Page 30 - Energize April 2021

VIEWS AND OPINION

Chris Yelland: The imported LNG fuel cost for the powerships However, any carbon price, carbon tax or environmental
is estimated at about R1,00 per kWh, which is much higher than levies resulting from emissions above that nominated by the
the full levelised cost of electricity (LCOE) of between R0,40 and bidder, may not be passed through to customers in the tariff,
R0,60 per kWh for new, standalone wind or solar PV. Why are the but must be borne by the IPP bidder itself. So that is how we
powerships not used in combination with wind and/or solar PV as manage these risks.
fuel savers? Will the powerships be allowed to contract wind and/ And now, moving on to renewables and battery storage, i.e.,
or solar PV as fuel savers in the future, and if so, will the savings wind and/or solar PV with battery energy storage, here there were
be passed on to customers through tariff rate reductions? two bid options. The first option is that the bid price in rand per
kWh is fully indexed to the South African CPI over the 20-year
Firstly, when we designed the programme, we encouraged contract period, and the other option is that the bid price is
projects combining different technologies, such as solar PV, wind, partially indexed. So, at financial close, government can decide as
gas, and batteries. So, there was that opportunity to do this. We to which option it will choose.
also said that it doesn’t matter where the gas plant is located. For Now, if we are to compare gas with renewables plus energy
example, the solar PV plant could be in the Northern Cape and storage, and guess which gives us best value for money –
the gas plant in Richards Bay or Coega. obviously, it depends on where the prices of gas, renewables and
However, Karpowership opted not to combine their gas- battery energy storage are at a particular point in time.
to-power offering with solar PV or wind. They still came in at a So, from a tariff point of view, if we were to compare a gas-
reasonable price, and hence were selected as preferred bidder to-power plant with another renewable energy plus battery energy
for three projects. On whether they could combine with wind storage plant now, I think gas generally comes in cheaper, as
or solar PV projects in the future, I think that’s a discussion for we speak. Obviously, in future, things might differ, depending on
another day. where the Rand price of LNG goes.
We should also not lose sight of the fact that although the
powership projects are not contractually combined with wind Chris Yelland: I am still struggling to understand how the
or solar PV, from a system operation point of view the various adjudication of a supposedly open and transparent bid process
technologies are indeed used in combination. Power from gas could award two thirds of the generation capacity to a vendor
engines is flexible and despatchable and can complement offering high CO2 emissions, low local content, and bid prices
variable power from wind and solar PV sources. that are significantly indexed to the US Dollar commodity price
So, the system operator has the flexibility to balance the of LNG and the US Dollar/rand exchange rate for 20 years, over
system using this gas-to-power in wind and solar PV projects that qualifying vendors offering low CO2 emissions, relatively high
we’re still going to procure in future bid windows of IRP 2019. local content and bid prices with essentially fixed tariffs in real
There is a benefit for the country if we look at this at a national terms over 20 years.
level rather than trying to balance the system at the plant level.
The RMIPPP programme followed an analysis of available options
Chris Yelland: Does the tariff bid by Karpowership include all identified in the request for information of December 2019 to help
pass-through costs such as carbon taxes, environmental levies, close the supply and demand gap in the shortest possible time.
and future LNG fuel prices risks? So, if the carbon tax and/or the The analysis showed that this would require short- or long-term
US dollar price of LNG goes up, will the tariff go up? Is the tariff commercial arrangements.
bid linked or indexed in any way to rate-of-exchange, price of Unfortunately, there is limited power from existing generation
LNG fuel, interest rates, CPI, etc., such that electricity customers plant under short-term power purchase agreements (PPAs), and
and the public are exposed to these future risks? Are the tariffs of this was also confirmed through the Eskom procurement initiative.
the non-gas bidders indexed or exposed to similar market risks? The option of short-term PPAs based on green-fields projects was
Which projects present more risks to customers and the public? not feasible due to high electricity unit cost as investors would
look to amortise their investment over a short period of time.
To start off with, the tariffs bid for the three Karpowership projects Through the RMIPPP request for proposals, the DMRE
incorporate all costs, including the fuel costs, the powership and therefore opted for the long-term commitment, to ensure
FSRU lease costs, the operation and maintenance costs, and the reasonable electricity unit cost considering system requirements.
environmental levies and carbon taxes. The RFP was technology agnostic, and proposals by the bidders
These costs making up the tariff are not fixed in rand per kWh had to be tailored to the requirements of the system operator.
over the 20-year contract period but are indexed to the US Dollar The notion that gas will be expensive for the country in the long
commodity price of the LNG fuel, the US Dollar/rand exchange term might be misleading and is based on incomplete analysis. It
rate, the carbon price or carbon tax rate, and other indices. is possible that CPI escalation on the renewable projects might be
The carbon tax component of the tariffs bid is based on the much higher than the US Dollar/rand exchange rate and gas price
level of emissions stated by the bidder at the time of tender. As escalation applicable to the powership projects. It is critical for the
with changes in the commodity price of the LNG fuel and the US country to balance its exposure whilst providing the much-needed
Dollar/rand exchange rate, any variations in the applicable carbon flexibility on the system to accommodate additional renewables as
price, carbon tax rate or environmental levies associated with per the IRP. n
these nominated emissions are passed through to the customer
via adjustments in the tariff bid. Send your comments to rogerl@nowmedia.co.za

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