and stagnation depends on the energy mix selected and the policy choices that are made. Essentially these economies must use energy sources which give them a competitive advantage or a comparative economic advantage.

Unfortunately they are being forced into taking incorrect economic options as a result of an international movement forcing the use of in many cases uneconomic renewables upon them.

This movement is influenced by the IPCC policies on anthropogenic climate change. It is supported by the group think coalition of idealistic individuals and politicians supported by institutions with vested financial and other interests in developing renewables.

The movement favours renewables, primarily wind and solar, and claim they will give security of electricity supply” at a competitive economic price and are superior to fossil fuels and nuclear which they deem to be environmentally dangerous even though these economies are rich in fossil fuels No better example of this battle for electricity generating supremacy can be found globally than in South Africa where the claim is made that renewables are best able to enable government to achieve its goal of “enabling economic growth and prosperity”.

This presentation on South Africa serves as a global example that : “The theory and the facts of real life strongly suggest that this is not true”.

Economic Risk Consultant

South Africa faces a growing security threat and a loss of its sovereignty Global trends, the state of the South African electricity market, challenges, repositioning and reform

Rob Jeffrey Economic Risk Consultant

Program Global Electricity Trends and challenges for the electricity sector • Global trends and the economic needs of the country • South Africa’s economic development Problems • Efficient and inefficient electricity generation sources • The looming crisis with high penetration renewables • The efficient provision of electricity to the economy – Challenges and the restructuring of Eskom – The role of Eskom – The role of IPPs

• Climate change • Conclusion

Economic Risk Consultant

Rob Jeffrey Independent Risk Consultant Managing Economic Consultant Econometrix Rob Jeffrey is an independent economic risk consultant. He is the former MD of Econometrix and continues to consult for them. Areas of expertise include global and domestic economic and energy trends and strategies to foster economic growth, the development of several important sectors of the economy including industry, mining, agriculture, financial services and electricity in South Africa. One of Rob’s major areas of expertise is the South African electricity and energy crisis. He is highly involved in analysing the energy requirements of the South African economy and the economic impact of alternative electricity generating sources. He is the author or co-author of numerous reports, papers, presentations and articles on matters relating to national, industrial, energy, and economic policy development.

Rob has wide practical experience and expertise in the industrial, construction, and engineering sectors. He was MD of Dorbyl Structural Engineering, Chairperson of the Constructional Engineers Association (CEA), the CEA representative on SEIFSA, and an executive member of the Association of Steel Merchant Stockholders. He sat on numerous councils and advisory panels. He is on the Executive of the Fossil Fuel Foundation and is a member of the South African Reserve Bank Economic Roundtable.

Rob graduated with a B.Sc. in Mathematical Statistics and Applied Mathematics at the University of the Witwatersrand and has Masters Degrees in Economics from Cambridge University and Business Leadership from the University of South Africa.

Economic Risk Consultant

GLOBAL, AFRICA AND SOUTH AFRICA’S ECONOMIC AND DEVELOPMENTAL REQUIREMENTS

Economic Risk Consultant

Poverty is the key issues facing emerging economies • Poverty is the single highest social cost to society

• There are only three major policy objectives.

– Poverty alleviation, – Reducing inequality and – Reducing unemployment • Economic growth is of paramount importance in their goodsproducing sectors. This requires electricity growth • Emerging economies require electricity energy sources that offer security of supply at the lowest possible cost.

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Cop 21: Paris Outcome ▪ The outcome of COP21 was an excellent agreement. What was important was not what was agreed but was not agreed.

▪ The agreement gave a set of sound long term global objectives. It asked for no commitments by any country.

▪ Major countries either could not get agreement internally e.g. the USA ▪ Countries were not going to make commitments ASEAN countries, China, Russia, India, Vietnam, Korea Poland

▪ They were embarking on major expansions of coal and fossil fuels

▪ In summary countries were expected to do what was in their best economic interests

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Australia's view of its schemes

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Total World Carbon Emissions

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Global Temperature trend

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The cost of adhering to COP 21 ▪ Bjorn Lomborg, President, Copenhagen Consensus Centre and a visiting professor at Copenhagen Business School estimates

▪ Global economic cost of $1 trillion to $2 trillion every year from 2030 due to slow growth and high energy costs.

▪ It will reduce global temperatures by just 0.21°C.

▪ The cost for the US, would be $154/172 billion every year in lost GDP. ▪ Support to disadvantaged countries of $100 billion per annum in climate aid.

▪ Carbon tax & renewables would cost SA between R35 to R 51 billion pa ▪ SA’s sacrifices will reduce temperature increases by about 0.0026 C by 2100.

▪ The Anti-Development Bank: The World Bank's Regressive Energy Policies by the London-based Global Warming Policy Foundation (GWPF) finds that the World Bank has abdicated its primary mission of tackling poverty in the developing world.

▪ Former Treasury adviser Rupert Darwall, By embracing high-cost, low-reliability renewables and restricting clean coal financing, the World Bank is guilty of “an inhumane and senseless attempt to try and save the planet on the backs of the world’s poor,” Economic Risk Consultant

Energy poverty a new issue in industrialised countries due to rising electricity prices ▪ 54 million people in Europe are affected by rising energy poverty, around 1.5 million people could be dying prematurely ▪ UK household electricity prices have increased of over 80% since 2005.

▪ The number of households affected by energy poverty in the UK, increased from 2 million to 5 million.

▪ Green-energy policies in California have resulted in as many as 15 percent of households falling into energy poverty.

▪ Ontario in Canada now has an energy crisis thanks to renewables ▪ In the EU coal-fired power plants generate electricity at half the price of wind turbines and a quarter of the price of solar PVs ▪ Governments have fallen in Australia and Ontario as a result of their renewable policies ▪ Comparative advantage of Fossil fuels in terms of non-intermittent energy supply not requiring back-up generation capacity.

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Electricity generation in developing economies ▪ Poland Russia India china and the ASEAN countries go ahead with fossil fuels and nuclear

▪ Clean coal has been determined as the cheapest and most reliable sources of electricity to achieve their economic growth objectives.

▪ Replacement of aging inefficient power stations is a major objective.

▪ ASEAN countries: Coal-based electricity capacity is projected to increase from about 47 GW in 2013 to 261 GW in 2035, average growth rate 8.1%

▪ Vietnam: GDP growth is expected to average 6.0 % per annum. Coal generation will increase from 36% in 2015 to 56% by 2030 increasing at 7.2% per annum

▪ Plans for utilising cleaner coal were effectively approved by Pres O Bama as essential to raise economic growth rates and reduce poverty in emerging nations Economic Risk Consultant

Asian Thermal Coal Import demand Contrary to the Paris Accord Demand is expected to grow over 400Mt over the period, from 740Mt in 2017 to 1147Mt in 2030. The demand growth is broad-based, with all countries except Japan increasing imports across the period, and not dependent on China.

Market Demand Study: Australian Export Thermal Coal Minerals Council of Australia

13 June, 2018

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Asian Thermal coal Imports

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Renewables security of supply and cost

▪ There is increasing evidence that renewables (wind and ▪

▪ ▪ ▪

Solar CSP) are not suitable for mass power in industrialised or industrialising countries Energiewende in Germany have driven up electricity prices to unacceptable and uneconomic levels The German government have capped wind and are in the process of withdrawing subsidies.

South Australia’s Lessons for the World: Wind Power The Fastest Route to Social & Economic Disaster Intermittent & unreliable renewable energy in South Australia is leading to the deindustrialisation and reduction in its citizens’ living standards.

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Stage of industrialization and per Capita Income & Consumption

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Infrastructure in Sub-Saharan Africa remains not well developed

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SOUTH AFRICA’S ECONOMIC DEVELOPMENT PROBLEMS

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Deindustrialisation and decline of mining (%GDP)

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Poor goods producing sector growth increasing imports insufficient exports increasing unemployment

Economic Risk Consultant

Unemployment Trends 2008-2017 Growth in services Decline in Goods producing sectors Jan-Mar 2008

Jul-Sep 2017

Jan-Mar 2008

Jul-Sep 2017

8.5 years

8.5 years Thousand Thousand Thousand

Thousand Thousand Thousand Rates (%) Analysis Labour Force All population Groups Unemployment rate Both sexes Employed / population ratio 31544 37 373 5 829 Population 15-64 yrs (Absorption) 18808 22 402 3 594 Labour Force 14438 16 192 1 754 Labour force participation rate Employed Formal sector (Nonagricultural)

9934

11 379

1 445

4.5

45.8

43.3

-2.5

59.6

59.9

0.3

Expanded definition of unemployment 36.8

5.9

256 Employed / population ratio -28 (Absorption) 80 Labour force participation rate 1 840

45.8

43.3

-2.5

66.2

68.5

2.3

2 689 810 1 313 6 210

Not economically active

12736

14 971

2 236

Discouraged work-seekers

1202

2 436

1 233

12 536

27.7

30.9

2433 838 1233 4371

11534

23.2

Unemployment rate

Informal sector (Nonagricultural) Agriculture Private households Unemployed

Other(not economically active)

Rates (%)

Normal definition of unemployment

Exp def of unemployment 25-34 Rates (%) years old

Unemployment rate

33.6

42.5

8.9

Employed / population ratio (Absorption)

56.6

49.6

-7

1 002 Labour force participation rate

85.1

86.4

1.3

Economic Risk Consultant

Real Gross Domestic Investment

Economic Risk Consultant

QES Total employment vs Real GDP growth % Electricity Consumption vs Production Index

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Increasing unemployment means Increasing Social Costs

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Fall in FDI to Africa and South Africa

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Lack of Confidence and Lack of Global Competitiveness ▪ Lack of confidence caused by political and economic policy uncertainty.

▪ State capture and corruption ▪ Potential implementation of the mining charter ▪ Threat of interference to the independence of the SA Reserve Bank ▪ Attacks on “white capitalism” ▪ Well-meaning but damaging regulatory laws hampering market efficiency ▪ Domestic confidence at lowest level for 30 years ▪ AT Kearney Foreign Direct Investment (FDI) Confidence index S A occupied 11th position in 2012, it dropped to the 25th position in 2016.

▪ 2017 Fragile States Index. Ten years ago, SA was ranked in the stable category. SA now falls in the elevated warning category –

▪ S&P, Moody’s and Fitch have all downgraded South Africa and have it on a negative watch Economic Risk Consultant

Summary Economic Development Problems • • • • • • • • • •

Slow economic growth Lack of growth in the goods producing industries Rising unemployment Structural balance of payment difficulties Increasing electricity price Economic and energy policy uncertainty Lack of competitiveness Educational and vocational mismatch Increasing social costs Lack of domestic and foreign investment to drive growth Economic Risk Consultant

EFFICIENT AND INEFFICIENT NATURAL ENERGY STORAGE SYSTEMS AVAILABLE TO SOUTH AFRICA

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Energy returned from energy invested

D. WeiĂ&#x;bach et al (2013)

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Fundamental Weaknesses Of Renewables For Base Load Electricity ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪

Wind & solar power require full equivalent back up Low Load Factors average between solar 26% and wind 35% Unreliable intermittent and unpredictable Storage extremely expensive One of the most inefficient electricity generation system Renewables are uneconomic & lead to economic stagnation Increased grid difficulties and grid costs Renewables are environmentally disastrous Other technologies effectively subsidise renewables Renewables raise electricity prices are a tax on the poor & increase energy poverty

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WORLD EXPERIENCE OF RENEWABLES

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Renewables security of supply and cost • There is increasing evidence that renewables (wind and Solar) are not suitable for power in industrialised or industrialising countries • Energiewende in Germany have driven up electricity prices to uneconomic levels.

• Prices paid by industry in Germany were 52% higher than France (nuclear) and 86% higher than Poland (coal). Ireland, prices were 34% higher than France and 64% higher than Poland • Fritz Vahrenholt in his study entitled ‘Germany’s Energiewende: A Disaster in the Making’ sums up: “It will take a long time to repair the severe damage caused by misled energy policy” • German government have capped wind & in the process of withdrawing subsidies.

• South Australia’s Lessons for the World: Wind Power the Fastest Route to Social & Economic Disaster.

• Intermittent & unreliable renewable energy in South Australia is leading to the deindustrialisation and for its citizens’ a substantial reduction living standards.

• King Island study in Australia, attempt to get 100% renewable supply shows that electricity prices increase R2.67/kwh and requires 100% diesel and gas back up.

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Relative costs of energy sources in China

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Relative cost of retail electricity in different countries

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The massive environmental cost to the economy ▪ ▪

The impact of CO2 is not disastrous but beneficial to the planet. (Dr Patrick Moore) South Africa only emits 1.1% of the GHG in the world Wind energy’s has a major impact on birds ▪ ▪

▪

Impact of windfarms in SA needs study ▪ ▪

▪

▪

In the USA killed 4 birds per MW in USA and 16+ birds per MW in in California.

The Effect of Wind Turbines on Bird Mortality Maeve White November 24, 2016.nConfirmation of an earlier study by Scott R. Loss, Tom Will, Peter P. Marra entitled “Estimates of bird collision mortality at wind facilities in the contiguous United States”.

“Strategic environmental assessment for the wind and solar photovoltaic energy in south Africa” (2015)” (SEA). Nine game reserves and nature reserves and were party to this submission.

Birdlife South Africa, Vulpro and others environmental groups have also objected to ill-considered windfarm developments and their effects on birdlife. “Objection to Environmental Application for The Spitskop West Wind Energy Facility, Eastern Cape Prepared by ADS Environmental Consultants.

Aggregated over the full area affected in SA of over 200000 square kilometres by 100000 MW multiplied by years then the number of birds lost would be at least 400000 pa & over 8 million over the 20-year life of these windfarms. Many would be large rare birds cranes, vultures, eagles and migrating birds Windfarms and batteries contain many toxic substances in both manufacture and disposal. The regular disposal of waste from 50000 towers and motors and batteries spread over a wide area have not been recognised or studied. In comparison disposal and closure of coal and nuclear are relatively simple and confined.

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Environmental damage

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THE LOOMING MAJOR POLICY CATASTROPHE FOR SOUTH AFRICA

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Two major policy implications of the energy decision

▪ S.A. could decide to substantially expand its renewable energy sources particularly wind ▪ S.A. could cease using increasing its coal generated electricity.

▪ The major implications of this ▪ ▪ ▪ ▪

Increase dependence on imported gas which would be uneconomic and create balance of payments problems Drastically reduce South Africa’s coal mining industry and have a major detrimental effect on mining and economic confidence Cause major environmental damage Raise costs of electricity and reduce economic growth rate Economic Risk Consultant

The value of Coal in South Africa South Africa is the  7th largest producer and 7th largest exporter of coal in the world  Major supplier to the Middle East, India, Far East, and some to EU and Africa

Coal in SA accounts for  Highest foreign exchange earnings annually from 2011 (R50 Billion in 2017)  Total coal sales local and export (R120 billion generated in 2017).  Largest mining income earner, beating gold, platinum, diamonds  >91% of SA electricity production, 81% of the regions’ energy

 100% of carbon reductants in the metallurgical industry  >33% of liquid fuels - petrol, diesel and other requirements  >200 major chemicals for 1000s of carbon-based products - plastics, paints, explosives, fertilizers, food, cloth material, pharmaceutical, road tar, etc.

Socio-economic factors related to coal  Over 250 000 direct employees. More than 4 times in related service Economic Risk Consultant

Importance of coal industry to SA economy

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The True Value of Coal ▪ Carbon via coal is the most abundant, cost-effective, reliable source, secure element for heat and power – ▪ Western world enjoys the luxuries of flicking on a switch to light homes and offices, heating food on an electric or gas stove or simply having a hot shower every morning.

▪ There are 1.3 billion who don’t. Therefore, by 2040, Asia is projected to account for four out of every five tons of coal consumed globally to meet the demand. In

▪ Many don’t realise that metallurgical coal and iron ore are required to make

while the foundation is made from concrete, which is made using products of coal Economic Risk Consultant

Coal Mitigation-CO2 Emissions reduction

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Ultra Super critical power generation Kenya’s Amu “Clean Coal” Power Station: ▪ Highest efficiency in the world - up to 49% (world av 33%) ▪ Reduces SOx and NOx and particulates by >99% ▪ Lowers CO2 by 512 000 tons annually (re to Supercrit plants) ▪ Exceeds the World Bank and OECD Standards ▪ Lowest non-subsidised tariff in the country – 7.81/kWh ▪ Reduces power generating costs by 12-36% ▪ Cost of projects $2 Billion ▪ Will provide 30% country power, extensive employment ▪ Highly flexible operation for daily demand ▪ Similar sized plants in Germany, Malaysia and Dubai

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The catastrophic economic cost on the economy ▪ The gas import bill would detrimentally effect the SA balance of payments by R30 billion per annum ▪ The coal sector would shrink 46%. Annual sales of coal would fall from 110.6 billion to approximately R60 billion per annum.

▪ There would be a substantial direct and indirect cost to the economy.

It would reduce ▪ ▪ ▪ ▪ ▪ ▪

GDP of South Africa by over 2.5% or R75.2. billion Compensation to employees by R25.1 billion Investment by R3.8bn per annum Government taxes by R16.2 billion Direct employment of in the coal industry by 29000 jobs General employment in the economy by 162000 jobs affecting 1 million dependents

▪ It would be cataclysmic blow to the coal mining sector and possibly the final nail in the coffin for the mining industry Economic Risk Consultant

The catastrophic economic cost on the economy ▪ South Africa’s coal reserves are estimated at around 53 billion tons ▪ Coal mining accounted for 26.7% of the total value of mining production in 2015 making it the most valuable in terms of sales of the 14 main mining commodities tracked by Stats SA. ▪ Mining, manufacturing and industry need security of supply of electricity at competitive prices.

▪ The only two electricity generation sources of energy that can achieve these objectives in this country are ‘clean’ or HELE coal and nuclear.

▪ The discounted value of coal reserves is more than One Trillion Rand.

▪ The value of Uranium reserves is probably also 0ne Trillion Rand.

▪ The drive for wind would deprive South African citizens of these benefits

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SUMMARY OF COST IMPACTS

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The essential economic truths

â–Ş Economic growth is essential for raising the standard of living reducing unemployment and reducing inequality

â–Ş Electricity growth is a necessary but not a sufficient condition for achieving economic growth

â–Ş Planning for low electricity growth becomes a self fulfilling prophesy for low economic growth and low electricity growth Economic Risk Consultant

Levelised Cost of Electricity Generation Source: IEA Clean Coal Centre 2018

Renewables Wind Solar PV

Biomass 10%

Coal Conv

50%

100%

Lignite SC

Gas CCGT

There is greater certainty in the estimation of the LCOE for coal and co-firing compared to renewable technologies The range in LCOE estimation for wind and solar is significant compared to coal and co-firing processes Economic Risk Consultant

Comparison of the IRP 2016 Base case and Recommended Systems mix Load Factor

Energy Source

%

IRP Base case Nominal MWh

Recommended

IRP Base Case

Recommended

Nominal MWh

Real MWh

Real MWh

Nuclear

90%

20 385

20 385

18 347

18 347

Coal

82%

15 000

37 390

12 300

30 660

Wind

35%

37 400

0

13 090

0

SolarPV

26%

17 600

17 600

4 576

4 576

Gas

-

21 960

12 000

10 980

6 000

OCGT

-

13 332

8 500

800

510

90%

2 500

2 500

2 250

2 250

128 177

98 375

62 342

62 342

Inga Total

Economic Risk Consultant

Risk related True economic LCOE by Technology Potential Dispatchable Cost

Apparent LCOE R/kWh

Nuclear

New Coal

Wind

SolarPV

R1.30

R 1.05

R 0.62

R 0.62

90%

82%

35%

26%

Life in years

60 yrs

30 yrs

20 yrs

20 yrs

True Risk related LCOE based COUE at IRP rates R77.30/kWh

R1.33

R1.10

R2.02

R2.83

Total capital cost per delivered real kwh

R0.17

R0.19

R0.31

R0.31

Average capacity Load factor

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Wind Backup Requirement

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Impact of carbon tax renewables and policies All are taxes on the poor Cumulative reduction in potential growth & employment by 2035 ▪ Impact of Carbon Tax

▪ GDP Growth: -4.4% -R200 billion ▪ Employment: -1.1 million jobs

▪ Impact of Renewables ▪ GDP growth: -4.4% R200 billion ▪ Employment: -1.1 millions

▪ Impact on Fixed Investment ▪ GDP growth: -10.0% -R500 billion ▪ Employment: -2.5 million

▪ Impact due to coal industry ▪ GDP growth: -2.5% -R28 billion ▪ Employment: -162000

▪ Reduce GDP and employment by 2035 ▪ GDP : –R930 billion ▪ Employment: -4.7 million Economic Risk Consultant

Other little recognised problems but requiring attention ▪ South Africa by exporting coal but not using it is effectively subsidising other countries industrialisation and will become less competitive. Negatively impacts the balance of payments.

▪ Users of renewables may pay less but when not available they require instant supply.

This cost is subsidised by others. Additional cost are borne by Eskom ▪ Eskom is forced to purchase electricity whether this supply is required or not, forcing more efficient and cheaper power to be wasted whilst having to supply on demand when there are shortages. These are subsidies.

▪ The 2017 Annual results show that Eskom paid R83 bn to Independent Power Producers. Much of this was unnecessary. These costs do not show the other costs incurred by Eskom to hold additional reserves.

▪ Experts acknowledge that LCOE is not an appropriate methodology for comparing the costs of variable and intermittent power. Suppliers of renewable power should themselves be forced to supply their own back up power.

▪ Batteries are not suitable for industrial, sectoral or major storage. They are extremely costly. The Musk 100 MW battery in South Australia costs approx. R1.3 bn for 129Mwh orR10000/kwh. This will supply a Koeberg size power station for less than 5 minutes or a 200MW windfarm for less than one hour Economic Risk Consultant

COSTS AND FALLIBILITY OF THE UK THE WEATHER DEPENDENT RENEWABLE EXPERIENCE

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UK Electricity generation by type 2017 to 2018-8

•

Solar Power nameplate 12.7 GW: capacity 9.6%: producing 1.22 GW

•

Wind Power nameplate 19.0 GW: capacity 19.6%: producing 3.72 GW

•

Biomass Drax nameplate 2.04 GW: capacity 82.1% dispatchable: producing 1.67 GW

•

Total Renewables nameplate 33.7 GW: combined capacity 19.8%: producing 6.67 GW contribution to the grid overall in 2017.

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UK generation 2017-2018 8 power to nameplate Source: IEA Clean Coal Centre 2018

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Comparative costs of electricity generation allowing for capacity Source: US IEA 2017

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UK Wind drought July 12-14 2018

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CHALLENGES FOR AND THE RESTRUCTURING OF ESKOM

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Basic Message • Eskom must grow if our economy is to grow • Many decisions about Eskom’s operations in recent years have been political rather than commercial • Because of the structure of Eskom, it has proved very difficult to see the cost impact of these decisions • Going forward it is not economic to anticipate that Eskom can remain the only supplier and fulfil all its current roles • The three roles that Eskom fulfils should not be under one management control.

• It is therefore most desirable to advance restructuring so the costs of decisions can be better identified and management control separated Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

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Restructuring Considerations There are three overall functions of Eskom • Generation: which is now in competition with renewables and other independent generators • Transmission: which creates a national highway for electrons, and which has no competition • Distribution: with Eskom responsible for about half the electricity supply and municipalities for the other half

Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

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Political vs commercial decisions Examples: • Delay in the construction of the new power station called for in the 1998 White Paper • Interference with contracting for Medupi and Kusile • Free basic electricity against recommendations of research • Below-inflation electricity price increases in the early 2000’s • Renewable energy programme by DoE rather than Eskom/DPE • Coal purchases from small Black-owned coal mines • Ballooning debt from municipalities • State Capture and state sponsored corruption

Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

The cost of these decisions • Below-inflation increases have led to above inflation increases today • Separation of the renewable energy programme has meant unexpected costs of connection for Eskom • It has extended delays in connection • Transmission lines on renewables are often only used 30% of the time.

• The future costs for renewable energy have been fixed contractually –no competition • Guaranteed payments whether supply used or useful or not lead to large subsidies • Coal from small mines is costing far more than that from large mines – Causes both quality management and transport problems

• Shareholding requirements are driving larger miners out • High costs, reduced security of supply and requirements are reducing FDI and domestic investment Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

Structural Problems • Eskom as presently structured masks the costs • The impact of non-payment on that cash flow has now fed through into questions about gearing • Similarly, transmission costs have long been hidden in a controlled tariff • Connection costs for renewables and other independent power producers are not readily identifiable • Eskom is being blamed for costs for which it is not responsible and has no control • Customers are being asked to pay for all the hidden costs of renewable and the hidden subsidies that renewables receive – Transmission, guaranteed payments, back up supplies and facilities, additional costs on ramping power up and down, services costs Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

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Restructuring Consideration • This was foreseen in the 1998 White Paper • There have been several attempts to carry it out – For instance, the stalled Independent System and Market Operator Bill

• Proposals for restructuring the finances of Eskom should call for a commitment to restructure the business • And to do so in a way that would make the cost of future political decisions more readily visible and management more clearly responsible.

Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

Restructuring: A restructured Eskom This suggests a structure: • Esco: an Electricity Supply Company, supplying electricity in open competition with other suppliers • Etcom: the Electricity Transmission Commission, a national resource purchasing electricity from suppliers and shipping it in bulk to distributors and bulk users • Edco: an Electricity Distribution Company, buying electricity from Etcom and distributing it to users in open competition with other distributors • Each to have separate management and board control. Most probably in public private partnerships.

• ESKOM MUST NOT BE PRIVATISED Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

Restructuring • Esco and Edco would be expected to make a profit in order to fund their operations – They would then contract with the State to undertake politically desirable projects such as the further roll-out of electrification – They would be reimbursed for such work • Etcom, however, as a national resource, would be a cost-plus operation – Costs would have to be accurately calculated – They would be reimbursed for state desirable projects – Its capital expenditure would be a direct charge against the fiscus, much as national roads have been

Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

Restructuring: The role of NERSA The restructuring would change the nature of NERSA • In the restructured world, it would regulate: – Prices for generated power – The cost of transmission – The cost of distribution

• This should significantly improve State oversight of the industry

Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

Summary of recommendations for restructuring • Divide Eskom: base power generation; transmission, market and control operator; and distribution.

• Fund each according to business requirements. Partially privatise generation and distribution • Expand independent power producers and foster equal competition • Practice best commercial business procedures • Independent management and board appointments • All tenders awarded on strictly arms-length business • Maximise security of supply of electricity generation transmission and distribution • Ensure sustainable and efficient operations at the lowest possible cost • Prime objective reduce the cost of doing business in SA Prof Philip Lloyd CPUT Rob Jeffrey Econometrix Parliament, June 2015

Economic Risk Consultant

CLIMATE ISSUES

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Who are we – Insignificant in the greater scheme of things

Source IEA - Top 20 CO2 Country emitters, 2008

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Carbon dioxide and temperature and the 30 year cycle

Source IEA - Top 20 CO2 Country emitters, 2008

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Predicted and observed temperatures

Source IEA - Top 20 CO2 Country emitters, 2008

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5000 years of climate change

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Use of carbon over millions of years

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The declining Holocene Temperature

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Greenland Ice Core Temperature last 10000 years

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UK Met Office Temperature Trends and CO2 emissions

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Historic Temperature Trends and CO2 levels

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Climate Model predictions and actual observations

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CO2 levels and temperature Trend 400000 years

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Zharkova SBMF analysis link to Cosmic rays and cooling

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Solar irradiance & cosmic ray activity and forecasts

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Long term climate cycles: Milankovitch

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Man’s real pollution and destruction

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Does it really matter

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CONCLUSIONS

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The necessity for fossil fuels

▪ India China Bangladesh Indonesia Russia have major coal and Fossil Fuel expansion programmes

▪ COP 21 deliberately requires no commitments so that countries can decide to do what is in their best interests

▪ Unless emerging countries that have Fossil Fuels use those FF resources it will heavily prejudice their future growth and result in increased unemployment and poverty

▪ This will detrimentally effect the economic political and social structures of many emerging nations

Economic Risk Consultant

Renewables and the carbon tax are contrary to objectives They are both taxes on the poor.

▪ Contrary to political and social objectives ▪ ▪ ▪ ▪

Increases Unemployment Increases Poverty Increases Inequity Reduces Standard of living

▪ Contrary to stated development policy

▪ Reduces mineral beneficiation objectives ▪ The uranium are coal reserves in SA are each valued at over R1 trillion Rand ▪ The renewable programmes would deprive South Africans of the value and added value that these commodities bring to the country

▪ Contrary to stated NGP or NDP

▪ Reduces economic growth particularly in goods producing sectors

▪ They are both Taxes on the poor Energy, Electricity & Employment Growth are the keys to South Africa’s Future Economic, Social and Political Prosperity, Sustainability, Stability and Individual Economic Freedom Economic Risk Consultant

Poverty and proven technologies

▪ ▪ ▪ ▪ ▪

▪ ▪

Economic growth reduces poverty Proven FF and nuclear reliable technologies New cleaner FF (HELE) technologies available Significantly lower LCOE and GHG Emissions Focus has been on negative Impacts Huge positive benefits ▪ Higher economic growth, ▪ Improved standard of living ▪ Better medical care ▪ Better housing ▪ Reduced poverty Poverty is the single highest social cost to society It is the major externality to consider.

Economic Risk Consultant

Energy and electricity the way forward The objective: Security of supply at competitive costs. Multilevel approach

▪ Efficiency programmes at industrial and domestic levels ▪ Developing energy resources with major competitive advantage namely HELE clean coal and now potentially gas

▪ Exploration of shale gas and gas as a matter of urgency ▪ Build 8000MW gas fired power stations initially LNG based with a view to potential future domestic development of shale and other gas deposits

▪ ▪ ▪ ▪ ▪

▪

Build 37000MW new & refurbished coal-fired HELE technology power stations

Proceeding with 6000MW nuclear power stations by 2030 20000MWW by 2050 Major PV Solar usage on all houses and office buildings Possible major use of PVsolar and solarCSP if economic

Limited but selected usage of renewables:

▪ Limited Waste Bio mass, Pump storage and hydropower where economic ▪ Very limited wind at a very few carefully selected sites Restructure Eskom and Ensure best business practice and procedures Economic Risk Consultant

THANK YOU Rob Jeffrey Economic Risk Consultant Email: rob@economicrisk.co.za Telephone: 082 469 5752

Disclaimer

Disclaimer Rob Jeffrey obtains information for analyses from sources, which he considers reliable, but does not guarantee the accuracy or completeness of the analyses or any information contained therein. He makes no warranties, expressed or implied, as to the results obtained by any person or entity from use of its information and analysis, and makes no warranties or merchantability or fitness for a particular purpose. In no event shall he be liable for direct, indirect or incidental, special or consequential damages, regardless of whether such damages were foreseen or unforeseen. Rob Jeffrey shall be indemnified and held harmless from any actions, claims, proceedings, or liabilities with respect to his information and analysis.

Copyright Copyright 2017, Rob Jeffrey, Sandton. No portions of any reports, publications or information produced by the author in whatever form (Electronic, Hardcopy or otherwise), may be reproduced or published in any manner without their prior written approval.

Economic Risk Consultant

Some important decisions

Economic Risk Consultant