SOURCE: Frost & Sullivan

April 01, 2011 02:30 ET

Will the Policy Adjusted IRP Impact Electricity Prices?

CAPE TOWN, SOUTH AFRICA--(Marketwire - April 1, 2011) - After months of planning and much public comment, the Department of Energy (DoE) has finally gained approval from Cabinet and released the Policy Adjusted IRP (Integrated Resource Plan). Closer inspection by Frost & Sullivan reveals a number of significant changes since the release of the Draft IRP, although a few constants remain. The big question remains whether these modifications will impact electricity prices.

The government gave the green light for the building of 9,600MW of nuclear capacity, escalating the building costs of nuclear by 40% in the new IRP.
"As a result, the overnight costs are now in line with recent international experience", comments Cornelis van der Waal, Frost & Sullivan's Energy and Power Business Unit Leader.

Medupi and Kusile, the two coal-fired power plants will go ahead as planned with additional coal capacity brought forward to allow investment by industrial electricity end-users.

Alterations to the Policy Adjusted IRP include a decrease in imported hydro from 3,300MW to 2,600MW, indicating less co-operation with South Africa's neighbours, specifically Mozambique and Zambia in this case. "This signifies reduced large scale hydro construction opportunities in these countries" says van der Waal. "Considering the dire electricity situation in both Mozambique and Zambia, these countries require much-needed energy investment into projects to cater for unmet local demand."

Frost & Sullivan favours the emphasis placed on efficient combined cycle gas turbine infrastructure, which has seen an increase from 1,900MW to 2,400MW by 2030. Van der Waal says: "This clearly opens the door for the development of gas infrastructure in South Africa. However, this should be done in an environmentally acceptable manner." Simultaneously, open cycle gas turbine infrastructure will be decreased from 5,800MW to 3,900MW due to its high operational cost; a move that clearly indicates that the policy makers believe there will be sufficient base load power to reduce stand-by peaking power infrastructure.

The energy category experiencing the largest change is Renewable Energy (RE), increasing from 11,400MW to 17,800MW. "It seems that the DoE has recognised their failure to include the Upington Solar Park into the IRP II document," comments van der Waal. Provisions have been made for significant allocations to Solar PV (8,400MW) and Concentrated Solar Power (CSP) (1,000MW) in the new policy adjusted plan. "This sends out a strong signal for investors looking at solar projects to speed up their feasibility studies. With NERSA having recently indicated that they are considering reducing RE feed-in tariffs, this could present reduced interest in solar and wind investments", says van der Waal.

Despite the increase in RE and a 40% hike in nuclear construction costs, the DoE claims that the electricity price path will not be affected. On the contrary, Frost & Sullivan believes this is a misrepresentation of the facts and urgent investigation is required to ensure that the price path still holds true. The impact of significantly higher electricity prices will have major implications for job creation, investment and economic growth. "Through DoE not providing re-assuring evidence that the price path will remain unchanged, we expect large energy users and South African investors, who essentially drive the economy, to feel particularly uneasy about the situation," says van der Waal. 

Other aspects addressed in the new policy adjusted plan include the following:

  • Allowances for the increase in Carbon emissions (i.e. more coal fired power stations) were decided against and the targets under the Revised Balanced Scenario still stand;
  • Electricity imports including coal generation imports have been allowed, meaning a potential revival of the Mambula Project in Botswana;
  • Energy Efficiency increases were not included in the plan as the DoE decided that even if South Africa can increase its energy efficiency potential from 3,420MW to over 6,000MW, failure to meet these targets could have significant disruptive impacts.

In general, Frost & Sullivan believes the Policy Adjusted IRP will hold positive outcomes for South Africa and its existing energy crisis. The next important steps include finalising the legislative aspects of IPP integration and setting up the Independent Systems and Market (ISMO) as a matter of urgency.

If you are interested in more information on the IRP 2010, please send an e-mail with your contact details to Christie Cronje, Corporate Communications, at christie.cronje@frost.com.

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