DEVELOPING A DISTRIBUTED GENERATION CO-GENERATION STRATEGY IN

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					      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 [1]                                       •      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 [2]
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            [1]    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      [2]    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            [3]    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           [4]    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,                 [5]    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        [6]    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    [7]    Cape Peninsula University of Technology (CPUT),
       region supply.                                                 www.cput.ac.za/icue06;
•      That clarity be sought with regard to export            [8]    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         [9]    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     [10]   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.                                     [11]   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          [12]    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: dintchev@icon.co.za          or
dintchevod@tut.ac.za

Presenter: Mr. Mutshidza Nndwamato Thomas.