DEVELOPING A DISTRIBUTED GENERATION/ CO-GENERATION STRATEGY IN SUPPORT FOR THE 30% PRIVATE SECTOR PARTICIPATION IN POWER GENERATION SECTOR N.T. Mutshidza**, O.D. Dintchev* ** Department of Minerals and Energy *Tshwane University of Technology ABSTRACT The South Africa’s power supply position is becoming 2. SOUTH AFRICAN ELECTRICITY MARKET increasingly insecure, as the margin between the existing generating capacity and increasing demand is 2.1. THE SUPPLY AND DEMAND ISSUES being eroded. Recent power shortages and especially the Western Cape electricity crisis, confirmed the The power generation market is South Africa is currently tightness of the current supply/demand balance. Of quite dynamic after many years of little activity. South the new capacity required to meet the country 4% Africa and the region are both running out of surplus GDP Growth and the targeted 6% GDP growth going capacity. In particular South Africa is running out of peak forward and other socio-economic imperatives, Eskom load capacity and hence the need for peaking type will be required to produce about 70% (in MW), with stations, particularly at the coastal centres that are far the remaining investment balance procured through removed from the base load power stations. Eskom’s private sector participation via direct (IPPs) or capital investment framework outlines that 10,000 MW of Distributed Generation (DGs) in the power additional capacity is needed by 2014. Current expansion generation. plans as approved by the Regulator in terms of the NIRP (2) taking into account some adjustment that was completed in 2004, has not managed to keep up with the 1. BACKGROUND growth in the economy, hence Eskom intervention strategy through Gen Plan and ISEP 10 and its revision to South African electricity demand is forecasted to grow cater for the latest development.. A new NIRP (3) is two fold over the next 20 years and the current expected late in 2007 which is expected to confirm an investment criteria continue to exclude distribute increased demand growth following Governments generation as a major contributor to ensuring security of increased economic growth targets leading up to 2010 and electricity supply. SA thermal and electric energy beyond. Eskom is facing a challenge to meet demand generation will cost about R173 billion over the next five growth. Annual demand growth in recent years has been years according to government investment plan and the growing at 3.5% year on year. Economic growth however National Utility (Eskom) will be responsible for almost has risen at a faster pace and it is expected that electricity R160 billion in its accelerated expansion programme demand growth will follow. In July 2004, new record including strengthening of the Transmission network peak demand was registered of 34,156 MW – 6.98% or capacity, while the private sector will be responsible for 2,228 MW higher than the previous year; depending on injecting R13 billion in the generation sector. The the severity of the winter a new record peak demand distributed generation will be a key player in this R 160 could once again be expected in 2007. Power cuts and billion accelerated programme with Eskom targeting interruptions have become more frequent and are 900MW from distributed generation, despite the lack of expected to increase in the short term. regulatory framework. Average pricing camouflages the on-peak costs of power and further lessens the chance of The Distributed Generation could assist South Africa in optimal generation selection. meeting its electricity sector demand and further critique its contribution to the 30 percent private sector Finally, heat and power generation cause 68% of participation in ensuring security of electricity supply. greenhouse gas emissions. Combined heat and power Particularly as it relates to expansion programme (CHP) plants achieve up to 95% overall efficiency – three targeting the following: times the traditional generation plant - by recycling normally wasted heat, but must be located at or near a) New/additional peaking generation capacity of 2,500 thermal users. The artificial barriers to distributed MW will be needed between 2007 and 2010; generation of electricity have prohibited the thermal b) Current surplus base load generation capacity in market from optimizing. South Africa will run out by 2010/11; c) It is expected that between 1000-2000MW of new capacity needs to be come on line every year starting about 2007. d) The Transmission network will have to be industrial production and electricity generation. In strengthened for the different corridors as illustrated addition Distributed Generation projects present ideal in the figure 1. below: options for: a) Meeting the aim of increased energy efficiency, b) Contributing to ensuring security of the already eroded electricity supply; c) As a vehicle to promote private sector participation in power generation efficiently. The development of a Distributed Generation sector could provide among others the following benefits: • Energy efficiency gains through improvements in fuel conversion efficiency and the use of waste Figure 1: Eskom Transmission network strengthening resources; requirements. Source  • Reduction in transmission losses from a decentralisation of electricity production – reduce From figure 1 it is evident that the corridor to the Cape effective demand to Eskom resulting in less output requires much attention as well as the one to Kwa-Zulu- and reduced GHG emissions Natal. This picture well illustrate why the Cape suffered • Environmental benefits from the possible blackout as well as brownouts when the Koeberg was mitigation of future environmental liabilities; down as the highveld was not able to transmit to the coast. • Possible reductions in greenhouse gas emissions (CO2, NOX and SOX); 2.2. DISTRIBUTED GENERATION • Provision of effective additions to the South African electricity generation base: Distributed Generation, sometimes called embedded • Modular, decentralized nature of Distributed generation, is electricity generation, which is connected to Generation allows for capacity to be added in step the distribution network rather than the high voltage with demand rather than in the ‘lumpy’ form of transmission network. It is typically smaller generation large power stations; such as renewable generation, including small hydro, • Bring capacity online in reduced time frame versus wind and solar power and smaller Combined Heat and large utility-scale power plants; Power. • Localised inside the fence generation – mitigating The development of Distributed Generation has an demand; important part to play in meeting the Government’s long- • Increased reliability and quality to the end user term environmental targets. – decreased dependence on centralized power Since Distributed Generation can meet both power system; and heat needs, it has other advantages as well in the form • Roll-out of projects can ease peak demand of significant cost savings for the plant and reduction in allowing for the improvement of reserve margins; emissions of pollutants due to reduced fuel consumption. • 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; • Environmentally beneficial technologies could simplify Environmental Impact Assessment (“EIA”) permitting process; • 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 Figure 2: A schematic network structure for Distributed power; Generation. Source  Distributed Generation, involving either the; decentralized This paper would try to present the rationale for production of both electricity and usable heat from developing regulatory framework as means to finding primary fuel (CHP) or production of decentralized practical solutions to accessing the benefits associated electricity from waste heat or unutilised industrial waste with DGs. fuel offers a logical means of mitigating wasted energy and harnessing the environmental benefits of optimised 3. DRIVERS FOR DISTRIBUTED 3.4. ENVIRONMENTAL SAVINGS GENERATION a) In addition to direct cost savings, Distributed Distributed Generation can significantly reduce energy Generation yields significant environmental benefits costs and greenhouse gas emissions, typically by up to through using fossil fuels more efficiently. In two thirds. Local air quality benefits can also be achieved particular, it is a highly effective means of reducing through the replacement of older coal-fired boilers. In carbon dioxide (CO2) and sulphur dioxide (SO2) addition to reducing operating costs, Distributed emissions, nitrogen oxides (NOx). Generation also increases resource utilisation. This is especially true given primary motivations, such as 3.1. EMISSIONS REDUCTION LAWS AND THE the production of industrial goods at lowest cost, in which CREATION OF ENVIRONMENTAL many industrial processes will tend to emit either usable MARKETS heat or waste as there may not be any other economically feasible way of disposing of the waste, as illustrated in the Following the ratification of the Kyoto protocol, diagram below: (developed) countries, are being forced to reduce emissions to 1990 levels by 5%. South Africa as signatory to the Kyoto protocol should tap into the benefits associated with GHG emission reduction certificates through carbon trading and other CDM related projects. It is common knowledge that for the world to progress in corrective manner and to win the fight against global warming, will need China as well as South Africa to have targets, hence the review in 2012 becomes crucial. 3.2. CONCERNS OVER FUEL DIVERSITY AND SECURITY OF SUPPLY Figure 3: Wasted energy from centralized power With the increasing globalisation of commodity markets, system in TeraWatt hours . Source [ 3] strong economic growth from China and India, and increasing socio-political volatility in the Middle East, the 4. BARRIERS TO DISTRIBUTED geopolitical risks in the fuel market have increased. This GENERATION has brought with it an increased risk of supply crunches, price spikes and the concomitant risk of blackouts, higher Given the benefits which could be delivered from the electricity prices and decreased economic performance. development of a Distributed Generation sector in South Distributed Generation with its multi-technology, multi- Africa the obvious questions arises as to why the sector location and multi-fuel options is seen an ideal solution has not developed significantly to date. The following for mitigating this risk and it present economies of scale reasons have been identified as possible current from location and timing point of view. limitations on the development of the sector: 3.3. ENERGY AND COST SAVINGS • Electricity market structure; • Current (low) price of wholesale power; A well-designed and operated Distributed Generation scheme will always provide better energy efficiency than • Lack of transparency in the application and conventional plant, leading to both energy and cost implementation process for project developers; savings. As a single fuel is used to generate both heat and • Perception that current process is overly electricity, so cost savings are dependent on the price- bureaucratic; differential between the primary energy fuel and the • Initial project development costs coupled with no bought-in electricity that the scheme displaces. However, ultimate certainty of a route to market tend to drive although the profitability of Distributed Generation away scarce corporate capital; generally results from its cheap electricity, its success • Variations in cost of capital amongst project depends on using recovered heat productively, so the developers are a seen a key feature of the current prime criterion is a suitable heat requirement. As a rough means of determining the required off take price; guide, Distributed Generation is likely to be suitable • Required payback period for industrials typically where there is a fairly constant demand for heat for at shorter than that of power generator increasing least 4,500 hours in the year (12 h a day). upward pressure on required prices; • Development of Distributed Generation projects The timing of the site’s electricity demand will also be seen as non-core by industrials due to lack of important as the Distributed Generation installation will incentives by policy developers. be most cost effective when it operates during periods of high electricity tariffs, that is, during the day. 4.1. REGULATORY AND MARKET BARRIERS 5. POLICY FRAMEWORK TO DISTRIBUTED GENERATION As outlined in the preceding section the development of a Although technologies used in Distributed Generation Distributed Generation sector in South Africa could systems have improved in recent years and DG has deliver significant social and environmental benefits. become cost-effective in many applications, significant When coupled with the challenges facing potential hurdles exist that limit widespread uses of DG’s. The Distributed Generation projects a strong case emerges in effect of these hurdles is to constrain use of DG systems, favour of a national policy framework to support the meaning that less-efficient conventional systems continue development of the sector. to predominate. The main hurdles to DG’s are: 5.1. DISTRIBUTED GENERATION • No national standards exist for the interconnection REGULATORY FRAMEWORK of distributed generation technologies to the electric utility grid, and as a result the monopoly A regulatory policy framework in support of Distributed utility impose onerous and costly studies, and Generation could be developed, embedded in this policy require the installation of unnecessarily expensive framework should be standards that among others will equipment to discourage DG. determine: • The national utility currently charge discriminatory backup rates and prohibitive "exit fees" to • The development of Distributed Generation customers that build DG facilities. regulatory framework to support environmental, • Current regulations do not recognize the overall energy efficiency and social benefits associated energy efficiency of DG or credit the emissions with distributed generation; avoided from displaced grid electricity generation. • The development of a Distributed Generation • Depreciation schedules for DG investments vary sector should proceed in a rational economic from 5 to 39 years depending on system manner and that consequently the cheapest, ownership, and frequently don't reflect the true quickest to deliver projects should be targeted economic lives of the equipment. first; • Many facility managers are unaware of technology • As a condition of licensing, a minimum portion of developments that have expanded the potential for electricity output on a year-by-year basis, should cost-effective DG. be sourced from qualifying Distributed Generation plants by the System Operator; 4.2. MARKET STRUCTURE • Both the long term contracting costs as well as ancillary costs to the offtaker (Eskom), from South Africa has a single buyer model for the electricity qualifying Distributed Generation capacity be fully market. Eskom generates about 95% of all electricity. The recoverable through a long arm PPA; remainder is generated by historically installed municipal • Procedures for pricing power to be supplied by and industrial plant, most of which is older than twenty Distributed Generators should be made transparent years and in many cases as old as forty years. No new through the Distributed Generation regulations and entrant is likely to enter and produce electricity at lower other piece of legislation; and prices than Eskom, which has the potential to stall • Standardised contracting procedures be developed government policy on diversification of primary sources and made available to the public through in power generation business. Access to the grid is also legislation to ensure transparent cost-effective an issue as wheeling tariffs are not transparently treatment for potential developers. available. The above proposal should be aligned to the South 4.3. PRICES African single-buyer model, and should remove the uncertainty surrounding capacity to be contracted with For potential Distributed Generators the limiting factor as Distributed Generators. Additionally the this should be to whether they develop projects will be whether they are configured to mirror Eskom’s stated objectives of able to earn sufficient return on their invested capital. For developing 900MW of Distributed Generation capacity Distributed Generators there are ultimately two possible over the next 5 years. means of generating returns on project capital: Depending on the implementation structure such • Sales revenue from electricity generated and on- regulatory framework could also serve as an enabler for sold or costs saved from energy not bought from the provision of financial support to qualifying generators. Eskom; and The determination of technologies and output to be • Sale of co-products such as steam for CHP covered by the regulatory framework as well as possible projects, or the reduction of co-product costs from financial support structures which could be enacted to alternative sources. ensure performance. 5.2. PROJECT TYPE It is intended that as part of their submission to the In order for a project to qualify for distributed generator Regulator, projects will indicate whether they wish to be status the electricity produced by the project will need to classified as a Type “I”, “II” or “III” Distributed be a co-product, by-product, waste product or residual Generation project, together with the intended fuel to be product of an underlying industrial process. For practical used as the basis for qualification. purposes the following types of projects are proposed as pre-qualifying for distributed generator status: 6. CONCLUSIONS a. Projects utilizing process energy which would Given the benefits identified from distributed otherwise be underutilized or wasted - Type “I” generation and the expected need for new capacity, projects. Distributed Generation offers a logical, ideal and timely means of bringing new capacity online. These would include but not necessarily be limited to the following project types: With Eskom pronouncement for supporting the development of 900MW of new distributed generation • Projects utilising waste heat from an industrial capacity over the next 5 years. All this sound good , process as the primary energy source to generate but without a clear regulatory policy framework will electricity - Waste Heat Recovery Systems mean nothing as Eskom will continue to inhibit any (WHRS). entrants to the market either for good or bad as there • Projects utilising waste or unused fuel, of a non- are no guiding framework on how to treat Distributed renewable nature, produced as a direct output of Generation projects as opposed to IPP’s projects. the underlying industrial process, as the primary Distributed Generation could be optimised in the way energy source to generate electricity. e.g. projects that brings the following benefits: burning waste flue gas to generate electricity. • Increased efficiency of energy conversion and b. Primary fuel based generation projects which use; produce, as part of their core design, other • Lower emissions to the environment, in usable energy in addition to electricity – Type particular of CO2, the main greenhouse gas; “II” projects. • In some cases, where there are biomass fuels and some waste materials such as refinery gases, These would include but not necessarily be limited to the process or agricultural waste (either anaerobically following project types: digested or gasified), these substances can be used as fuels for Distributed Generation schemes, thus • Combined Heat and Power (CHP) projects where increasing the cost-effectiveness and reducing the in addition to electricity the project produces need for waste disposal; consumable heat e.g. projects producing process • Large cost savings, providing additional steam or district heating type projects. competitiveness for industrial and commercial • Trigeneration or Combined Heat, Cooling and users, and offering affordable heat for domestic Power (“CHCP”) projects where in addition to users; usable heat the project produces usable cooling via • An opportunity to move towards more absorption cycles. For measurement purposes, and decentralised forms of electricity generation, given that the cooling is produced via heat where plant is designed to meet the needs of local utilisation, this would be treated the same way as consumers, providing high efficiency, avoiding a) above transmission losses and increasing flexibility in system use. This will particularly be the case if c. Renewable fuel based projects, where the natural gas is the energy carrier; renewable fuel source is both (i) the primary • Improved local and general security of supply - source of energy used for generation and (ii) a co- local generation, through Distributed Generation, product of an industrial process – Type “III” can reduce the risk that consumers are left without projects. supplies of electricity and/or heating. In addition, the reduced fuel need which Distributed These would include but not necessarily be limited to the Generation provides reduces the import following project types: dependency - a key challenge for Europe's energy future; • Projects utilising fibrous waste as the primary • An opportunity to increase the diversity of energy source to generate electricity e.g. bagasse generation plant, and provide competition in from the sugar industry or forestry waste from the generation. Distributed Generation provides one of paper and pulp industry. the most important vehicles for promoting • Projects utilising wastewater as the primary energy liberalisation in energy markets. source to generate electricity. 7. RECOMMENDATIONS • The PPA as a commercial contract should set a depreciation schedule for DG assets at 7 years, Eskom’s new build programme present solution for which reflects the true technical and economic life capacity shortage in the long term. The short-term of most systems. strategy of targeting 900MW from cogeneration or • The Government (DME) should enact tax credits distributed generation has regulatory challenges. The through the DNA to encourage efficient, low- strategy only gave Eskom discretion to take up a project emissions DG systems. at its own discretion and without any regulatory regime to • Eskom should implement interconnect and access govern the price methodology and commercial rules as set in the Grid codes favourable to DG, transactions. facilitate siting and permitting, cost-share DG feasibility studies, and review facilities for CHP In order to achieve level of supply from Distributed opportunities. Generation, the following should be recommended. 8. REFERENCES • That an explicit security standard should be established, as a basis on which to plan new  Eskom system operator report to the DME on capacity and to determine an appropriate Security of Supply. 2006 unpublished report. generation reserve margin, taking into account the  CHP Technologies and their impact on Energy contribution of Distributed Generation to avoid a use, LBNL, 1999;http://www.distributed- situation wherein Eskom wake up and just on ad- generation.com, hoc bases decide what power should come from  A draft position paper for review by stakeholders these distributed generators. in the Sugar and Renewable Energy Sectors title • That, instead of using Cost of Unserved Energy “Production and Use of Bio-ethanol in south (CoUE) to determine how much new capacity to Africa; add, the main criterion should be the defined  University of Cape Town Graduate School, IPP security standard, which will spell out the kind of Power Purchase Agreement Framework; technology and the defined time frame. workshop, Oct-2006, • That system security should be planned,  Eskom Wholesale Electricity Pricing System, implemented and monitored on a regional basis, to www.eskom.co.za; identify any regions where security is below the  Blueprint for Electricity Distribution Industry specified standard and where additional security Restructuring (2001): Department of Minerals and may be required. This will help developed regional Energy, RSA, http://www.dme.gov.za/ based distributed generation to beef up the specific  Cape Peninsula University of Technology (CPUT), region supply. www.cput.ac.za/icue06; • That clarity be sought with regard to export  COGEN Europe (2002) Towards a EU-wide contractual commitments and the impact on supply coherent approach to determining primary security. This should be seen from regional energy/greenhouse gas savings from CHP; collaboration in which, for example SASOL trade  Combined Heat and Power: Capturing Wasted Gas from Mozambique and as such could use such Energy. A primer on combined heat and power gas on Distributed generation, and then it should technologies. R. Neal Elliott and Mark Spurr, be clarified who bear the cost. 1999; • That the reliability of import arrangements and the  Deployment of Distributed Energy Resources: associated risks to security of electricity supply Sources of Financial Assistance and Information, should be monitored continuously on a published by the Federal Energy Management probabilistic basis, particularly for cross border Program in January 2002; players like SASOL.  Draft Biofuel Strategy: Department of Minerals • However, given that the price of power supplied and Energy; http://www.dme.gov.za from Eskom (as a monopoly) is expected to rise  Combined Heat and Power: significantly over the foreseeable future, it is The Efficient Path for New Power Generation, recommended that the focus on quantifying the http://www.aceee.org, ‘economic’ price of power be moved away from current prices and on to the cost of developing the 9. AUTHORS next baseload generating capacity in South Africa. In a single buyer model this effectively dictates the Principal author: Principal use of Eskom’s avoided cost as the basis for author: Mr. Mutshidza determining the economic efficiency of future Nndwamato Thomas holds Distributed Generation projects. National Diploma and • The Regulatory (NERSA) should develop Bachelor of Technology: guidelines for the purchase of backup and Power Engineering (TNG). supplemental power service for DG facilities at This paper is presented in fair and reasonable terms. fulfillment of the requirement towards Master of Technology Degree: Power Engineering (TUT). He worked as Lecture: Power Engineering (TUT). He further worked as an Energy Officer: Electricity Distribution (Dept. Minerals and Energy) and; currently he is working as Deputy Director: Electricity Generation and Transmission (Dept. Minerals and Energy), responsible for the procurement of new generation capacity through private sector participation in power generation in South Africa. Co-author: O.D. Dintchev is a professor at the Department of Electrical Engineering of the Tshwane University of Technology. His fields of expertise and interests are Renewable Energies, Sustainable Energy Management, Energy efficiency, Measurement & Verification, Rural Development Projects based on application of sustainable energy sources. e-mail contact addresses: email@example.com or firstname.lastname@example.org Presenter: Mr. Mutshidza Nndwamato Thomas.