25 May 2011

The sins of the forefathers revisited? Thinking ahead - a base case for independent renewable energy production

Climate change is no longer just a topic of conversation amongst the bunny huggers over a cup of green tea. A recent study entitled "Climate Change: risks and opportunities for South Africa" (South Africa Climate Change Study) concludes that climate change is now also a commercial concern. It motivates for "proactive responses across the private and public sector to effectively address climate change in South Africa". When one combines this sentiment with South Africa's immediate struggle to meet its energy supply demand, the case for renewable energy power generation assisting with that supply makes perfect sense. Why, then, isn't everyone doing it?

Historically, renewable energy projects have been considered administratively burdensome - too expensive to develop and operate (particularly since there has been no appropriate cost recovery mechanism for these projects) and not as efficient as coal fired power stations. While these concerns may still hold true to some extent, they are outweighed by various factors. The demand for energy supply far exceeds Eskom's current installed capacity, as the main producer of power for South Africa, to construct and develop either traditional coal-fired power stations or renewable energy power stations without the assistance of the private sector.

Urgent action must therefore be taken:

• to alleviate the pressures of meeting our future energy demand in a sustainable manner;

  • to assist the South African government in achieving its commitment to facilitate the generation of 10,000 GWh of energy from renewable sources by 2013;
  • to mitigate the adverse effects of the climate change crisis blamed to a large extent on traditional coal-fired power stations;
  • to address the impact of these adverse effects on South Africa's climate competitiveness; and
  • to address the increased consumer cost should Eskom have to foot the climate change bill alone.

Independent power producers (IPPs) may well, in terms of Phase 2 of the National Energy Regulator of South Africa's Renewable Energy Feed-In Tariff (as read with the Electricity Regulations on New Generation Capacity published in 2009), be entitled in future to sell power directly to consumers rather than via Eskom and/or the mooted independent systems operator. This is still somewhat uncertain and increasingly South African corporations are considering the benefits of producing their own power in the form of captive power generation, utilising, amongst other things,

renewable energy sources and/or discard coal. Save for the potentially high infrastructure cost implications (some of which could be recovered through the sale of voluntary or certified carbon emission reductions), and the potential delay attaching to obtaining the requisite environmental authorisations and other potential grid connection requirements, there is no major impediment to South African corporations generating of electricity for their own use.

Apart from making triple-bottom-line (social, environmental and economic) sense, IPP renewable energy power generation makes commercial and legal sense.

According to a study by the Climate Institute in 2009 (referred to by the South Africa Climate Change Study), South Africa ranks 16/20 on the G20 low carbon competitive index. High carbon intensity electricity production is one of the primary reasons for its low ranking.

The South Africa Climate Change Study states that "the high carbon intensity of the South African electricity grid remains a constraining factor for climate competitiveness for all sectors of the economy". While the South African government's approach to business' role in addressing climate change has been criticised, our legislation already requires that business play a significant role in addressing climate change. The South Africa Climate Change Study reports that "it would not be surprising to see certain businesses leading the way for the decarbonisation of the national electricity grid, linked to increased scope for independent clean energy producers and the identification of commercial low carbon energy solutions".

Although South African environmental law is considered to be fairly progressive, there is still no climate change legislation. However, in seeking to address the impact of climate change on South Africa (and the energy supply demand), environmental and fiscal policy is increasingly driving independent renewable energy generation. Electricity generated from renewable energy sources is exempt from the 2 c/kWh levy imposed on electricity generators in terms of the Customs and Excise Act.

The National Climate Change Response Strategy highlights the need to reduce dependency on fossil fuels, enhance energy security and decrease greenhouse gas emissions. In December 2009, South Africa proposed a national emissions peak by 2020 - 2025, a plateau for a decade and then a decline from 2035. Rating climate change as priority 5, the draft National Strategy on Sustainable Development for 2010 to 2014 proposes various mitigation interventions including a carbon tax, incentives and subsidies for renewable energy sources and technologies, the promotion of energy efficiency and the speeding up of processing of clean development mechanism projects. In addition, the Department of Environmental Affairs, in line with the National Electricity Response Plan (NERP), has published draft guidelines aimed at the short term acceleration of the environmental impact assessment process required for the construction of certain electricity related facilities regulated under the NERP, (and which will not necessarily only be those owned or operated by Eskom).

In expanding on the principle of sustainable development, the National Environmental Management Act's duty of care requires every person who causes, has caused or may cause significant pollution or degradation of the environment to take reasonable measures to prevent such pollution or degradation from occurring, continuing or recurring. That duty applies to significant pollution or degradation that arises or is likely to arise at a different time from the actual activity that caused the contamination.

This imposes a positive duty on all entities which are negatively affecting climate change to take proactive reasonable measures to curtail their impact, including, where it is appropriate, by investing in projects such as renewable energy. Such investments will, in addition to improving South Africa's climate competitiveness, fulfill that duty.

In considering the potential implications of a failure to abide that duty in the context of contributions to climate change, it is worth noting the recent United States Supreme Court of Appeals judgment (State of Connecticut versus American Electric Power Company) which held that federal courts are empowered to and, in fact, must hear actions based on an argument that climate change creates public nuisance, more particularly since, like South Africa, there is no federal law on climate change in the United States.

The all round cost of implementing these projects now, compared with the increasing costs (be they social, commercial, economic or environmental) attaching to a future without such projects, is insignificant.

The bottom line: renewable energy power generation now, more than ever, makes sense.

Justine Sweet, Senior Associate, Environmental

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