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Eskom continues to implement IPP procurement programme

24th November 2017

     

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By: Thava Govender

The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has its foundation in the Integrated Resource Plan 2010 (IRP 2010), which was promulgated in March 2011.

The IRP identifies the preferred technology to ensure the sustainability of South Africa’s electricity system, while meeting expected demand growth to 2030. It incorporates several government objectives, including the provision of affordable electricity and carbon mitigation.

Following the promulgation of the IRP 2010, the Department of Energy (DoE) developed plans for the implementation of the IRP, starting with Ministerial determinations, which were issued in accordance with Section 34 of the Electricity Regulation Act. The determinations give effect to the proposed capacity plan by facilitating the procurement of capacity from independent power producers (IPPs) through programmes run by the DoE. So far, the Minister of Energy has ‘determined’ more than 39 000 MW of generation technology to be implemented. Eskom has been designated as the buyer for the bulk of this ‘determined’ capacity. A government support framework agreement (GSFA) was put in place to assure IPP developers that, in the event of Eskom not being able to pay for the energy they generate, government will provide assistance.

Under the Ministerial determinations, a total of 13 225 MW was to be generated from renewable-energy sources, with an expectation of connection to the grid by 2025. To date, Eskom has signed 64 power purchase agreements (PPAs) for a total of 4 000 MW under the REIPPPP’s bid windows 1, 2, 3 and 3.5. As at September 30, a total of 3 262.04 MW was operational and being made available to the grid.

The Minister of Energy has also requested Eskom to sign additional capacity under Bid Window 3.5 (100 MW) and Bid Window 4, including the extension of Bid Window 4 (2 206 MW). The signing of these contracts is still outstanding.

Circumstances have fundamentally changed since the IRP 2010 was promulgated, with electricity demand being lower than what was anticipated in the IRP 2010. However, the implementation of the determinations and the Eskom build programme have continued at a pace similar to that anticipated in the IRP 2010, resulting in excess capacity, which is likely to continue for a considerable period, not counting the additional capacity that has been determined by the Minister but not yet signed by Eskom.

Eskom understands that it must comply once a Ministerial determination has been made and all the statutory and contractual obligations have been complied with, as envisaged in the relevant legislation. However, Eskom must act as a responsible organ of the State and exercise its fiduciary duties on a prudent basis. Accordingly, Eskom initiated a process with government stakeholders to investigate the need for new generation capacity at this juncture. This has delayed the signing of IPP contracts over and above those requested recently by the Minister of Energy.

In compiling the multiyear price determination application, the expected costs of IPPs were included. A requirement of the GSFA is that projected energy purchases and associated costs that are to be included in the revenue application must receive government approval. For this revenue application, this information was requested during June 2016 and the input from government departments was then used in the application and also included in Eskom’s production planning process.

Owing to the significant time lapse since input was received from government – in August 2016 – and the delay in the formalisation of the agreements, the Eskom submission significantly overstates the revenue requirements for IPPs. However, it is understood by Eskom that the National Energy Regulator of South Africa will make the necessary adjustments to the allowed revenue. In the application, Eskom has indicated the costs for IPPs at R34.2-billion. This constitutes 5.5% of the price increase. However, should the necessary adjustments be made to the IPP revenue requirements, this figure may decline to R27-billion. Eskom’s own generation costs will have to increase to accommodate the energy required to meet the shortfall caused by this adjustment.

The energy prices arising from the REIPPPP have been declining with subsequent bid windows – partly because of increasing competition in the bid process and the improved credibility of the process, but also owing to the progressive reduction in technology costs. Thus, the capital and operational costs need to be accommodated.

These cover the full cost of constructing and operating the power station. However, the short-run marginal cost of operating a renewable-energy facility is effectively zero, as the bulk of the costs are in the construction and become sunk costs once the facility is operational. This is in contrast to facilities that require a fuel input (such as coal or gas), where the incremental cost will generally align with the cost of the additional fuel input. Thus, a renewable generator is often treated as a ‘must-run’ plant, dispatched before all others, leading to the dispatchable generator focusing on the residual demand (the total energy demand less the energy produced by renewable generators).

  • Govender is group executive for transmission at Eskom

Edited by Creamer Media Reporter

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