Presentation on the IRP & IEP

FFF Council Meeting - 23rd September 2014
Ronald Chauke
 Legislative landscape
 Integrated Energy Planning
 Contextual Background
 National Development Plan
 Policy Decisions
 IRP RBS Allocations
 Modelling
 2003 IEP vs 2012 IEP
 Gas
 Benchmarks
 Future role of Coal
 Technology
 Key Macroeconomic Assumptions
 Energy Trilemma
 IRP2010 vs Update IRP2010 Report
 Conclusions
 Carbon Offsets and Carbon Tax
Legislative Landscape
 1998 Energy White Paper
 Diversification on energy supply options
 Electricity Regulation Act of 2006
 Section 34(1) - The Minister may, in consultation with the Regulator(a) determine that new generation capacity is needed to ensure the
continued uninterrupted supply of electricity;
(e) require that new generation capacity must(i) be established through a tendering procedure which is fair, equitable,
transparent, competitive and cost-effective;
(ii)provide for private sector participation.
 New Generation Regulations I & II
The objectives of these regulations include the regulation of entry by a
buyer and an independent power producer (IPP) into a power purchase
agreement (PPA); the facilitation of fair treatment and the nondiscrimination between IPP generators and the buyer
Legislative Landscape (Cont...)
Section 6(4)(c) of the 2008 National Energy Act,
states that the Integrated Energy Plan must take into
account the balance between supply and demand.
Objective 1 only makes reference to security of
supply and no mention of demand. However, the
1998 Energy White Paper makes it clear that energy
policy should be demand-driven and not supply sideled.
Integrated Energy Planning
Conventionally, it is perceived as the primary
planning process that has to provide the foundational
framing and form the basis for other sub-sectoral
planning and development of comprehensive
SMART strategies pertaining to various energy
carriers and resources.
Prudency dictates that full lifecycle analysis and full
cost accounting of all energy sector activities should
be included – with the core objective being to
continuously improve on the understanding of
complete energy (including demand, supply and
Contextual Background
• The Integrated Resource Plan (IRP) 2010-2030 was
promulgated in March 2011.
• A ‘living plan’.
National Development Plan
 By 2030 - South Africa should have transitioned to a
low-carbon, resilient economy and Just society.
 A shift to a green economy and more sustainable
practices in general should not be seen in opposition
to development, job creation and economic growth.
Nor should it be seen as a nice-to-have or merely an
additional sector of the economy.
Policy Decisions
 2007 Cabinet Decision on new Generation Capacity 
Eskom = 70%; and
IPPs = 30% - to introduce competition within the Gx
 Eskom to procure the 100% power generated by IPPs
 Renewable Feed-in tariff – 2009 (discontinued)
 Renewable Energy IPP Procurement Programme
Competitive bidding.
IRP Allocations
• IRP2010-2030 – Generation mix
o Renewables
= 17800MW (Solar 8400 MW, Wind
8400MW and CSP = 1000MW) – i.e. 42%
o Nuclear 9600 = 23%
o Coal =15%
o Other sources (OCGT, CCGT & Hydro) = 20%.
• Further determination issued – December 2012 –
3200MW capacity.
Revised Balance Scenario Allocations
IRP Revised Balanced Scenario Capacity
Capacity in
from 2010 2030
2010 to
 To simplify a model, certain assumptions need to be
made, as rightfully done by the DoE, but with time,
models should be modified to incorporate new available
data. This is due to the fact that the latest available
information at this point in time have not been factored
because of a timing difference, implying that the draft
final IEP should reflect revised assumptions.
2003 IEP vs 2012 IEP
 Key milestones achieved to date in accordance to the
2003 Integrated Energy Plan not clearly articulated.
 For instance, the 2003 IEP strongly recommended that
government should explore mitigating options to
lessen the over-reliance on imported liquid fuels and
the 2012 IEP does not give an update on how far the
country has moved towards its self sufficiency on liquid
 The 2012 IEP does not indicate what has been
achieved, what still needs to be done and lessons
learnt in implementing the 2003 IEP.
The gas option has not been factored sufficiently in
the energy supply mix – for instance, the National
Development Plan recommended that natural gas
should be considered as an alternative to coal,
environmental costs and benefits outweigh those
associated with South Africa’s dependence on coal,
or with nuclear power as an alternative.
Gas (cont...)
The draft 2012 IEP identified as one of the main
challenges of introducing gas to the market as the
high capital investment requirements in the
infrastructure within the value/supply chain.
However, the draft IEP fails to take into account new
developments on the technologies that can be used
to transport natural gas which are affordable (e.g.
Mat Modules).
The time horizon of IEP to the year 2050 is quite
long and most of the assumptions might not be
relevant for that time span. It could be applicable if
the review of the IEP is conducted annually similarly
to the review in the USA.
For instance, the time horizon of NEMS (National
Energy Modelling System) of USA used for
development of the Annual Energy Outlook (AEO
2013) is 2040 and the plan is updated every year.
Future role of coal
Continued investment/use of coal versus addressing
the issue of the carbon intensity of our economy.
Coal 3 and possibly Coal 4 – has these two options
been modelled in the current draft 2012 IEP Report,
if not, why?
 Identification and consideration of a right mix of technology
options and energy resources and sources that minimise the
total cost of energy while meeting the projected energy
 Minimum total cost of energy will not necessarily translate into
affordable energy prices to consumers, however, consideration
of the multiplicative effect is paramount.
 Key objective 7: 'Promote localisation, technology transfer and
job creation’, however, it is not clearly elucidated in the draft
2012 IEP on the appropriate selection of energy options.
Technology (Cont...)
 The cost associated with alternative sources of energy ‘must
be considered and investment needs to be made to promote
the development of new technologies to improve the use of
coal’. It emerges that new technology comes at a high cost.
 Coal-fired power plants with carbon capture and storage
technologies were considered as an option, due to their
relatively high cost the model does not select any CCS
technologies in the Test Cases with emissions limits as other
cheaper alternatives (i.e. Wind and Solar technologies) are
 Based on the above, the test case prioritises energy mix
technologies which are less emitting and low cost. As things
stand, it is assumed (although no position appears to be taken
by the DoE) that the test case is preferred over the base case
due to fewer emissions.
Key Macroeconomic Assumptions
 Discount rate
The 2003 IEP used a discount rate of 10%. However, the
IRP2010 uses discount rate of 8.14% while draft 2012
IEP applies an 11.3% discount rate for all technologies in
the planning horizon.
 GDP Growth rate
The moderate growth rate used in the IEP 2012 is 4%,
while the growth rate in the updated electricity demand
forecast for IRP2010 is 6%. The electricity demand
forecasts in the IRP and IEP should be aligned
Energy Trilemma
The DOE’s fundamental objective is to ensure
energy security and affordability (including access).
However, on the emissions front, the IRP
implementation will definitely culminate in more than
2°C warming.
DEA’s emissions’
target of striving to achieve less than 2°C warming.
The latter is in contrast to the
Energy security vs environmental sustainability – the
balancing act ...
IRP2010 vs Update IRP2010 Report
The IRP2010 Update Report moved away from an
approach that strived to orchestrate a 20 year lock-in
plan to the one that is more responsive to decision
making under uncertainty.
IRP2010 vs Update IRP2010 Report
The IRP2010 Update Report therefore says no
decision is needed right now – but identifies the point
in time when a decision will be needed, also given
the lead times of various technologies.
It further depends on demand projections, around
which the best approach could be to do a sensitivity
analysis or exploration of higher and lower demand
IRP2010 vs Update IRP2010 Report
 Energy planning is now transitioning from a single
criterion applied in the past (cost) to a multi-criteria
decision-making in the recent Update – adding criteria of
increased access and reduced carbon emission.
 It is an iterative energy planning process that enables
informed debate among experts to provide robust
evidence and advice to decision makers. But the Update
is not yet formally adopted, and it is unclear when and in
what form it will become the formal plan.
What comes first, is it the IEP or IRP?
Implementing the IRP is a journey, and not an end
state by itself o There are lessons to be learnt, e.g. execution of key
milestones at Medupi should be extrapolated to Kusile
delivery – managing cost overruns!!!
Regional options – not effectively factored into the
IEP equation.
of Energy announces that a
collaboration deal has been signed with Russian
nuclear technology providers.
Carbon offset
A carbon offset is a measureable avoidance,
reduction or sequestration of carbon dioxide (CO2)
or other GHG emissions.
Carbon offsets are
sometimes described as project-based because they
typically involve specific projects or activities that
reduce, avoid or sequester emissions.
Carbon Offsets
 It is envisaged that carbon offsets will enable firms to cost
effectively lower their carbon tax liability.
 Carbon offset schemes are viewed as a catalyst that could
incentivise investment in least cost mitigation options in the
country, driving investment in greenhouse gas (GHG)
mitigation projects that deliver carbon emissions reduction at a
cost lower than the carbon tax.
 Such projects have the potential to generate considerable
sustainable development benefits in South Africa, including
channelling capital to rural development projects, creating
employment, restoring landscapes, reducing land degradation,
protecting biodiversity, encouraging energy efficiency and low
carbon growth.
Carbon offset
 As a matter of principle, the NT proposed carbon offset
trading scheme should be aligned to the carbon
budgeting approach set out in the National Climate
Change Response Paper (NCCRP).
 The carbon offset trading mechanism has been factored
into the carbon
 On the other hand, the desired emission reduction
outcomes (DEROs) scheme which can be ascribed to a
carbon budgeting approach as it serves as a mixture of
measures aimed at achieving the desired outcomes.
Carbon Offsets (Cont...)
 For the effective implementation of a carbon offsets mechanism that
contributes towards the climate change response policy objectives
and facilitates a transition to low carbon economy, the following
eligibility criteria for carbon offset projects are proposed:
 Only South African based credits will be eligible for use within the
carbon offset scheme, to encourage the development of locally
based projects and GHG mitigation in South Africa.
 Projects that generate carbon offset credits must occur outside
the scope of activities that are subject to the carbon tax. This is
to prevent double counting of the carbon reduction benefit should
an offset project be implemented on the activity that is liable to
the carbon tax.
 Project registered or implemented prior to the introduction of the
carbon tax regime will have to fulfil specified conditions to be
accepted to the scheme.
Carbon Offsets (Cont...)
 In keeping with the desired carbon offset spirit/principles, a list of eligible
projects will be introduced as a starting point to provide certainty and
stimulate investment decisions and project development in the carbon
offsets market.
However, this standardized approach will be sufficiently flexible in
accepting additional methodologies, so as not to limit the variety of
projects that can be added once the offset programme has been
launched. The list will therefore be expanded as the programme matures
to allow new project types to be included should they meet the required
Lists of both eligible and ineligible projects should be introduced, based
on the value added to the low carbon transition.
An eligible projects list would include project areas that, in addition to
carbon mitigation, also have sustainable development benefits and
contribute to meeting South Africa’s developmental priorities.
An ineligible projects list would include projects that would be
implemented within the scope of taxable activities following the
introduction of the carbon tax. Projects that have little co-benefits and
low value, such as the mitigation of industrial gasses, should be
Transition to a low carbon economy
 “The Infrastructure requirements for a high carbon
economy, across transport, energy, water systems and
cities, are estimated at around US$90 trillion, or an
average of US$6 trillion per year over the next 15 years.
By combining renewable energy with reduced fossil fuel
investment, more compact cities, and more efficiently
managed energy demand, low carbon infrastructure will
increase investment requirements by only an estimated
US$270 billion a year. These higher capital costs could
potentially be fully offset by lower operating costs, for
example, from reduced expenditure on fuel. Investing in
low-carbon economy is a cost-effective form of insurance
against climate risk”. (Source: New Climate Economy
Report, September 2014)
Carbon Tax
 Three ways in which a carbon tax is envisaged to work in changing
producer and consumer behaviour and therefore address climate
 Firstly, carbon pricing will encourage a shift in production and
consumption patterns towards a low carbon and more energy
efficient technologies by altering the relative prices of goods and
services based on their emissions intensity and encouraging the
uptake of cost effective, low carbon alternatives. Pricing carbon
emissions addresses the problem of negative externalities, as
polluters should pay for their emissions.
 Secondly, carbon intensive factors of production, products and
services are likely to be replaced with low carbon emitting
alternatives. To achieve the extent of emission reductions
committed to in Copenhagen, the production technologies will
need to become less carbon intensive and/or the consumption of
certain carbon intensive products such as cement, steel and
aluminium will need to be reduced.
Carbon Tax (Cont...)
 Lastly, a carbon price will create dynamic incentives for research,
development and technology innovation in low carbon
alternatives. It will help to reduce the price gap between
conventional, carbon intensive technologies and new low carbon
Contact details
• Ronald Chauke
– [email protected]
– 082 666 9704

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