General Introduction to Cogeneration (Context and Clarification)

1. General Introduction to Cogeneration (Context and Clarification) Energy Portfolio Committee Public Hearings on Cogeneration of Electricity25 July 2013K.M. NassiepCEO-SANEDI

2. mandate The National Energy Act, 2008 (Act No. 34 of 2008), Section 7 (2)provides for SANEDI to direct, monitor and conduct energy research and development, as well as undertake measures to promote energy efficiency throughout the economy. The South African National Energy Development Institute

3. What is cogeneration ? (1) International Definition “where a fuel source (eg. gas, biomass), produces energy (electricity), at the same time as producing thermal energy (heat), in one process”. Cogeneration = COGEN = CHP, (Combined Heat & Power)

4. What is cogeneration ?(2) International Definition, (interpreted) • Should not be confused with Waste Heat Recovery technology, with an efficiency of approximately 58 %. • Production of cooling is also possible under CHCP = trigeneration. • COGEN will achieve an overall efficiency up to 90%, (vs 35% of a conventional coal power plant). • Typically generated on-site at industries, or off-site for district heating (cold climates) and/ or district cooling, (hot climates) and needs a fuel source that may be procured separately, eg. piped gas or available on-site, eg. bagasse at sugar mills, which has some value , (can be fossil-based or renewable)!

5. Cogeneration, in the SA context? • NERSA’s COFIT originally included the concept of cogeneration, including industrial biomass, waste heat and waste fuels. • DOE reinforced this by excluding all Cogen (even from renewable fuels), from the RE-IPP programme. Any industrial onsite power generation, such as waste heat/ energy/ fuel recovery, to produce power (bottom cycling cogeneration), is regarded as cogeneration . This can and should be considered clean (renewable) energy, but is more in line with the generally accepted definition/s for Energy Efficiency.

6. SA COGEN-type Opportunities Presentations to follow by industry sectors, will probably cover : • On-site fuel used to generate power and heat – eg. fuel mainly produced from waste, such as Sugar, Pulp & Paper & the Food Processing industries, etc., ca 1500 MW potential; • Purchase of fuel such as natural gas, biomass or even coal, to produce power and heat (and sometimes cooling: trigen), with very high potential! • These have different features and requirements for investment. • All have an improved efficiency (to ca 85-90 %), as compared to stand-alone Eskom or other IPP condensing power, (ca 35 %)!

7. Common Features of COGEN • Far higher energy efficiency (up to 90%), than standalone Eskom, or other IPP condensing generation (25 - 35 %), with:- • lower greenhouse gas emissions; and • lower water usage. • Grid connection infrastructure (transmission,) already in place. • Generally far quicker implementation than green fields projects. • Higher load factors (typically 80 to 85%), as opposed to base load power generation. • No (or little) physical export (wheeling) of the power and hence no or low transmission and distribution losses. • Reliant on host operating fuel and/or heat/steam off-take. • Private sector will generally own and fund at a lower cost to consumers, (at a lower cost than other renewable energy solutions).

8. Why has there been little movement in SA? • South Africa has great potential for COGEN, which is the most efficient form of heat -associated power generation. • Why has very little happened – as compared to most other industrially developed nations? • No mechanism to incentivise industry, to make significant capital investment that is typically repaid over ca 10-15 years; • Difficulties (lack of clarity,) regarding grid access; • An ‘off-taker’ is required for any plant that goes into export; • There is no clear national long-term programme to procure cogeneration; • NERSA will not grant a COGEN license, unless it is part of IRP 2010 (although the IRP 2010 doesn’t explicitly recognise cogeneration), which then needs special DoE Ministerial permission for a Generating Licence; • Government has not made the regulatory environment ‘wheeling-friendly’; • Eskom’s charges for use of the networks for wheeling are far too high; • NERSA have not dealt with the issues around ‘wheeling rules’; and • No standard approach exists, to deal with ‘wheeling’ power though municipalities!

9. What should make COGEN work in SA ? • Looming power shortages and the shorter implementation period for COGEN. • Eskom historically has NOT been supportive, as COGEN competes with their generation capacity/ pricing. • Recent establishment of the Independent Power Producer (IPP) office is focussing on 20 year Power Purchase Agreements (PPAs), with all available supply having to be ‘sold’ to the Independent System Market Operator (ISMO):- • for guaranteed power is not preferred, as cogen linked to host operation cycles; • for delivered power like wind, solar has risks (& increases costs), as cogen plant may at times not operate; and • In any case, all or most power, will be used onsite to reduce grid demand!

10. What should make COGEN work in SA, cont’d ? • Special Purpose Vehicle (SPV) projects prefer some form of capacity payment for availability of power (to cover fixed costs), and separately, for variable power delivered; • Hosts can independently fund the investment, through ‘on balance sheet’ financing; • IDM (Capital Grant), has been effective and offers a much lower cost (42 c/kWh for 3 years), but has dropped as NERSA MYPD 3 assumes that Cogen will simply happen! • It has not and will only happen ‘naturally’ when power prices are at peak, with the alternative option of industry shutting down operations, as power is a major cost in most cases, leading to loss of economic value-add, beneficiation, jobs etc.. • Finance and cash flows need more money upfront and then support can eventually be phased out, over time.

11. Recommendations Broadly speaking, two clear enablers are needed : • Procurement Programmes - Power Purchase Agreements (PPAs), and/ or • Capital Incentives eg, Tax Incentives for Cogeneration Projects. General Areas to Consider: • Fixed capital grant as was done by Eskom-IDM office to accelerate investment at a low cost to SA, for embedded generation – REINSTATEMENT; • Fast tracking of PPA’s through the IPP office (recent RFR/I), to get projects to financial close asap, (before June 2014) – IN PROCESS; • Sector-based, standard PPA’s to enable sectors to have clarity and certainty of medium-to-long term policy direction and supporting regulations, to develop projects - LINK TO IRP & PLAN FOR COGEN; and Deal with the stumbling blocks identified, that are stopping good (low-cost, efficient, quick), projects, by providing certain, clear, timely & simple/ user-friendly guidelines, (especially for small projects/ companies, such as biogas from waste) – ideally upfront!