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The challenge of fossil fuel binding constraints

18th January 2013

By: Saliem Fakir

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Despite the failure of the recent round of the Doha climate change talks, the national project on a low-carbon transition requires continued impetus.

South Africa is vulnerable economically from carbon intensity and climate change: its economic growth model is based on a high dependence on fossil-based energy production and use. Coal meets 66% of the fossil fuel demand and accounts for 86% of electricity generation. The heavy dependence on coal also makes South Africa one of the largest emitters of greenhouse gases in the world.

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There is also coal-based liquid fuels produced synthetically and close to 60% of imports of oil from overseas. Both dependences will ensure future systemic risks and price volatility and put a strain on the management of costs owing to rising prices driven by growing global demand or the continued fluctuation of our currency.

The challenge to manage various shifting variables associated with the demand and supply of these resources presupposes sound coordination, an aspect where we seem to have floundered in the last few years – if one considers the fuel shortage crises in the past and the battle to secure long-term coal contracts at affordable prices.

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Traditionally, coal and oil were regarded as cheap sources of power and fuel for transport. But, as global demand for both resources grows, despite their abundance, the costs of these fuels are unlikely to be at historical lows, where they remained for a good decade in the past.

Further, resource hunger will drive the scarcity value of these two critical fuels for our economy. The easiest to mine and cheapest coal deposits in South Africa have reached peak pro- duction. The availability of coal from new deposits, such as the Waterberg, will require extensive new infrastructure in the form of rail, roads and water-related infrastructure.

There are differences of opinion among coal mine experts regarding the economic viability of coal in the Waterberg that can be mined as well as the quality of this coal. These deposits may also have much lower calorific values than the best coal deposits.
Given that coal type and quality can have a major impact on power plant heat rates, capital costs, generating effi- ciency and emissions performance, as well as on the cost of electricity, the risks associated with low-quality coal are high for the country.

On the costs front, in general, the cost of coal, owing to growing international demand, will rise and be subject to some degree of volatility. Research indicates that coal prices have correlated closely with crude oil prices in rand terms since at least the beginning of the 1980s. The high degree of correlation of long-term coal and crude oil price movements in rand terms is not widely appreciated and the common belief appears to be that rand coal prices move less rapidly than rand oil prices over time.

The correlation indicates that, with oil prices rising in the future, there will be significant price risks posed to the economy by coal. There is also a great deal of uncertainty regarding how fossil fuel prices will behave in the future because they are affected not only by demand and supply lag problems, but also by strategic consolidation of deals/contracts and purchasing at the downstream end by the world’s major economies, which have the finances and State-to-State relations to do so.

Finally, with the future being increasingly carbon constrained, coal is not an option that would be available to the country for long to meet its growing electricity demand. These constraints will also demand that cleaner coal technologies (CCT) be put in place to enable cleaner burning of coal in conventional steam turbine plants using either new combustion technologies and pollution-control devices or sub- stituting coal- derived gases for natural gas in gas turbines. The term ‘CCT’ typically covers every option capable of reducing emissions upstream, downstream or within the power generation process.

The most common CCTs include supercritical and ultrasupercritical pulverised coal technologies, circulating fluidised-bed combustion and integrated gasification combined cycle. These CCTs may be with or without carbon capture and storage (CCS). Most of the CCTs have been demonstrated on utility-scale plants and are increasingly being deployed, but they are more expensive than conventional alternatives.

Moreover, some energy penalty may be associated with CCTs like CCS or sequestration technologies. Estimates indicate that the energy penalty of CCS is in the range of 20% to 30% of electrical output. However, since no full commercial systems are yet in operation, this is yet to be confirmed.

In the case of CCS, specifically, the future cost will depend on the technologies that are used, how they are applied and how far costs fall as a result of research and development and learning realised during market uptake. The shift to CCTs and CCS will certainly make renewables more competitive.

South Africa is involved in developing CCS options through the Carbon Capture and Storage Centre, which has done an assessment of geological storage facilities. The optimal sites are offshore. The economic viability of these sites is unproven. However, there are strong indications that, in the end, the cost of CCS could prove to be prohibitive and may limit the extent to which CCS is a solution.

The irony of all of this coal push is that prevailing realities will push us onto a low-carbon journey with or without a climate deal.

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