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The numbers ESKOM won’t allow us to see

Published in the Cape Times 16 November 2011

If you were responsible for running a major economy, what would you need to know in order to make a decision about the largest capital investment in a generation? Tax payers will pay for this investment for the next 25 years and it will determine the nature of the country’s growth path, how many dollars it must generate from exports and the technologies that will dominate the way things are done. Surely you would like to know why you need to spend so much money and whether there are alternatives? Right?
Well this is not what happened when Cabinet made the decision to support the Integrated Resource Plan (IRP) which is South Africa’s electrification investment strategy.

After a sophisticated game of smoke and mirrors, ESKOM plus a handful of South Africa’s biggest energy users (who depend on subsidized energy prices) managed to convince the nation to spend a R1 trillion without providing any evidence as to why this is really necessary. This has, of course, happened before – in the 1970s and 1980s, resulting in stranded assets that had to be mothballed. It is about to happen again but this time the result will be a debt crisis.
In very crude terms, the IRP that has now been approved by Cabinet commits South Africa to spending over R1 trillion over the next 20 years to build a new fleet of coal-fired and nuclear power stations, plus some investments in a range of other energy sources including renewable energy.  Total generation will increase from 260 TWh in 2010 to 454 TWh in 2030. This will be achieved by increasing high carbon generation capacity by 30% (coal and gas), nuclear by 23%, hydro by 6% and renewable power by 42% (from, of course, a near zero base).   It is the latter figure that the spin doctors will use to impress the crowds at COP 17. But what will be conveniently omitted is that by 2030 high carbon energy will still generate 65% of our energy, nuclear 20%, renewables only 9% and (imported) hydro 5%. The smart guys at COP 17 will not be fooled.
Ignoring for the moment the debate about whether the IRP is consistent with the White Paper on Climate Change and pledge President Zuma made at COP 15 in Copenhagen in 2009, the real question that needs to be asked is whether we really need to invest so much money in additional capacity? Then we need to ask whether we are investing in the right technologies given the global transition underway to low-carbon economies?
The assumption that the economy will need 454 TWh of energy by 2030 is based on what is called the Demand Forecast. The Demand Input Parameter used in the IRP is based on ESKOM’s System Operator Moderate Demand forecast. The methodology to develop this forecast is described in an 18-page report titled IRP 2010 Demand Forecast Revision 1 by ESKOM’s Systems Operations and Planning unit. The report states that a model was used that is based on the demand “forecasts” of its so-called “Key Customers” who together consume 40% of all energy generated by ESKOM.
The problem is that no information is provided as to how these Key Customers generated their forecasts, nor are these numbers divulged for scrutiny and debate. ESKOM insists they are confidential customer information. In short, there has been no public scrutiny of the most important numbers that drive the R1 trillion investment decision that resulted from the approval of the IRP.
We have no idea, therefore, what we really need. What ESKOM said to Cabinet was “trust us, this is what the handful of companies who are South Africa’s biggest energy customers  want”. Should we trust them? Well, their calls since the late 1990s to invest in generation capacity have been consistently ignored. President Mbeki apologised publicly for ignoring them in  2008. So if you were them, would you inflate what you need hoping that if you get less it will be just enough? Of course you would. Did we call their bluff? Unlikely, because it suits ESKOM to believe them.
But the Demand Forecast is not the only leg of the argument. The other leg is GDP growth. The Demand Forecast assumes a Moderate Forecast of 4.5% GDP growth multiplied by 0.9. How this number was arrived it remains a complete mystery (but we can, of course, be grateful it was not a 1:1 ratio).
According to a paper by Hilton Trollip and Emily Tyler delivered at a National Planning Commission Workshop on the low carbon economy earlier this year, the consequence of this calculation is that the demand forecast from 2010 onwards is 10 TWh/year which is double real historical increases in demand for the period 1975 to 2010. Even during the growth period 1994-2005, real demand growth did not exceed 5TWh/year. Suddenly, overnight we are expected to believe that demand growth per annum will double for twenty years! How can the Cabinet and taxpayers really be so studid?
Although even a simplistic understanding of South African growth makes a doubling of annual demand for electricity hardly believable, it becomes even less believable if you understand the most basic economic laws of supply and demand. When economists talk about price elasticity, they are referring to what happens to demand if the price goes up. For example, if the price of meat goes up, more people will buy less meat – the higher the price rise, the quicker demand goes down. The same elasticity applies in the electricity sector.
What we do know for certain is that electricity prices are going up at above inflation rates every year, and this trend is set to continue for a number of years especially in light of the fact that Medupi and Kusile – the third and fourth largest coal-fired power stations in the world – will cost a lot more than originally assumed. According to research by Inglesi and Pouris, two Pretoria University economists, published in the South African Journal of Science in 2010, ESKOM’s Demand Forecast ignores the basic economic principle of price elasticity. Using modelling tools based on previous trends, they predict that rising prices could suppress electricity demand by between 18% and 31% by 2025. If they are right, the Demand Forecast is wrong because the calculation that demand equals GDP multiplied by 0.9 is wrong. South Africa could be paying for a very serious calculation error rooted in ESKOM’s ignorance of basic economics. The end result is obvious: over-investment, stranded assets and misdirected expenditures that will exacerbate poverty. Given that we have decided to borrow dollars to pay for all this based on the assumption that 4.5% growth rates will materialise, the price of getting this all wrong will not just be low growth but high external debt. Europe today is what could happen to us tomorrow if we continue on this path.
So the obvious question is whether the National Treasury is aware of this problem. After all, they have clearly demonstrated in the past that they understand economics better than ESKOM. While in public they put on a brave face, privately Treasury officials admit they have not been allowed to interrogate the numbers provided by the Key Customers, nor have they been given access to the model that was used to generate the forecast. This should be extremely alarming for every South African, but in particular decision-makers in the Executive and Legislature.
Finally, are we investing in the right technologies? Clearly not. High carbon technologies will still be generating 65% of our energy by 2030. All the global trend analyses show that the costs of nuclear and coal-fired power are rising while the costs of renewable energies are declining. Grid parity for PV is 3 to 5 year away. Furthermore, researchers like Chris Hartnady have published scientific research that shows that South Africa’s coal reserves are half what government assumes them to be. The 10 billion tons left is sufficient for 40 years supply at current rates of production, but in reality it will be less because we will be obliged to increase our coal exports to our new friends in the BRIC club if we want to retain our membership. We extract about 250 million tons per annum and will probably hit ‘peak coal production’ by 2020, the scientists predict. This, of course, means that coal prices will go up while quality goes down which means – as reflected in ESKOM’s own figures for the past ten years  – more coal needs to be burned to produce the same amount of electricity.
In short, we have made an energy investment based on numbers we are not allowed to see and we are committed to using outdated increasingly costly technologies that require raw material inputs that are running out. The fact that it all adds up to a high carbon future that will result in ever-rising carbon taxes just adds insult to injury.  China, Europe and the USA are investing heavily in the race to become technology leaders of the low-carbon transition – overall CO2 emissions in the USA peaked in 2007, dropped 7% since then and will probably drop by another 14% by 2020. South Africa, on the other hand, remains wedded to technologies that ESKOM knows and which ensure super-profits for a key set of powerful elites that run our mineral-energy complex. The only question is  how long will taxpayers be prepared to subsidize these profits and how many jobs must be lost before we realise we are paying too high a price for building a high carbon economy as the world moves in the opposite direction.