Why Eskom’s electricity demand forecasts are wrong – again

Eskom gave input into the Departments of Energy IRP2010 (Integrated Resource Plan) – some would say they wrote it on behalf of the Department.  One of the key factors in planning electricity generation capacity is knowing what the demand will be.  Currently, the electricity demand peaks at just under 40 000MW.  Eskom projected than by 2030, the demand would be about 85 000MW, or about 4% compounded demand growth, every year.

There are two assumption behind this: one is that the economy will more than double over the next two decades, and that electricity demand growth is tied to economic growth.  The first is awkward to agree with, as we know that we cannot simply consume twice as much natural resources, such as fresh water.  Particularly with the reality of climate change upon us, water in particular is likely to become scarce, and along with that food production comes under pressure.  We cannot simply keep doubling our consumption.

The second assumption is just not true – it is well documented that economies tend to shift over time from dominance by raw materials and heavy industry, to a more service orientated economy (see The Structure and intensity of energy use: Trends in 5 OECD countries, R B Howarth et al.)   Sweden, as an example, used less electricity in 2009 (364 TWh) than it did in 1970 (375 TWh), but its economy has grown by a factor of 10 over the same period.

Reduction in industrial demand

If the projected supply and demand proceeds as predicted by the IRP 2010, there will be a time when there will be shortfalls (see http://www.miningmx.com/news/energy/power-situation-remains-critical-says-eskom-ceo.htm.) The threat of this will have at least three effects.

Firstly, electricity consumers in general, but large consumers in particular, will start to invest in energy efficiency.  This is a demand that disappears for good, as no company would remove efficiency measures once they are put in place.

Secondly, industries will start to look at methods of generating their own electricity, to reduce their dependence on the grid.  This will happen both via co-generation using existing processes, as well as via installation of technology such as wind turbines and solar photovoltaic arrays.  In all cases, once the generation equipment is in place, it will make economic sense to keep it operating for as long as possible.  With the cost of electricity rising, it is also likely to make sense to maintain or replace the generation equipment as required.  This means that this demand will be lost forever, as far as Eskom is concerned.

Thirdly, with the cheapest electricity in the world, South Africa was an ideal place to build intensive energy users such as smelters.  As this advantage is eroded by the steep rising price of electricity, these companies will think carefully when the existing plants reach their lifetime, or require major overhaul.  Closures will cause a sharp drop in demand, and reduce the percentage contribution to the economy made by energy intensive industries.

So, far from growing in lock step with the economy, electricity demand will be affected by efficiency, own generation and a shift in the industrial landscape.

Boom and Bust

Historically, Eskom has made poor choices in terms of allocation of capital to massively wasteful overcapacity. [International Journal of Regulation and Governance, Rationale for restructuring and regulation of a ‘low priced’ public utility: a case study of Eskom in South Africa Anton Eberhard and Msafiri Mtepa]. Past behaviour, it is said, is a good indicator for future behaviour, and indeed all the signs are there that Eskom is on the brink of repeating this mistake from the 1970s.  The pattern is to:

  • overestimate demand
  • embark on building large centralised generating capacity projects which take a decade or more to come online and incur large borrowing costs
  • incur massive cost overruns (e.g. Medupi will cost more than double the initial figure)
  • eventually be saddled with excess generation capacity
  • with an oversupply, look around for ways to sell large quantities of electricity
  • enter into long term contracts with intensive users such as smelters, at heavily discounted prices, sometimes below cost
  • forget about planning for the next three or four decades, until the next crisis

With Medupi, Kusile, and plans for six nuclear reactors, the first part of this pattern is already clear.  In particular, long term locked in options such as nuclear power plants, with 10 to 15 year lead times between ordering and switching on, are the worst options. Even the Department of Public Enterprises disagreed with Eskom’s demand forecast, and put forward their own projections, which were ignored for the purposes of the IRP 2010.

Conclusion

The one thing that we can be sure of about the future is that all our predictions will be wrong.  And in a changing climate, our plans should be flexible and able to respond to rapid change.  We should favour generation technologies which have shorter lead times, and plans that can be rapidly adjusted in response to actual demand, for example adding wind turbines or solar collectors.  Distributed renewable energy fits these needs perfectly, and would not only avoid huge debt from large centralised power stations, but also avoid the problems of fuel waste pollution.

Further reading:

Business Day Editorial: We need power … but that much?

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