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  • Credit: © Greenpeace Africa / Mujahid Safodien

  • Credit: © Greenpeace Africa / Mujahid Safodien

  • Credit: © Greenpeace Africa / Mujahid Safodien

  • Credit: © Greenpeace Africa / Mujahid Safodien

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groundWork on behalf of Life After Coal – comment on Eskom revenue application 2018/19

13 October 2017 at 1:07 pm

Life After Coal/Impilo Ngaphandle Kwamalahle is a joint campaign by Earthlife Africa JohannesburggroundWork, and the Centre for Environmental Rights. We discourage investment in new coal-fired power stations and mines; accelerate the retirement of South Africa’s coal infrastructure; and enable a just transition to renewable energy systems for the people.

Bad energy

Commenting on Eskom’s MYPD2 application in 2009, we said: “We are being asked to pay for the wrong energy strategy.” Wrong on the choice of power generation technologies, wrong in its assumptions on what the power was for, wrong because of the massive social and environmental externalities, and wrong because Eskom wanted citizens to pay the price of decisions taken by Eskom without consulting them.

We noted that the critical issue was not the funding model but the energy model. We observed Eskom’s choice of very large generating plant creates unaffordable funding requirements. The costs of Medupi and Kusile have risen exponentially. Total costs for Eskom’s new build were estimated at R84 billion in 2004. These two plants alone are now put at R260 billion and it seems that this is not yet the final price.

Indeed, it was not. The plants are now estimated to cost R420 billion. The associated debt is supported by R350 billion government guarantees. Eskom’s own credit rating is junk and, on its own account, it has contributed substantially to government’s rating being cut to junk [108/111]. Eskom debt payments are now running at R37.8 bn while another R18.2 bn of interest is added to the debt pile (capitalised) [AR 2017: 76].

In 2009, we noted that these very large coal-fired plants are primarily designed to supply very large energy intensive industries but that Eskom was sending the bill to the public who were thus to subsidise big industry. We noted too that the choice of large plant would likely lead to over-investment as it was “likely that assumptions of future growth will not be met as expectations of global economic recovery are implausible …”

In 2017, Eskom wants to be compensated for patently exaggerating demand growth. ‘Rebasing’ to compensate for shrinking demand accounts for almost half of its requested increase.

In 2012, commenting on MYPD 3, we observed that “the model of building big coal fired base-load to supply ‘cheap and abundant’ power to energy intensive industries” was the model of the minerals-energy complex and it was collapsing under the rising costs of its own expansion. The Energy Intensive Users Group (EIUG) was then complaining that the higher prices were making them uncompetitive. We said,

All South Africans are thus to pay for a system that is primarily designed for the benefit of large minerals corporations. These beneficiaries, however, now balk at the costs of what they have demanded and look for someone else to pay for it.

In 2017, Eskom wants a 19.9% rise but 27.5% from municipalities. At the same time, energy intensive users are lining up to negotiate a temporary reduction in tariffs. The EIUG is following that with a proposal to Nersa for ‘structural changes’ – i.e. permanent – in tariffs for big industry, whether supplied by Eskom or municipalities. Eskom’s ‘demand stimulation plan’ is clearly aimed at cutting deals with big industry. Hence, it appears that the move to shift the cost of the new build onto the public is underway.

Meanwhile, the special pricing agreement (SPA) with South32’s Hillside and Mozal aluminium smelters still subsidises a major transnational corporation with electricity at well below Eskom’s production costs.

We are, of course, aware that Eskom’s demand from municipalities is trying to squeeze a year’s increase into nine months. We see no reason why municipal customers should be saddled with a doubly exorbitant demand merely because the financial years are not aligned. Moreover, the logic is that municipalities must always pay about 1.4 times the average tariff increase which is thus compounded.

Coal costs

In 2009 and 2012, Eskom said rising coal costs were next to capital costs in driving up tariffs. Big colliers were then pushing up exports to Eskom’s disadvantage. The export coal market has since contracted. Eskom notes the following trends:

–       the Highveld coal resource is in decline;

–       big old mines are reaching the end of life,

–       more coal is coming from smaller mines,

–       more is transported long distance,

–       coal quality is declining,

–       environmental impacts are increasing.

For this application, Eskom says it intends restoring investment in big cost plus mines and so will postpone the closure of big old mines. It does not say why it suspended investments in these mines in the first place. In some cases – notably Arnot – it appears that it was acting in bad faith. At present, there is little reason to take Eskom at its word that it will make these investments. And, while cost plus coal will be cheaper than that from short and medium term contracts, costs will still escalate with depletion.

Eskom does not mention the numerous scandals relating to coal procurement. Not only has Eskom paid certain suppliers over the odds but it has also accepted poor quality coal which pushes up the cost of power station maintenance. Poor quality coal, for example, is thought to have contributed to the boiler explosion at Duvha.

The fragmentation of the coal mining industry is widely observed. Eskom has played a leading role in this process and thus to undermining its own resource base. This will result in increasing costs and social and environmental damage.

Prudent and efficient

The corruption at Eskom appears to infect all aspects of procurement: the new build, coal and services of all kinds. It is difficult to see how this can be reconciled the idea of ‘prudently and efficiently incurred costs’. To the contrary, it appears that Eskom is used as a conduit for selective enrichment. Until it can demonstrate clean governance, any increase in revenue cannot be countenanced. A revenue application must itemise and quantify corruptly incurred costs and those costs should be taken off its allowed revenues.

‘Protecting’ the poor

Over half of South Africans are poor and another quarter are vulnerable to being pushed into poverty. Many poor households use electricity and other forms of energy. Many of the vulnerable quarter depend exclusively on electricity. Hence, steeply rising electricity tariffs will likely contribute to deepening poverty or to pushing people into poverty.

Eskom says poor households are ‘protected’ by the inclining block tariff. This applies to Eskom’s own residential customers on 20 amp connections. The Block 1 tariff increase of 17.5% scarcely protects poor people. It will come as a shock to already fragile household budgets. The block 2 increase is at close to the average increase and provides no cushion at all.

For people on 60 amp connections, the tariff increase is the full 19.9%. Many of these households will fall into the vulnerable quarter.

The tariff increases for municipal residents will presumably be much steeper. It makes little difference that the increase will be delayed by three months.

As previously, we propose that an inclining block rate should apply universally but that the present blocks be revised. It should start with a dramatically expanded free provision adequate to real needs for the first block. The first step to paid-for electricity should be shallow with increasingly steep steps thereafter including additional steps at the higher end. The total bill for profligate consumers should rise higher than the overall price rise.

Externalities

Full life-cycle externalities from Kusile would raise the levelised costs by between 91 and 205c/kWh. “Accounting conservatively for the life-cycle burdens and damages of coal-derived electricity thus doubles to quadruples the price of electricity’ according to Nkambule and Blignaut. Kusile is a supercritical plant and designed with sulphur scrubbers. The rest of Eskom’s fleet will therefore have higher externalities.

It is also conservatively estimated that Eskom emissions of PM2.5 result in over 2,000 ‘equivalent attributable deaths’ every year and a heavy burden of ill health, affecting tens of thousands, is imposed on the population. This does not include the impact of other pollutants or of pollution from coal mining. This is a scandal that neither Eskom, Nersa nor government choose to recognise – possibly because most of the affected people are poor.

Further environmental impacts include climate change and the wholesale destruction and pollution of river catchments. Without a rapid reduction of carbon emissions, climate change will finally cost the earth – or rather, it will cost humanity’s future on earth. The destruction of land, fresh water and people’s health represents the loss of capacity to adapt to climate change.

As well as carrying the heaviest burden of externalities, poor people on the Highveld, in the Vaal Triangle and in the Waterberg are priced out of the benefits of using electricity. They must then use dirty energies such as coal, paraffin and waste in their homes. Thus the burden of externalities is compounded.

On the other hand, externalities from the power system represent a massive subsidy to the profit of big energy intensive industries. Hence, the rich profit at the expense of the poor and wealth is transferred from poor to rich.

Just transition

A rapid transition from coal to renewables is urgently needed. It would be accompanied by rapid improvements in people’s health and open the way for the work of restoring ecological health. We support calls by worker organisations for government to develop a plan for a just transition that protects the interests of workers and communities. We note that the rapid expansion of renewables will provide many more jobs at less overall cost than trying to reproduce the dying coal economy. This will markedly reduce tariff increases.

We do not believe that a just transition is compatible with privatising renewables. In principle, government should direct Eskom take a leading role in the process. But to do this, Eskom must be brought under democratic and honest governance.

Nevertheless, Eskom should not retain a monopoly of power production. Socially owned and democratically controlled renewable systems should be supported at municipal and community levels. Eskom’s recent defiance of policy by refusing to sign power purchase agreements, indicates that it will remain conflicted in the dual role of generator and systems operator. We call for a separate socially owned systems operator with control of the national grid.

Conclusion

groundWork, Friends of the Earth South Africa:

– demands that Eskom itemise and quantify corruptly incurred costs and that those costs are taken off its allowed revenues;

– rejects Eskom’s proposed residential tariff increase and calls for a universal inclining block tariff with a wider lower band for which the tariff is set at 0c/kWh and more bands at the top;

– calls for the repudiation without compensation of the special pricing agreement with South32, inherited from BHP Billiton;

– proposes that the cost of base-load new build be attributed to energy intensive industrial corporations in proportion to their consumption;

– calls on NERSA to consider the externalised costs of construction and operation to the environment and to people’s health and well-being – which makes the price hikes even more burdensome;

– calls for the closure of equivalent capacity in Eskom’s old coal plants as Medupi and Kusile are brought on line;

– calls on government to conclude the IRP 2016 process in an open, participatory and democratic manner;

– calls on government to create a socially owned systems operator independent of Eskom;

– calls on government to turn away from fossil and nuclear technologies and focus national capacity on building a sustainable energy system under people’s control and based on energy conservation and efficiency and renewable generation technologies;

– calls on government to plan for a just transition through an open, participatory and democratic process.

In conclusion, if SA wants to 1) supply the energy needs of its people, 2) create work with a future, 3) avoid catastrophic climate change, 4) clean up air pollution to let people breathe, 5) conserve water and prevent the further destruction of whole watersheds, and 6) avoid bankrupting itself, it is imperative to focus national resources on developing renewables under democratic control while shutting down coal plants.

ENDS

Simone Schotte, Rocco Zizzamia and Murray Leibbrandt, Social stratification, life chances and vulnerability to poverty in South Africa, Southern Africa Labour and Development Research Unit, UCT.

Nonophile Nkambule and James Blignaut, Externality costs of the coal-fuel cycle: The case of Kusile Power Station, South African Journal of Science, Volume 113 | Number 9/10, September/October 2017. P.8.

Holland, M. 2017. Health impacts of coal fired power plants in South Africa. Report to groundwork and Health Care Without Harm.

One Million Climate Jobs, Alternative Information and Development Centre, October 2017; CSIR Energy Unit submission on the IRP, March 2017.