COP26 agreement could keep electricity prices in check

This interview was conducted in Afrikaans, as featured on RSG Geldsake here, and has been translated in this transcription.

RYK VAN NIEKERK: This week, during the COP26 Climate Change Conference in Glasgow, Scotland, South Africa secured a historic R131 billion deal with various developed countries. The aim of the agreement is to help South Africa dramatically reduce greenhouse gas emissions.

Read: SA secures R131bn commitment to transition to low carbon economy

The money is particularly intended to help Eskom speed up switching off its old coal-powered power stations and replacing them with renewable energy sources; this would also help support communities currently dependent on coal and the power stations.

André de Ruyter is on the line. He is Eskom’s chief executive, chatting to us from Glasgow. André, a warm welcome to the programme. You have already declared the agreement to be a “breakthrough”. How exactly do you think this money will be used in practice to reduce our greenhouse gases?

ANDRÉ DE RUYTER: Good day, Ryk. We need to spend a great deal of money over the next 10 to 15 years to replace our coal-fired power stations, which are rapidly reaching the end of their lives, with new, cleaner and greener power-generating capacity.

This not only includes power generation, it also includes some 8 000 to 10 000 kilometres of new transmission lines, as well as a total renewal of our distribution network to accommodate renewable energy.

In total, we expect this to cost in the order of R400 billion to R500 billion.

So the transaction just announced is a welcome first step in affecting this renewal, this transition, specifically aimed, as you said, at a just transition, so that we don’t leave behind ghost towns when we cease producing electricity from coal.

RYK VAN NIEKERK: Will it speed up the process? I assume you already had formed a plan for when these power stations would be switched off, but will this money now accelerate that process?

ANDRÉ DE RUYTER: That’s the plan. The consideration is to remove CO₂ more rapidly from the atmosphere than would have otherwise been the case. The plan we currently have on the table is to remove 22GW – roughly half our installed capacity – of coal-generation capacity from the system by 2035, and to replace it with greener energy.

It’s important to emphasise that this new, greener energy will not be generated by Eskom alone.

In fact, our ambition is relatively small. We want to bring about eight of the 50-odd gigawatts required on line. For the remainder we want to enter into partnerships with the private sector; we therefore think there is an excellent opportunity for the private sector to play a prominent role in this new-generation capacity.

RYK VAN NIEKERK: How many power stations will be turned off by this programme?

ANDRÉ DE RUYTER: By 2035 the current plan includes turning off about nine of the power stations, and we plan to then keep only six of our current coal-powered stations until they reach their end of life, which would more or less be by 2040/2045 – excluding of course Medupi and Kusile, which will continue producing until around 2069.

RYK VAN NIEKERK: With regard to the number of green-powered or green projects that Eskom will itself tackle – are there any plans for those on the table?

ANDRÉ DE RUYTER: Yes, we have already tabled an entire pipeline of projects. Those are part of the objectives we want to achieve through this transaction. Among other things, we want to equip our current coal-fired power stations with new green energy, as well as battery manufacture, battery storage, and the provision of so-called micro-power generation which we can use for rural areas. Those projects are already in the pipeline. We also have wind and solar projects that we want to put in place with this new facility now at our disposal.

RYK VAN NIEKERK: Eskom’s financial position is not too healthy, and neither is government’s, so what are the financial consequences for Eskom and South Africa in accelerating this process? In other words, will this funding now available to us really be a sustainable financial option for us?

ANDRÉ DE RUYTER: Ryk, the advantage, if we can put it like that, for South Africa is that the cost of CO₂ mitigation in South Africa is far lower than the cost for developed countries. Those countries are therefore prepared to make funds available to us at very low interest rates. Naturally the money has to be paid back, and guarantees from the state are of course required for taking out these loans. One however needs to ask oneself:

What alternative do we have? We need new capacity. We have to reduce our CO₂ footprint – also to make our exports more internationally competitive, and we thus have to make the best of a bad situation and obtain the funding as cheaply as possible to effect this transition.

RYK VAN NIEKERK: I think everyone would agree that we need to make that transition, but we currently have an interesting situation, since many countries have also now committed themselves to dramatically reduce their dependence on coal. Yet China, India and America did not sign this COP26 agreement to phase coal out. These three countries currently use about 70% of all the world’s coal. One might then ask whether South Africa is blessed – to some extent – with very cheap coal. Do you think it’s fair to expect South Africa to accelerate its process, possibly at a higher cost than the initial plan would have anticipated?

ANDRÉ DE RUYTER: That’s a very complex question. The first thing one needs to keep in mind is the age of our coal-fired power stations and the fact that they are not reliable. We therefore have to replace those old power stations and provide more capacity online. If one looks at the cost of available new technology per kWh [kilowatt hour], solar power costs one-tenth that of new coal capacity.

To build new coal-fired power stations one would need to get funding for doing so, which is doubtful, and it is hugely more expensive than building green power plants. So we have to replace them, we have to make the transition.

I think the second component that is important is the competitiveness of our exports. Compared to the countries you mentioned, South Africa is much more coal-intensive than our international competitors. The European Union has already announced that from 2023 a coal or a CO₂ import tax will be levied. Because 87% of our electricity is derived from coal, our manufacturers and our mines are very concerned that they will be hit by these CO₂ imports, and to remain internationally competitive we therefore have to lower our CO₂ intensity.

Those are a couple of the reasons why we think we need to take up this opportunity while the world has an appetite for making cheap money available to make our transition possible.

RYK VAN NIEKERK: You said earlier that there would a large focus on supporting communities around these operations. Have you any indications of the size of these communities, and the impact of replacing the power stations with alternative types of electricity-generating plants?

ANDRÉ DE RUYTER: We have already done detailed studies, socio-economic studies, in the areas surrounding the power stations. We have completed six such studies. Some 20 000 to 25 000 job opportunities are at risk – not all at once, of course, but over a period of 10 to 15 years – which we will have to address and replace in some way.

If we get the proper industrial policy to stimulate manufacturing as well, specifically in towns and cities such as Emalahleni and Middelburg, the Steve Tshwete municipality, studies have already shown that there would be a net growth of 300 000 job opportunities, even if people currently working in coal-related areas lose their jobs.

For that reason we think this will have a net positive effect on these communities.

RYK VAN NIEKERK: The money is intended not only for Eskom, but do you think some of this cheap funding could be made available to private projects because, as I understand it, most of the current green-power projects are financed at normal commercial terms offered by banks, which of course could mean considerably higher interest rates?

ANDRÉ DE RUYTER: Yes, that is correct. At this stage the money is earmarked chiefly for Eskom, as well as for developmental work for electric vehicles. South Africa has of course a large vehicle export industry with [a need to keep up with] international trends, as well as conversion to the hydrogen economy. Those two elements are at an earlier stage than Eskom’s projects, but they will definitely also benefit from them.

The question one needs to ask as to why cheap money should be made available to the private sector is whether the benefit of lower interest rates will flow through to cheaper tariffs and accelerated projects, and whether the lower financing costs would find their way to the pockets of shareholders, which would not benefit the lenders in foreign countries with whom we are currently negotiating.

RYK VAN NIEKERK: Will there be independent oversight over this foreign money?

ANDRÉ DE RUYTER: Absolutely. That is one of the elements that I proactively, from day one, put on the table. I think proper oversight is absolutely essential, given Eskom’s history of state capture and corruption, and we are very comfortable with the lender retaining control of the money up to the point where payment should be made in a bona fide manner to contractors who have already first proved themselves successful on the ground and can be verified as having delivered.

The money currently being made available will thus not be available to Eskom in a big lump sum, where someone licking their lips will be looking after it.

It will be controlled very tightly by the lenders. We all have our eyes wide open to the cupidity staring us in the face.

Read: Eskom tackles corruption – contract by contract

RYK VAN NIEKERK: Now, the money is earmarked to become available within the next three to five years. That’s of course merely the initial stage of the whole process. Will more money become available after that?

ANDRÉ DE RUYTER: Yes. That’s the initial amount, the initial facility. We do of course realise that we have a longer path to follow than the three to five years currently on the table. The reason that we were not able to conclude a longer-term agreement is that the countries’ governments are uncertain as to who would be in power in three to five years’ time. They are also subject to democratic processes, so they are unable to enter into 10- or 15-year contracts committing their successors in their respective countries. But we are convinced that, should we deliver and demonstrate that we can use money responsibly, more money will be made available to make the rest of the transition possible.

RYK VAN NIEKERK: That will certainly bring about a lowering of our carbon footprint, but it may also somewhat reduce the tempo of tariff increases. So there are environmental and financial advantages, which means this is really an extremely advantageous agreement for Africa.

ANDRÉ DE RUYTER: Definitely, Ryk. If one looks at the prices quoted in the most recent renewable energy round, where private investors bid on building renewable energy projects, those figures were put on the table as 40 to 43 cents/kWh. Eskom’s costs for its coal generation fleet are in the region of 70 cents to 72 cents. So, should one be able to speed up this transition, taking into account the need to also invest in storage capacity, batteries and pump stations, we think that renewable energy would indeed slow the rate at which electricity tariffs increase. That would of course be good news for the economy.

RYK VAN NIEKERK: Absolutely. André, many, many thanks for your time this evening. That was André de Ruyter, the chief executive at Eskom.