LEPHALALE – State-owned electricity enterprise Eskom was going all out to claw back cost escalations as the price tag of the giant Medupi power station under construction here had risen to close to R120-billion from an initial R78-billion, Eskom chief officer power generation Brian Dames said on Friday.

Dames told Engineering News Online, during a media visit to the 4 800 MW Medupi coal-fired power station project in Lephalale, that the rise to R120-billion was the result of higher interest charges, commodity prices and changes to the scope of the project.

“The cost-reduction target that I have given the team, just for Medupi and Kusile, is a target closer to between 15% and 20%. I think that is going to be tough, and what we are really realistically working towards and what I think is achievable, is certainly a 10% saving on what we currently have in place, around Medupi and Kusile,” Dames told Engineering News Online, Kusile being Eskom’s large coal-fired power station being built in Mpumalanga province.

When Eskom had done its initial estimate, Dames said that Medupi’s escalation had been very close to inflation.

“But, certainly, what we’ve seen is something totally different,” he told Engineering News Online.

Higher interest rates were the single biggest driver of the cost escalation: “The interest charge has gone up significantly, given the changing market,” Dames said.

Commodity prices, which had moved up significantly, had now fallen, and Eskom was already reaping some of the benefits of that fall.

Changes made to Medupi’s project scope had, however, added just over one-fifth to the cost.

“The markets have significantly changed on us. When we started the build programme, it was at the peak, and we contracted at the peak for equipment.

“Things have changed currently, and there are opportunities certainly to see the escalation of our costs turning down, because of lower commodity prices, and we are seeing some of those benefits.

“Also, we are taking quite a long time before we contract the outstanding contracts to make sure that we explore the market opportunities to their fullest and in that way make sure that, as Eskom, we contribute to keeping our capital expenditure down to the absolute minimum,” he said.

Steps to reduce capital expenditure would include: the renegotiation of escalation clauses in contracts, taking advantage of lowering commodity prices, and considering different design options.

“We have done very specific work. We have carried out crossfunctional engineering and every one of our suppliers has worked with us to see how we can optimise.

“For example, on design of the air-cooling condensers, we are contemplating not putting in all of the rows of fans, and installing the full set later, and in that way deferring some of the capital.

“We might also save capital by not building a railway line right now for the transport of lime, and there are many other examples,” Dames said.

On the scope-change cost escalation, Dames recalled that Eskom had had to fast-track Medupi: “We used Majuba’s footprint, we had no designs, we had no soil conditions and we had no contracts.”

As a consequence, scope changes had had to be made and those changes had contributed “just over 20% to that increase", to close to R120-billion.

On contract delays, Dames differentiated between the “contract schedule” and Eskom’s date of completion and said that rock conditions on site were the main cause of the six-month slippage of the “contract schedule”. In terms of the “contract schedule”, the first of the six 800-MW Medupi units are meant to be completed by September 2011, but in terms of Eskom’s schedule, the first unit must be completed by April 2012, “which it will”, Dames assured journalists.

“We have just had to lower the site a lot more, which meant a lot more additional work, before we could get to the final rock,” Dames explained.

Also, the design of the turbine base for the Medupi site was distinctly different to what Eskom was used to, and the engineering teams had taken a “significant amount of time, and rightly so”, before signing off on it.

Another impact, was an issue around procuring labour and the subsequent strikes.

“But, that impacts on the internal contractual date only. So, when contractors talk about delays, and they have been, that’s what they are referring to,” Dames said.

“On the other hand, we have seen lower productivity from our contractors, and that’s something that we are working on and, I think, now they are starting to pick up,” Dames added.

PUBLIC-PRIVATE PARTNERSHIPS

On the possibility of Eskom striking up public-private partnerships (PPPs) to assist with the development of the Medupi, Kusile and Ingula projects, Dames said that Eskom was not averse to the idea.

“I can say to you that we certainly have quite an open mind to PPPs,” Dames told Engineering News Online.

Asked if Eskom had been approached by private-sector companies keen on partnering Eskom in PPPs, Dames said: “Yes, and the work was prompted from within Eskom, which has been looking at all possible options.”

Dames said that the possibility of PPPs – ventures that are funded and operated through a partnership of government on the one hand and one or more private sector companies on the other – had arisen during Eskom’s study of a range of options.

“We, as South Africans, will have to come up with our own models. We all need to understand the role that tariffs will play; whether or not more money from government is possible, and whether further borrowing is possible.

“The work that we are doing with the World Bank and the African Development Bank will help. Export credit agencies are playing quite a big role. We recently approached the French government to look at supporting the Alstom turbine contract, and there has been a very positive response,” he said. Alstom has won the contract to supply the turbines to Medupi and Hitachi the boilers.

Eskom’s own contribution would be the curtailment of its capital expenditure, Dames reiterated.