A study conducted by global growth consultancy firm Frost & Sullivan, estimates that the independent power producer (IPP) market is set to take off from 2007. Multiple projects currently in the pipeline across the region will trigger the market to grow to earn $13,25-billion in 2012.



The ineffectiveness of Southern African utilities in delivering required amounts of electricity in a cost-effective and continuous manner is an ongoing cause for concern. As a result, there is a clear need for private companies to assist national utilities in expanding their generating capacity.



“The economies of the southern region of Africa are faced with a growing demand for electricity. Booming economies, coupled with the implementation of electrification programmes, have culminated in higher than expected demand,” says Frost & Sullivan industry analyst Fabrice Essono.



IPPs will become an option in the future, and the power they produce must be made available to supply the country within ten years, as this is when Eskom is expected to reach its full generating capacity. It is estimated that current capacity plants will reach the end of their life cycle by that time, states Eskom’s demand-side management operational guide.



However, the current price of electricity does not reflect the cost of generating this electricity for IPPs. This poses a hindrance for global companies looking to invest in the region, says Essono. Add to this the fact that IPPs do not have the same benefits of support that State-owned utility Eskom enjoys.



“The financial model used by Eskom is undervaluing the cost of production. Consequently, selling electricity at Eskom’s rate would be unsustainable for private producers,” says Essono.



The general investment environ- ment for IPPs lacks incentives, resulting in the unwillingness of banks to participate in IPP projects. “Key is not the investment itself, but whether the investment will bear fruit,” says Essono. IPP contracts are complex and investors want to feel secure in their investment.



International company CIC Energy Corp is expected to meet with Eskom’s board to discuss the power-purchase agreement (PPA) pertaining to the Mmamabula energy project in Botswana. If successful, this PPA negotiation can be used as a blueprint for other independent power producers nego-tiating for power-purchase agreements within Southern Africa.



The price of electricity must reflect the demand, as opposed to the contract stating what it should cost. It must be sold for the market value. An independent regulator will set the price of electricity, taking into consideration how much electricity is to be generated. This is important for the end-users of electricity. “The independent regulator will thus look at the power generation sector to set the price of electricity, while IPPs can be confident of the fairness of the prices,” says Essono.



Essono warns that with the implementation of IPPs, South Africans must accept that they are going to pay more for electricity, owing to supply shortages.



One way to mitigate these shortages is to promote congenration projects, where electricity is produced as a by-product of an industrial process.



Energy-intensive companies can use this as an additional source of power, provided that it is financially viable. If Eskom offered incentives for cogeneration, the option should exist to sell any additional power back to Eskom. With the additional power, Eskom could meet existing domestic demand and possilbly sell more electricity to other countries, such as Namibia, explains Essono.



The legislation governing the issue of cogeneration power is currently under review.