Jesse Burton 24th October 2016 Jesse.Burton@uct.ac.za 1 The - PowerPoint PPT Presentation

Jesse Burton 24th October 2016 Jesse.Burton@uct.ac.za 1

 The mitigation challenge  Energy markets – technology prices and coal markets  South Africa’s INDC and climate change commitments  South Africa’s committed emissions  Making a ‘fair share’ mitigation contribution: effects on the power sector and liquid fuels  Moving forward: the coal sector 2

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Pfeiffer et al 2015 4

Geden, 2016 5

Developed reserves vs carbon budget 6

Unburnable reserves 7

Climate Action Tracker 8

INDCs and 2 degrees  “There remains a substantial gap between what governments have promised to do and the total level of actions they have undertaken to date. Furthermore, both the current policy and pledge trajectories lie well above emissions pathways consistent with a 1.5°C or 2°C world .”  December 2015 - INDCs likely below 3°C and over 90% chance exceeding 2°C  The emissions pledge pathway that includes INDCs has over a 90% probability of exceeding 2° C, and only a ‘likely’ (>66%) chance of remaining below 3°C this century. The current policy pathways have a higher than 99.5% probability of exceeding 2°C.  Climate action tracker 9

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Large cost declines 11

South African costs 12 CSIR, 2016

Rapid uptake 13

Coal markets  Peak demand (Goldman Sachs, Deutsche Bank, Bernstein, Citi)?  Structural vs cyclical?  Recent price rally due to Chinese policies  not long term structural recovery  US and EU are transitioning – slowly – away from coal  Not just ‘greenies’ – economics of coal no longer competitive (eg USA) 14

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PPD vs South Africa’s fair share 700.00 700 600.00 600 500.00 500 Base 14 Gt 400.00 400 300.00 300 10 Gt 200.00 200 100.00 100 0.00 0 PPD Upper PPD Lower PRIMAP 90th PRIMAP 10th Base 10Gt Constraint 14Gt Constraint Source: Burton & Caetano 16 2015

Infrastructural inertia: committed emissions What level of emissions is South Africa locked into? 17 Burton et al 2015

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 Previous work has examined the effects of meeting approx. the mid- range of South Africa’s NDC (14Gt carbon budget to 2050)  Extended to assess effect of 12 and 10Gt constraints on power plant utilisation  Implications – below 14Gt, substantial stranding of power sector assets (old and new)  Exacerbated if CTL not stranded (2040 plant life)  Other infrastructure stranding not detailed eg rail, road, and water investments  No detail on firm-level fossil fuel stranding (future work) 19

Key terms  Stranded assets are defined as assets that “have suffered from unanticipated or premature write- downs, devaluations or conversion to liabilities” (Caldecott et al, 2014)  “Stranded capacity” is the underutilisation of existing plant, which when run at very low load factors renders those plants uneconomic (Johnson et al, 2013) or results in earnings foregone  Technical vs transition costs: costs of investment in new technology vs costs of underutilisation of preexisting, high carbon infrastructure 20

Research questions  What is the effect on the South African energy sector of the country meeting a fair mitigation burden?  What are the impacts of different carbon budgets on infrastructure (under-) utilisation?  What are the trade-offs of not mitigating in non- electricity sectors? 21

Model and scenarios  South African Times Model (SATIM)  Full energy sector model  Least-cost optimisation:  meets projected future energy demand, given assumptions such as the retirement schedule of existing infrastructure, future fuel costs, future technology costs, learning rates, and efficiency improvements, as well as any given constraints such as the availability of resources  10, 12, and 14Gt CO 2 -eq (2015-2050) constraints imposed for comparison 22

Assumptions  Altieri et al (2015) for full set of assumptions  Assume retirement as per Eskom (IRP)  Power plant cost and performance parameters were aligned to the IRP update assumptions (IRP Update 2010, 2013)  updates on the investment cost for nuclear, CSP and PV derived from recent work within ERC (Merven et al. , 2015)  And coal supply as per Merven et al (WB and CB separated; old contracts) 23

Carbon constraints – electricity Burton et al 2016 24

NDC vs higher ambition - elec 700 Imported Electricity (Gas) Imported Electricity (Coal) 600 Imported Electricity (Hydro) Biomass Electricity Production (TWh) 500 Pumped Storage Hydro domestic 400 Wind Central Solar PV 300 Solar Thermal Nuclear 200 Coastal Gas Gas Domestic Shale 100 Gas from N Moz Inland Gas Plants 0 OCGT diesel 2010 2015 2020 2025 2030 2035 2040 2045 2050 2010 2015 2020 2025 2030 2035 2040 2045 2050 2010 2015 2020 2025 2030 2035 2040 2045 2050 New Coal 10 Gt constraint 12 Gt constraint 14 Gt constraint Existing Coal 25 Burton et al, 2016

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Load factors for coal fleet 27

Higher ambition plus Sasol fixed 700 Imported Electricity (Gas) Imported Electricity (Coal) 600 Imported Electricity (Hydro) Biomass Electricity {Production (TWh) 500 Pumped Storage Hydro domestic 400 Wind Central Solar PV 300 Solar Thermal Nuclear 200 Coastal Gas Gas Domestic Shale Gas from N Moz 100 Inland Gas Plants OCGT diesel 0 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 New Coal Existing Coal 10 Gt constraint 12 Gt constraint 10 Gt constraint SAS 12 Gt constraint SAS 28

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Electricity prices  Driven by new investments in RE  But also by ‘transition costs’  The costs of not recouping investments made in coal plants 30

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12 vs 12SAS  Cumulative investment is similar  But have to build new generation capacity much earlier and strand coal plants  So higher prices from 2030s onwards for the same electricity output  T he “transition costs” are borne by electricity users 32

Conclusions  Committed emissions are already very high (at least 7.4Gt) and given long lives and inertia, investments in emissions intensive infrastructure should be carefully considered  Socio-economic consequences of stranding assets in South Africa are likely to be substantial - even with optimistic export assumptions  Mitigation policy needs to be “least - cost” and integrated  ie an IEP, not a grandfathered IRP  Trade-offs between sectors need to be better understood 33

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understanding and planning a transition  Coal prices have doubled in the past 5 years  And will on average continue to increase  Costs of rehab fall to Eskom and not adequately covered  Global demand will likely flatten in the medium term  This will – again – raise domestic prices in general  RE costs falling and significant uptake globally  Increasing global pressure as INDC are reviewed and ratcheted 35

Just transition?  South Africa needs a plan to avoid carbon lock-in and the costs of stranding assets (mines, rail, ports, roads)  No new coal unless it is replacing old, inefficient and expensive plants  We need to develop retraining packages and programmes for workers  We need to understand options for social intervention for local communities 36

Just transition?  In a future carbon constrained world, there will be limits to both use and extraction. We need to understand the trade offs between major consumers and multiple producers of coal.  A key question is who gets to extract their coal and for whom?  Political ramifications depend on which plants and mines are affected  Macro political & economic question  Social question at micro level 37

 Thank you! Questions?  Thanks also to my colleagues at the ERC, who have spent years developing the model used for this study and have spent days explaining to me how it works:  Tara Caetano, Bruno Merven, Alison Hughes, Adrian Stone, Bryce McCall, and Fadiel Ahjum 38

References  Burton, J, Caetano, T, Hughes, A, Merven, B, Ahjum, F, McCall, B (2016) The impact of stranding power sector assets in South Africa: Using a linked model to understand economy-wide implications 39