Estimating the opportunity cost of water for the Kusile and Medupi coal-fired electricity power plants in South Africa

Abstract

In South Africa, water is considered a limited source, not only because of the country’s arid nature, but also because of the relatively skew distribution of the resource and the fact that 98% of the resource is already allocated. Eskom, the South African electricity supplier, commenced with the construction of two new coal-fired power stations namely Kusile and Medupi. The question is: what is the opportunity cost of investing in these power stations from a water perspective? We do not argue here against the need for power plants and additional electricity generation capacity per se, but consider the opportunity cost of using this specific technology. We estimate the shadow price of water for different power generation technologies as an indicator of the opportunity cost of water. We apply a production function approach for a baseline case (coal-fired power generation using the Medupi and Kusile parameters), and four alternative technologies. The only alternative that performs worse than the baseline case is the traditional wet-cooling coal-fired power process. The baseline case, however, does show a high opportunity cost when compared to renewable alternatives (solar, wind and biomass) ranging from R0.66/kWh (biomass) to R0.83/kWh (solar) to R1.31/kWh (wind).