Presentation on the IRP & IEP

1. Presentation on the IRP & IEP FFF Council Meeting - 23rd September 2014 Ronald Chauke

2. Content • 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

3. 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 non-discrimination between IPP generators and the buyer

4. 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 side-led.

5. 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 efficiency).

6. Contextual Background • The Integrated Resource Plan (IRP) 2010-2030 was promulgated in March 2011. • A ‘living plan’.

7. National Development Plan • Vision • 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.

8. Policy Decisions • 2007 Cabinet Decision on new Generation Capacity - • Eskom = 70%; and • IPPs = 30% - to introduce competition within the Gx space. • Eskom to procure the 100% power generated by IPPs • Renewable Feed-in tariff – 2009 (discontinued) • Renewable Energy IPP Procurement Programme • Competitive bidding.

9. IRP Allocations • IRP2010-2030 – Generation mix • Renewables = 17800MW (Solar 8400 MW, Wind 8400MW and CSP = 1000MW) – i.e. 42% • Nuclear 9600 = 23% • Coal =15% • Other sources (OCGT, CCGT & Hydro) = 20%. • Further determination issued – December 2012 – 3200MW capacity.

10. Revised Balance Scenario Allocations

11. IRP Revised Balanced Scenario Capacity

12. Modelling • 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.

13. 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 fuels. • The 2012 IEP does not indicate what has been achieved, what still needs to be done and lessons learnt in implementing the 2003 IEP.

14. Gas • 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, provided that the overall economic and environmental costs and benefits outweigh those associated with South Africa’s dependence on coal, or with nuclear power as an alternative.

15. 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).

16. Benchmarks • 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.

17. 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?

18. Technology • 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 demand. • 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.

19. 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 available". • 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.

20. 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

21. 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. • The latter is in contrast to the DEA’s emissions’ target of striving to achieve less than 2°C warming. • Energy security vs environmental sustainability – the balancing act ...

22. 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.

23. IRP2010 vs Update IRP2010 Report (Cont...) • 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 realizable.

24. IRP2010 vs Update IRP2010 Report (Cont...) • 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.

25. Conclusions • What comes first, is it the IEP or IRP? • Implementing the IRP is a journey, and not an end state by itself - • 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. • Minister of Energy announces that a collaboration deal has been signed with Russian nuclear technology providers.

26. CARBON OFFSETS AND CARBON BUDGETING SLIDES

27. 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.

28. 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.

29. 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 tax regime aimed for 2016 implementation. • 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.

30. 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.

31. 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 criteria. • 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 excluded.

32. 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)

33. Carbon Tax • Three ways in which a carbon tax is envisaged to work in changing producer and consumer behaviour and therefore address climate change: • 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.

34. 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 alternatives.

35. Contact details • Ronald Chauke • maronza97@gmail.com • 082 666 9704