Eskom defends mandatory power-saving proposal, says voluntary...

Eskom defends mandatory power-saving proposal, says voluntary scheme is failing
Published on October 29, 2008by Mike.
Tags: crisis, eskom, power, shedding.

State power utility Eskom has moved to counter assertions that the proposed power conservation programme (PCP) – which would initially target mandatory savings from South Africa’s top 300 or so energy-intensive businesses – would be applied wholesale and without regard to a company’s energy-efficiency progress.

It has stressed, too, that final allocations will only be arrived at after direct and thoroughgoing consultation with companies, whereafter mandatory sector targets will be set.

But acting system operations and planning division MD Kannan Lakmeeharan has defended the controversial move to a mandatory regime, saying that the current voluntary programme is failing to deliver the 10% reduction needed to stabilise the supply system and create space for new connections.

He reports that, at best, savings of between 2% and 3% have been achieved since the load-shedding of February and March, noting that year-to-date savings of only 1,5% against 2007 consumption levels have been achieved – and this he attributes more to a warmer-than-usual winter and municipal self generation rather than any material evidence of savings.

Lakmeeharan also dismisses as “fallacy” ongoing assertions by the mining sector that it is being forced to save 10%, while the rest of society is failing to deliver any savings. In fact, he says some mines are not saving at all, while the savings contribution from the sector is well below 5%. In fact, he reveals that there is not a single economic sector contributing a full 5% under the voluntary arrangements.

For this reason, the power-stressed utility and government will seek to institute a mandatory scheme, targeting an overall reduction of 10%, or 26 terrawatthours (TWH), over the next four to five years.

Initially, the utility’s top 250 customers, which together consumer 80 TWH yearly, as compared with the City of Cape Town, which consumes 10 TWH/y, as well as the leading five to ten customers in the 12 largest municipal areas, will be targeted.

This is sure to raise the hackles of some in business, which have repeatedly called for a power-savings regime that cuts across society. It also, ironically, conflicts with previous pronouncements by Eskom CEO Jacob Maroga, as well as senior government officials, who have suggested that industry should not take disproportionate pain.

However, Lakmeeharan says that a scheme covering all eight million of Eskom’s customers would be too unwieldy and would also not deliver the level of savings sought. He says only low-consuming customers would be sensitive, while the large consumers would be “inelastic” to the pricing signals.

NOT ONE SIZE FITS ALL
But he also strongly dismisses recent suggestions by a member of the Energy Intensive User Group (EIUG) that the PCP would be pursued as a “one-size-fits-all” model, and would fail to take into account savings already achieved by a number of large users.

In fact, Mike Rossouw, who works for Xstrata Alloys and is a past chairperson of the EIUG, warned recently that the proposed scheme was “unrealistic”, “inappropriate” and would not necessarily yield the “low-energy, high-growth” outcome sought.

Rossouw asserts that the Energy Conservation Scheme (ECS) component of the PCP fails to take full cognisance of the energy intensity of the South African economy, and does not fully acknowledge the role that energy-intensive businesses play in generating wealth, earning foreign exchange and providing impetus to other growth sectors of the economy.

He has argued that the ECS has all but ignored the time it would take for some industrial sectors to adapt, and the fact that some large consumers are already “best in class” globally with regard to their electricity-consumption habits.

But Lakmeeharan stresses that processes will be put in place to ensure that baselines and allocations are fair for each sector, are phased in appropriately and can be reviewed.

Further, an arrangement is being considered to enable those able to save ahead of target to trade these savings with those struggling to meet their allocations so as to limit the number of firms exposed to what could be extremely punitive tariffs.

In fact, the ECS being proposed by Eskom and the Department of Minerals and Energy (DME) as a remedy for South Africa’s medium-term power shortages, is a local adaptation of a successful Brazilian model, deployed in 2001 to reduce demand and wasteful consumption.

It is targeting a 10% (3 000-MW) reduction in demand over the next four years – a savings level that Eskom argues to be necessary in order to create space not only for appropriate generation maintenance, but also for the connection of new consumers. It should also help close the 26 TWh/y supply-demand gap that is likely to arise before the R343-billion build programme gains full supply-side traction.

The ECS is a key component within a PCP that was initially meant to be implemented by year-end. The other key aspect of the scheme is a so-called Electricity Growth Management framework, which will set out rules and guidelines for new connections.

It is now unlikely that the PCP will be deployed this year, given that the National Energy Regulator of South Africa is likely to want to entertain public hearings on the matter before approving its enforcement. These hearings could be held during November.

Envisaged under the ECS are mandatory regulations, backed by legislation, to force a real reduction in demand from industry, which is currently subject to a voluntary reduction of between 5% and 10%.

The initial focus was expected to be on the 22 000 large customers, with consumption levels of more than 100 MWh/y, and currently consume 81% of Eskom’s direct sales and more than 77% of the direct sales arising from municipal distributors. But, in the first phase, that focus is likely to be narrowed to the EIUG and the large municipal users, comprising mostly mines, smelters and large process facilities, such as steel mills.

PUNITIVE TARIFFS
The main instrument of enforcement is a proposed pricing structure, which becomes increasingly punitive as participants exceed their allocations – these annual allocations could be determined using consumption patterns recorded between October 2006 and September 2007.

Proposed is a steeply inclining block tariff structure, with four pricing bands.

In the first so-called “allocation” band, a consumer would pay the normal industrial tariff of about 25c/kWh, or whatever the regulated tariff would be determined at.

There is then a narrow “control band” where those exceeding the allocation by between 1% and 2,5% will be charged R2,80/kWh for that additional consumption, a figure derived using the running costs of the expensive diesel-fuelled open-cycle gas turbines (OCGTs).

Any consumption beyond the “control band”, but less than 10% above the agreed allocation level, will be charged at a so-called “disincentive tariff” of R4,80/kWh – the full operating and capital cost of running the OCGTs.

Finally, there is a so-called “punitive band” for those consumers exceeding their agreed allocations by more than 110%, with a tariff of R9/kWh that could be levied.

In addition, there is a proposal for additional penalties for repeat offenders, with an ultimate tariff of up to R18/kWh.

Lakmeeharan insists that the idea is not to extract penalties but to encourage savings, adding that any money arising from above-allocated use will flow not to Eskom but the DME.

The Brazilian experience reportedly shows that industry will adapt to avoid such penalties, while an economy can continue to grow in spite of medium-term power constraints.

But Rossouw says that, while there is overwhelming consensus on the need to lower consumption and to reduce waste, he is not convinced that the economic impact will be as low as suggested by the proponents of the ECS, given the energy intensity of the South African economy.

He stresses, too, that the retrofitting of energy-efficient technologies involves long lead times, while the propensity to save and costs associated with such savings differ markedly not only from industry to industry, but also from process to process within the production chain.

He, therefore, believes a far more disaggregated approach is needed than that which is being proposed under the ECS. “The medicine should be targeted and based on a correct diagnosis,” he asserts.

Lakmeeharan counters that such a targeted and disaggregated approach is precisely what is envisaged under the ECS.

He stresses, too, that the call by the National Business Initiative’s Yaw Afrane-Okese for international benchmarking to determine appropriate savings levels has been taken on board.

Afrane-Okese has warned that absolute electricity reductions across industrial sectors may not result in energy-intensity improvements, given that some South African sectors were already among the most efficient users in their class globally.

He points specifically to the local cement industry, which he claims to be among the most efficient users of power when benchmarked against their international peers. Further research and international benchmarking is, therefore, required rather than the current focus “on soft targets who are switchable”.

“We realise that some industries have made energy efficiency strides. But we have research that also suggests that savings of 15% should be possible from South African industry,” Lakmeeharan avers, referring specifically to a McKinsey study conducted in the wake of South Africa’s power crisis earlier this year.

He adds that its own research suggests that the top 250 energy consumers can realistically contribute a third of the savings required, while the balance will have to come from society as a whole.

However, these residential and commercial customers will not initially be included under a mandatory regime. Instead, they will be targeted through the use of effective and consistent communication as well as through a range of demand-side management programmes, from the accelerated roll-out of energy-efficient light bulbs through to improving motor efficiency at factories and mines.

Prospects for the mass deployment of solar-water heaters, however, appears to have fallen down the priority list, given funding constraints.

In addition, Eskom has set its own internal target of saving 1 TWh/y within five years by installing efficient pumps and motors, improving substation performance and lowering consumption at its buildings by 25%.

“We are not out of the woods yet and, unfortunately, the voluntary savings plan is not delivering. Therefore, we need to move to a fair and transparent system of mandatory savings as soon as possible,” Lakmeeharan concludes.