As renewable sources of energy continue to see dramatic drops in price, these sources are no longer dependent on policy support or subsidies. Instead, they are now viable mainstream sources of electricity generation that can be compared with the traditional generation sources, whether fossil fuel-based or powered by nuclear reactors.
There are several misconceptions about how different sources of electricity are priced. A good number of misconceptions are a direct result of how Eskom, South Africa’s vertically-integrated electricity monopoly, seeks to present them. This is particularly true in relation to renewable sources supplied by Independent Power Producers (IPPs).
The internationally-accepted metric for comparing different generating technologies is the Levelised Cost of Electricity (LCOE). Its principal purpose is as a planning tool and it seeks to bring into account the present value of all the energy produced (in kWh) by a generator. In this way, it is the lifecycle cost per kWh of any future project. However, it is static and only considers capital costs of the competing technologies at a point in time, and fails to consider the rapid fall in price of technologies like wind and solar energy. Furthermore, LCOE does not consider fuel and operating or maintenance costs – important (and costly) factors for a coal or nuclear plant – or the costs of pollution.
The continuing drop in the prices of renewables is relentless, and is now well below the price of fossil fuel – and certainly nuclear – in many parts of the world. In South Africa, a similar trend is clearly evident. Through various competitive bidding rounds in the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), in just 4 years, prices of onshore wind have fallen in rand terms by 50%, whereas solar PV has fallen by over 75%. The table below shows the fall in the fully-indexed average price (Rand/kWh) reflected in the Power Purchase Agreement with Eskom, at each bidding round. These prices are now well below the prices of coal. Although Eskom does not report what tariff Medupi and Kusile would require on a stand-alone basis, the recent Baseload Coal IPP resulted in a tariff substantially above that of renewables in the most recent REIPPP bidding rounds.
|Reduction from previous Round||21.32%||27.10%||12.82%|
|Total Decline from BW1||50.00%|
|Reduction from previous Round||42.18%||46.43%||21.90%|
|Total Decline from BW1||75.81%|
|Reduction from previous Round||6.25%||0%||7%|
|Total Decline from BW1||14%|
Other issues, grouped together as “bankability”, are also not captured by the LCOE calculation. As the world moves away from carbon dioxide-emitting power, it becomes increasingly difficult to find funding for large fossil fuel-based plants. Investors, fearing that their fossil fuel investments will become stranded, are less willing to provide the funding, and if they do so, the cost of that capital available to fund fossil fuel based projects increases. In this context, being locked into a coal-based energy system sees increased risks and increased costs of capital. Nuclear is known to be risky.
As the price of electricity from a nuclear power station is heavily dependent on the price of capital, increases in the price of capital impacts on the price of electricity that the plant generates, should it ever be completed. Yet the very presence of a nuclear power programme, due to its negative impact on a host country’s credit rating, works to increase the cost of capital – not just for the nuclear power station, but for everyone.
Nuclear power and large fossil-based power projects both permanently raise the price of electricity that is generated from them for all consumers, and displace opportunities for renewables to meet this demand at ever-decreasing cost. Another important displacement occurs: available budgets which could be directed towards critical immediate needs such as education, health, and employment are dissipated in these wasteful mega-projects.
Renewables’ improved competitiveness has seen a strong trend favouring them over “conventional” generators. Renewables now account for more additions to global generating capacity than all other sources of electricity generation. Conservative estimates by bodies such as the International Energy Agency (IEA)predict that solar will become the biggest individual source of power by 2050. The march towards a future dominated by renewables will be relentless, but it also poses a real threat to countries that fail to embrace it. Large-scale power plants, unable to compete with lower prices, are at real risk of becoming stranded assets: built at great cost, but uneconomic and unviable well before the end of their design life.
Simple rules of prudence in financial management – let alone the management of our common environmental resources – require us to embrace the opportunities of less expensive electricity supplied with reduced emissions and other impacts, and to expressly avoid expensive and inflexible nuclear and fossil fuel-based megaprojects with their associated risks of becoming unusable monuments to lost opportunities.
- Dirk de Vos, Director: QED Solutions, a corporate finance and advisory firm, and Nicole Löser, Attorney: Centre for Environmental Rights, a non-profit organisation of activist lawyers who help communities and civil society organisations realise our Constitutional right to a healthy environment.