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  • 1. ICUE CONFERENCE CAPE TOWN 29-30 May 2007 Mr. Nndwamato Mutshidza Deputy Director: Electricity Supply Contact Number: 012 – 317 8657 E-mail Address: [email_address] Developing a Distributed Generation/ Co-Generation strategy in support of the 30 % Private Sector participation in Power Generation Sector. Annexure G
  • 2.
    • Industry Background
    • Drivers of Distributed Generation
    • Benefits of Distributed Generation
    • Barriers to Distributed Generation
    • Considerations for DG/IPP/Eskom split
    • The Security/Cost Trade-Off
    • Distributed Generation rollout approach
    • Cost of Unserved Energy
    • Distributed Generation support Strategy
    • Recommendations
    • Conclusions
    • End
    Presentation Outline
  • 3. Industry Background
    • The South Africa’s power supply position is becoming increasingly insecure, as the margin between the existing generating capacity and increasing demand is being eroded.
    • Recent power shortages and especially the Western Cape electricity crisis, confirmed the tightness of the current supply/demand balance.
    • Of the new capacity required to meet the country 4% GDP Growth and the targeted 6% GDP growth going forward and other socio-economic imperatives, Eskom will be required to produce about 70% (in MW), with the remaining investment balance procured through private sector participation via direct (IPPs) or Distributed Generation (DGs) in the power generation.
  • 4. Industry Background
    • Power cuts and interruptions have become more frequent and are expected to increase in the short term.
    • The SA electricity requirements have over the years doubled and as such the industry should do the following:
    • New/additional peaking generation capacity of 2,500 MW will be needed between 2007 and 2010;
    • Current surplus base load generation capacity in South Africa will run out by 2010/11;
    • It is expected that between 1000-2000MW of new capacity needs to be come on line every year starting in 2007.
    • Co-gen could vigorously be explored to assist meeting this requirements.
  • 5.
    • The importance of power system security has increased significantly in recent years, following large-scale power outages in North America and Europe.
    • It has become evident that maintenance and asset management are crucial to avoid increases in fault events that risk more and larger customer interruptions.
    • The traditional approach of leaving security to be managed by a utility has been replaced by a transparent and inclusive process, with Governments and Regulators taking a pro-active position .
    • Detailed public domain information on plant availability; analysis of major outages; and plans and proposals for generation and transmission augmentation; is the international norm.
    Industry Background
  • 6. Drivers Distributed Generation?
    • Emissions reduction laws and the creation of environmental friendly markets;
    • Concerns over fuel diversity and security of supply;
    • Energy and cost savings benefits;
    • Environmental savings
  • 7. Benefits of Distributed Gx
    • Contributing to ensuring security of the already eroded electricity supply;
    • Meeting the aim of increased energy efficiency,
    • Being a vehicle to promote private sector participation in power generation efficiently.
    Distributed Generation projects present ideal options for:
  • 8. Other Benefits of Distributed Generation
    • Present energy efficiency gains through improvements in fuel conversion efficiency and the use of waste resources;
    • Offers reduction in transmission losses from a decentralisation of electricity production – reduce effective demand to Eskom resulting in less output and reduced GHG emissions;
    • Offers environmental benefits from the possible mitigation of future environmental liabilities;
    • Further offers possible reductions in greenhouse gas emissions (CO2, NOX and SOX);
  • 9. Other Benefits of Distributed Generation
    • Provision of effective additions to the South African electricity generation base through the following:
    • Modular, decentralized nature of Distributed Generation allows for capacity to be added in step with demand rather than in the ‘lumpy’ form of large power stations;
    • Bring capacity online in reduced time frame versus large utility-scale power plants;
    • Localised inside the fence generation – mitigating demand;
    • Increased reliability and quality to the end user – decreased dependence on centralized power system;
    • Roll-out of projects can ease peak demand allowing for the improvement of reserve margins;
  • 10. Other Benefits of Distributed Generation
    • Easing of grid congestion at the transmission level with a reduced and deferred need for transmission and distribution investment;
    • Ability to serve customers better than centralized production given location close to source of demand and ability to tailor output;
    • Mobilising private sector resources in the electricity generation sector;
    • Supports security of energy supply and the de-risking of existing generation asset base by broadening scope of fuels used in the supply of power;
  • 11. General Barriers to Distributed Gx
    • The current electricity market structure;
    • Current (low) price of wholesale power;
    • Lack of Standardised PPA.
    • Lack of transparency in the application and implementation process for project developers;
    • Perception that current process is overly bureaucratic with over dominant of Eskom throughout;
    • Initial project development costs coupled with no ultimate certainty of a route to market in the sector;
    • Variations in cost of capital amongst project developers are a seen a key feature of the current means of determining the required off take price;
    • Required payback period for industrials typically shorter than that of power generator increasing upward pressure on required prices;
    • Development of Distributed Generation projects seen as non-core by industrials due to lack of incentives by policy developers.
  • 12. Regulatory and Market Barriers to Distributed Gx
    • No national standards exist for the interconnection of distributed generation technologies to the electric utility grid, and as a result the monopoly utility impose onerous and costly studies, and require the installation of unnecessarily expensive equipment to discourage Distributed Generation.
    • The national utility currently charge discriminatory backup rates and prohibitive "exit fees" to customers that build Distributed Generation facilities.
    • Current regulations do not recognise the overall energy efficiency of Distributed Generation or credit the emissions avoided from displaced grid electricity generation.
    • Depreciation schedules for Distributed Generation investments vary from 5 to 39 years depending on system ownership, and frequently don't reflect the true economic lives of the equipment.
    • Many facility managers are unaware of technology developments that have expanded the potential for cost-effective Distributed Generation.
  • 13. Market structure Barriers to Distributed Gx
    • South Africa has a single buyer model for the electricity market. Eskom generates about 95% of all electricity.
    • The remainder is generated by historically installed municipal and industrial plant, most of which is older than twenty years and in many cases as old as forty years.
    • No new entrant is likely to enter and produce electricity at lower prices than Eskom, which has the potential to stall government policy on diversification of primary sources in power generation business.
    • Access to the grid is also an issue as wheeling tariffs are not transparently available.
  • 14. Prices Barriers to Distributed Gx
    • Sales revenue from electricity generated and on-sold or costs saved from energy not bought from Eskom; and
    • Sale of co-products such as steam for CHP projects, or the reduction of co-product costs from alternative sources.
  • 15. Considerations for DG/IPP/Eskom split
    • (Firstly agree what needs to be built) - Reserve margin Considerations for what it needs to be (based on consistent definition)
    • System reliability – we have now entered an era where system performance is expected to deteriorate due to age of plant (e.g. 90% plant availability now reduced to 86% in 90:7:3 planning parameter)
    • Risk and contingencies – the risk and cost of “unserved energy”. Certain load centres have already shown a greater risk than others e.g. Western Cape, Eastern Cape and KZN
    • Economic cost of carrying the reserve margin – too high a reserve margin will lead to upward pressure on prices unnecessarily
  • 16. Considerations for DG/IPP/Eskom split
    • Other strategic considerations
    • Only certain technologies are attractive to IPPs (no nuclear, nor coal with long tenor offtake agreements, nor pumped storage)
    • IPP opportunities are limited and DG could provide a solution
      • to bring competition to the industry
      • Meeting capacity shortage in the country
      • For diversification of energy mix.
  • 17. Considerations for DG/IPP/Eskom split
    • Renewable technology and cogeneration
        • A “must buy” obligation on Eskom subject to certain criteria being met (feed-in tariff criteria as set by NERSA)
      • Limited opportunity relative to demand and target (10 000GWh by 2013 for renewable energy)
      • Cogeneration (energy efficient generation that would otherwise result in opportunity cost) should complement this and opportunities should be unlimited
    • If opportunity (cogeneration or renewable) is more than 500MW it should be classified as part of IPP 30%
    • Transparent process to be initiated inviting developers to submit proposals for cogeneration and renewable energy
  • 18. Considerations for DG/IPP/Eskom split
    • Lead times for supply of key equipment increasing, mainly due to Chinese growth and other international demand for power plants;
    • Long lead time for EIA approval (Environmental considerations);
    • Urgent need for development of procedure for handling unsolicited proposals, developed jointly with DPE, NERSA and Eskom, particular reference being Cogen> 500MW;
    • Should this not materialize, it will lead to unserved energy scenario.
      • 2011-15 (project Alpha) of particular concern due to shift of time of availability;
      • Distributed Generation provide a contingency for mitigating against the continued high growth in demand.
    International supply chain considerations
  • 19. The Security/Cost Trade-Off
    • Maintaining a secure electricity supply is essential for any developed economy.
    • The appropriate level of supply security to be provided is a trade-off between the costs involved in improving power system reliability and the losses to the economy and customer welfare associated with power outages.
  • 20. Distributed Generation rollout Approach
    • Two approaches - deterministic and probabilistic.
      • Deterministic approach indicates the total generation expected to be needed at peak load hours, based on scenario analysis.
      • Probabilistic approach takes into account the random nature of the different elements of the system and calculates the probability that the system is not able to supply all the demand. The results are usually expressed as a loss of load probability (LOLP) or loss of load expectation (LOLE).
    • The LOLP/LOLE calculations are based on values for planned and unplanned outages and a demand forecast.
    • However, whilst probabilistic approaches are used to determine the LOLP/LOLE, it is usual to express the outcome in terms of the Reserve Margin, since this term is more easily understood.
            • Source: SRPESA
  • 21. Preferred Option
    • The deterministic approach involves relating the reserve margin to the largest single (or sometimes double) event hazard - for example, the loss of one of the two units at Koeberg.
    • A deterministic criterion is usually based upon an examination of a number of constraining situations with the assumption that if system operation can be assured for these cases it will be secure for all situations.
    • While a deterministic approach is easier to understand, it does not reflect the reality that a given level of security of supply is in fact contingent upon a number of underlying factors.
    • Reliability indices derived through probabilistic methods therefore constitute a better estimation of the risk of failure than deterministic indices.
  • 22. Cost of Unserved Energy
    • The probabilistic approach is used by most utilities internationally as part of their system planning, as is the case in South Africa.
    • However, a key criteria used by Eskom, NERSA in South Africa to determine the need for additional capacity is the “cost of unserved energy” (CuE) - assumed to represent the value to customers of system security.
    • This approach is now recognised as not being an adequate basis for determining power system security (as illustrated by the response of customers to recent power outages in Western Cape).
    • It is therefore recommended that, instead of using CuE to determine whether or not to add new capacity, the main criterion should be a defined security standard.
            • Source: SRPESA
  • 23. Distributed Generation Support Strategy
    • DG Regulatory Framework
    • The development of Distributed Generation regulatory framework to support environmental, energy efficiency and social benefits associated with distributed generation;
    • The development of a Distributed Generation sector should proceed in a rational economic manner and that consequently the cheapest, quickest to deliver projects should be targeted first;
    • As a condition of licensing, a minimum portion of electricity output on a year-by-year basis, should be sourced from qualifying Distributed Generation plants by the System Operator;
  • 24. Distributed Generation Support Strategy
    • DG Regulatory Framework continues..
    • Both the long term contracting costs as well as ancillary costs to the offtaker (Eskom), from qualifying Distributed Generation capacity be fully recoverable through a long arm PPA;
    • Procedures for pricing power to be supplied by Distributed Generators should be made transparent through the Distributed Generation regulations and other piece of legislation; and
    • Standardised contracting procedures be developed and made available to the public through legislation to ensure transparent cost-effective treatment for potential developers.
  • 25. Recommendations
    • That an explicit security standard should be established, as a basis on which to plan new capacity and to determine an appropriate generation reserve margin, taking into account the contribution of Distributed Generation to avoid a situation wherein Eskom wake up and just on ad-hoc bases decide what power should come from these distributed generators.
    • That, instead of using Cost of Unserved Energy (CuE) to determine how much new capacity to add, the main criterion should be the defined security standard, which will spell out the kind of technology and the defined time frame.
    • That system security should be planned, implemented and monitored on a regional basis, to identify any regions where security is below the specified standard and where additional security may be required. This will help developed regional based distributed generation to beef up the specific region supply.
  • 26. Recommendations..
    • That clarity be sought with regard to export contractual commitments and the impact on supply security. This should be seen from regional collaboration in which, for example SASOL trade Gas from Mozambique and as such could use such gas on Distributed Generation, and then it should be clarified who bear the cost.
    • That the reliability of import arrangements and the associated risks to security of electricity supply should be monitored continuously on a probabilistic basis, particularly for cross border players like SASOL.
    • Given that the price of power supplied from Eskom (as a monopoly) is expected to rise significantly over the foreseeable future, it is recommended that the focus on quantifying the ‘economic’ price of power be moved away from current prices and on to the cost of developing the next baseload generating capacity in South Africa. In a single buyer model this effectively dictates the use of Eskom’s avoided cost as the basis for determining the economic efficiency of future Distributed Generation projects .
  • 27. Recommendations
    • The development of guidelines for the purchase of backup and supplemental power service for Distributed Generation facilities at fair and reasonable terms.
    • The PPA as a commercial contract should set a depreciation schedule for Distributed Generation assets to reflect the true technical and economic life of most systems.
    • The Government (DME) should enact tax credits through the DNA to encourage efficient, low-emissions Distributed Generation systems.
    • Eskom should implement interconnect and access rules as set in the Grid codes favourable to Distributed Generation, facilitate siting and permitting, cost-share Distributed Generation feasibility studies, and review facilities for Co-generation opportunities.
  • 28. Conclusions
    • Over the past 10 years the reserve margin has fallen very significantly as a result of growth in demand of around 3% (equivalent to 1,000MW of additional peak demand) per year and the very limited amount of new capacity commissioned.
    • The impact of the current approach is that, in some regions of South Africa where demand exceeds the local generation capacity, the security of supply is lower, due to the limitations of the transmission system, than in those regions where the amount of generation exceeds the demand.
    • An opportunity to increase the diversity of generation plant, and provide competition in generation. Distributed Generation provides one of the most important vehicles for promoting liberalisation in energy markets.
  • 29.
    • Effectively, customers in some parts of South Africa have a sub-standard supply security, based on a perceived value of supply interruptions, CuE (the value of which has no rigorous basis and is inappropriate to determine security) .
    • In addition, if the return to service of mothballed plant, the commissioning of any of the new gas turbines run behind schedule or the forecast level of DSM fails to materialise, the capacity situation in the short term will become tighter. e.g. Alpha being delayed to 2011 1 st unit and 2015 all units running.
    • In this instances Distributed Generation provide an optimum solution to the problem at hand from location economies of scale.
  • 30. END
    • and
    • Questions can be thrown