INTEGRATED ENERGY PLAN PRESENTATION PORTFOLIO COMMITTEE ON ENERGY

20 NOVEMBER 2012

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HIGH-LEVEL APPROACH

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HIGH-LEVEL APPROACH

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KEY PLANNING PARAMETERS AND ASSUMPTIONS

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BASE CASEThe Base Case (also referred to as Baseline or Reference Case) encapsulates the state of energy demand and supply over the planning horizon, which is most closely informed by current energy market trends; the national macroeconomic outlook; assumed energy prices; existing energy infrastructure and the existing suite of policies and government programmes

The Base Case is not a representation of the most likely future or most likely scenario, but is rather a simplistic representation of a future outcome that could materialise in light of current policies and macroeconomic trends. It represents a Business-As-Usual or Status Quo scenario where current trends continue into the future.

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TEST CASEA deviation from the status quo where current trends do not continue into the future and deviations are as a result of specific policy interventions. A Test Case therefore defines a set of circumstances and resultant outcomes or impacts which is informed by the possible impacts of policies and policy interventions. A Test Case does not indicate what will happen but rather tests what could happen if a particular course of action takes place. While Test Cases are sometimes also referred to as scenarios, for the purposes of common interpretation, a Test Case is specifically differentiated from a scenario in that a scenario is largely influenced by exogenous forces which the policy maker has no control over.

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KEY GLOBAL PLANNING PARAMETERS

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KEY BASE CASE ASSUMPTIONS

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HIGH-IMPACT POLICY:COMMITTED IRP 2010

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Non IRP

Coal imports Nuclear

Import hydro

Gas – CCGT

Peak –

OCGT1 Wind CSP Solar PV Coal OtherDoE Peaker Wind2

Other Renew.

Co-generation TOTAL

MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW

2010 - - - - - - - - 380 260 - - - - 640

2011 - - - - - - - - 679 130 - - - - 809

2012 - - - - - - - 300 303 - - 400 100 - 1,103

2013 - - - - - - - 300 823 333 1,020 400 25 - 2,901

2014 500 - - - - 400 - 300 722 999 100 - 3,021

2015 500 - - - - 400 - 300 1,444 100 200 2,944

2016 - - - - - 400 100 300 722 200 1,722

2017 - - - - - 400 100 300 2,168 200 3,168

2018 - - - - - 400 100 300 723 200 1,723

2019 250 - - 237 - 400 100 300 1,446 2,733

2020 250 - - 237 - 400 100 300 723 2,010

2021 250 - 237 - 487

2022 250 1,143 805 2,198

2023 250 1,183 805 2,238

2024 250 283 - 533

2025 805 805

2026 -

2027 -

2028 -

2029 -

2030 -

Total 2,500 - 2,609 711 2,415 2,800 500 2,700 10,133 1,722 1,020 800 325 800 29,035

New build options Committed

The IRP committed build plan is included in the Base Case

Eskom Commitments (Pre IRP)2011 determinations2012 determinations

POLICY-DRIVEN PARAMETERS

• Annual Emissions Limits• Emissions Penalties• Minimum Renewable Energy Production• Reserve Margin

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POLICY-DRIVEN PARAMETERS: MINIMUM RENEWABLE ENERGY PRODUCTION

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MW MW MW MW MW MW

2010 - - - - - -

2011 - - - - - -

2012 - - 300 400 100 800

2013 - - 300 400 25 725

2014 400 - 300 - 100 800

2015 400 - 300 - 100 800

2016 400 100 300 - - 800

2017 400 100 300 - - 800

2018 400 100 300 - - 800

2019 400 100 300 - - 800

2020 400 100 300 - - 800

2021 400 100 300 - - 800

2022 400 100 300 - - 800

2023 400 100 300 - - 800

2024 800 100 300 - - 1,200

2025 1,600 100 1,000 - - 2,700

2026 400 - 500 - - 900

2027 1,600 - 500 - - 2,100

2028 - - 500 - - 500

2029 - - 1,000 - - 1,000

2030 - - 1,000 - - 1,000

Total 8,400 1,000 8,400 800 325 18,925

New build options Committed

Wind2Other

Renew. TOTALWind CSP Solar PV

• Electricity: Will be based on total renewable energy in IRP2010• Liquid Fuels/Petroleum: Regulations on Blending of Biofuels not yet

promulgated

RE IPP Window 1RE IPP Window 2Future Windows

RESERVE MARGIN

• The Energy Security Master Plan for Electricity, ESMP-Electricity, of 2007 recommended a reserve margin of 19% for electricity generation capacity in South Africa

• A reserve margin of 19% indicates the point where the trade-off between costs and reliability is minimum. (Based on costs as calculated during the drafting of the ESMP 2007)

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MACROECONOMIC INDICATORS• Discount Rate:

– 11.3% as provided by National Treasury

• Economic Growth: – Based on National Treasury 2012 Budget Forecast (Provided prior to

the 2012 Medium-Term Budget Policy Statements - MTBPS)

• Global Oil Price:– Based on the Energy Information Administration (EIA) Annual Energy

Outlook 2012 (AEO2010) Projections

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GDP GROWTH RATE

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Low growth scenario

Short Term Medium Term Long Term

2012 2013 2014 2015-2020 2021-2031

2.7% 3.0% 3.3% 3.2% 3.0%

Moderate growth scenario      

Short Term Medium Term Long Term

2012 2013 2014 2015-2020 2021-2031

2.7% 3.6% 4.2% 4.0% 4.0%

High growth scenario      

Short Term Medium Term Long Term

2012 2013 2014 2015-2020 2021-2031

2.7% 3.6% 4.2% 4.6% 5.0%

Base Case: GDP growth forecasts will be based on “Moderate Growth Scenario”

GDP growth scenarios are based on National Treasury 2012 Budget Forecast

GDP GROWTH RATE

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Low growth assumption:National Treasury 2012 Forecast then growth of 2.9% over the forecast periodAssumptions Upside RisksContinued skills constraints Strong commodity price growthInfrastructure bottlenecks Reduced skills constraintsLow global growth Reduced infrastructure bottlenecks

Improved global growth outlook

Moderate growth assumption:National Treasury 2012 Forecast, followed by Assumptions RisksContinued skills constraints Risks to the moderate forecast can be either up- or downside risksInfrastructure bottlenecks Upside risks to gorwth forecasts are the same as the risks faced in the low growth assumption

Downside risks to growth forecasts are the same as the risks faced in the high growth assumption

High growth assumption:National Treasury 2012 Forecast, Assumptions Downside RisksStrong commodity price growth Continued skills constraintsReduced infrastructure bottlenecks Infrastructure bottlenecksImproved global growth outlook Low global growth Skills shortage alleviates

GDP GROWTH RATE

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GLOBAL OIL PRICE PROJECTIONS• The Global Oil Price projections made by the Energy Information Administration (EIA) on an annual

basis within the Annual Energy Outlook, 2012 (AEO2012) have been used as a basis for the projection of future global oil prices for the purposes of the IEP

• The AEO2012 makes projections for High, Moderate and Low price scenarios which are informed by various assumptions about the global geopolitical and macroeconomic environment.

• The AEO2012 global oil price projections are defined as the average price of crude oil similar to the price for West Texas Intermediate (WTI) crude oil, which is traded on the New York Mercantile Exchange

• Although daily spot prices of crude oil from different sources vary, trends for annual averages are similar and therefore the AEO2010 projections deemed independent and reliable source of future projected prices

• Projections up to 2035: The key assumptions which inform the global oil price projections and the actual projections have been taken directly from the Annual Energy Outlook 2012, which has projections up to 2035.

• Projections from 2036 to 2050: The oil prices from 2036 and 2050 have been extrapolated using a straight line based on the average price increases of each of the three scenarios from 2012 to 2035.

• (More information available in the Annual Energy Outlook 2012 which is available at www.eia.doe.gov)

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GLOBAL OIL PRICE PROJECTIONS

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Historical Prices 2010 Projections from AEO2012 Extrapolation to 2050

ASSUMPTIONS FOR VARIOUS TEST CASES

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TEST CASESBACKGROUND POLICY QUESTION TEST CASEThe IRP 2010 determined that nuclear power should form a large part, about 20 percent by 2030, of the country’s energy mix from 5 percent in 2010. The Fukushima nuclear crisis of 2011 has made some governments around the world to rethink the role of nuclear energy.

What will be the impact of removing nuclear as an option on our targets to significantly reduce emissions by 42 percent by 2025 as outlined in the National Climate Change Response Policy (NCCRP)?

Test Case 1: In this case, the new nuclear build in the Policy-Adjusted IRP 2010 is excluded as a supply option. This implies that all the committed capacity from Policy-Adjusted IRP are included with the exception of new nuclear. Nuclear is replaced by the next best supply options as chosen by the model.

One of the recommendations from the National Development Plan was for other alternatives, such as liquefied natural gas for electricity generation, to be compared against the construction of a new nuclear fleet.The burning of coal is responsible for a significant amount of GHGs emissions. While new technologies such as CCS are being developed to curb the GHG emissions, the use of natural gas in power generation has gained steam.

What is the impact of removing nuclear and introducing more natural gas as an option on the total cost of energy and emissions target?

Test Case 2: The new nuclear build in the Policy-Adjusted IRP 2010 is excluded as a supply option. This implies that all the committed capacity from Policy-Adjusted IRP are included with the exception of new nuclear. The nuclear is replaced by natural gas supply options.

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TEST CASESBACKGROUNDAs a net importer of crude oil, South Africa is a price taker in the oil market and its market is highly sensitive to fluctuating global oil prices. The Department of Energy is in the process of introducing new fuel specifications (CF2) which will ensure refined product with reduced sulphur content and thereby reducing the quantity of pollutants and greenhouse gas emissions from the liquid fuel and transportation sectors.South Africa is currently also considering the construction of new refining capacity which would be aligned with these specifications. While mobility is a key contributor to energy demand, developments in technology could see the move away from traditional modes of transport to more efficient and less costly means of transportation. However for South Africa, it is assumed that traditional modes of transport (i.e. fuel-powered vehicles, with minimal penetration of electric and hybrid vehicles) will continue into the foreseeable future (NAAMSA presentation “Energy Planning Colloquium, March 2012”). The National Development Plan has presented five different options that South Africa should consider:1)Build new oil-to-liquid refinery2)Build new coal-to-liquid refinery3)Upgrade existing refineries or allow significant expansions of one or more of the existing refineries or both4)Import refined product5)Build a new refinery in Angola or Nigeria (and buy a share of the product of that refinery)

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TEST CASESPOLICY QUESTION TEST CASEAssuming more people will continue to drive fuel-powered vehicles as their primary means of transport well into the future, what is the best way of ensuring security of fuel supply in the country? (Note: Fuels pertain to final product and includes synfuels from CTL and GTL production processes).

The National Development Plan provides a high-level analysis of the advantages and disadvantages associated with each of the options presented therein. As South Africa is a price taker, when all other investment costs have been taken into consideration (capital costs, upgrade costs), the main differentiating factor is the input costs (in this case the price of crude oil). Equally important is the price of coal and shale gas. Therefore sensitivity analyses (of different crude oil price ranges) will also be conducted on all the alternatives considered.For given sets of crude oil price ranges and for each price range: Test Case 3: The cost of increasing refining capacity (green field refinery which could be crude oil, CTL or GTL as optimized by model) is determined together with total emissions.Test Case 4: The cost of upgrading/expanding existing refineries. In this option any production shortfall would be met by imports. (This test case takes into account possible upgrade of port infrastructure that may be necessary as well as the associated costs).

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ANNUAL EMISSIONS LIMITS• The South African Government has made a commitment to reduce emissions by

34% by 2020 and 42% by 2025 which was informed by the outcomes from a study on the Long-Term Mitigation Scenarios (LTMS)

• Two scenarios: – “Business As Usual” which led to a range of trajectories - BAU lower and upper bounds– “Required by Science” which led to the “Peak Plateau Decline” emissions trajectory

• The findings of the LTMS study also determined that South Africa’s energy use emissions constituted just under 80% of total emissions, of which the majority arose from electricity generation (40% of total emissions) in 2000.

• Emissions from oil refining and production of synthetic fuels (CTL and GTL) were estimated to contribute 9% towards total emissions. Therefore, total emissions from the energy transformation and conversion processes contributes approximately 49% towards total emissions.

• The “Peak Plateau Decline” trajectory will inform the emissions constraints for electricity generation and petroleum refining in one of the IEP Test Cases

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TEST CASES

BACKGROUND POLICY QUESTION TEST CASEAccording to the National Climate Change Response Policy (NCCRP), the energy sector contributes about 80 percent towards total carbon emissions for the country. South Africa has also committed to reducing emissions by 34 percent by 2020 and 42 percent by 2025 ‘below a business as usual baseline’. These targeted reductions in total emissions have been defined by the Department of Environmental Affairs (DEA) as the “Peak, Plateau, Decline emissions trajectory” and have further been translated into absolute reductions required for the entire country and by each sector based on contribution to the total.

What are the impacts of meeting the emission reduction targets as set by the Department of Environmental Affairs for the energy sector?

Test Case 5: Refurbish the existing fleet of plants so as to meet the targets set by DEA. Retrofit on the existing infrastructure. (Note: It is acknowledged a retrofit programme would still leave demand outstripping the supply of electricity).

Test Case 6: The energy sector should meet the 34 percent and 42 percent emissions reduction target no matter what. This includes mothballing the power plants that are responsible for emissions and investing in new technologies.

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EMISSIONS PENALTIES• In 2010, the National Treasury published a discussion

document on a proposed carbon tax policy• The policy document is near finalisation and could

potentially be promulgated in the short-to-medium term

• The introduction of a Carbon Tax has significant implications for the energy sector and will be considered as a Test Case in the IEP

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TEST CASES

BACKGROUND POLICY QUESTION TEST CASEIn efforts to support the country’s commitments of reducing emissions, the National Treasury has published a Discussion Documents which seeks to introduce a Carbon Tax across all sectors.

What are the possible impacts of the proposed Carbon Tax by National Treasury on the energy sector?

Test Case 7: Impact of the Carbon Tax on the choice of energy technologies throughout the entire value chain. The current proposal is a tax of R75 per ton of CO2 and with an increase to around

R200 per ton CO2 (at 2005 prices)

introduced as from 2015.

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PROGRESS TO DATE

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HIGH-LEVEL WORKPLAN COMPLETED TO DATE

Key Planning Assumptions

- Global Planning Parameters and Policy Assumptions informed by High-Impact Policies

- Key Macroeconomic Parameters/Indicators

- Assumptions underpinning Demand Projections

- Base Case versus Test Cases

Demand Projections

- Approach to modelling demand for energy services within all demand sectors

- Demand Projections

Key Policy Questions and Alternative Options for each

- Test Cases to be considered in the model

- Other Policy Options to be considered

Key Criteria and approach for evaluating model output (Outcome of Base Case and Test Cases)

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HIGH-LEVEL WORKPLAN STILL TO BE COMPLETED

Quality-checking and finalisation of technology data collected

Address any data gaps that may arise

Configuring of Model for Base Case and model runs

Configuring of Test Cases in model and Model runs

Analysis and Evaluation of model output

Report Writing

Table Draft IEP Report in Cabinet

Stakeholder Consultations on Draft IEP Report

THANK YOU

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