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Eskom letter sends shock waves through private power sector

Eskom chairperson Dr Ben Ngubane

Eskom chairperson Dr Ben Ngubane

Photo by Duane Daws

21st July 2016

By: Terence Creamer

Creamer Media Editor

  

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News of Eskom’s letter to Energy Minister Tina Joemat-Pettersson – seeking clarity on the approach the utility should take to contracting in future with independent power producers (IPPs) – sent shock waves through the private power community, which is only just starting to find its feet in a sector still dominated by the State-owned monopoly.

The letter, the contents of which were leaked to the Business Day, was sent last week by Eskom chairperson Dr Ben Ngubane, who indicated that the utility was unwilling to sign further power purchase agreements (PPAs) beyond the preferred projects selected under bid widow 4.5 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

Joemat-Pettersson’s special adviser Allan Taylor refused to comment on the letter, saying only that the Minister is a keen supporter of the IPP programme, as she is of the nuclear build programme, and that the two initiatives should not be viewed as being mutually exclusive.

However, in the absence of an updated Integrated Resources Plan (IRP) – the current version is six years out of date and anticipates far higher levels of electricity demand than is currently the case – Eskom’s leaked letter brings into the open simmering tensions between Eskom and the IPPs and once again highlights serious policy, regulatory and legislative fissures.

Eskom CEO Brian Molefe has been openly hostile in his attitude towards existing renewables projects and has also raised questions about the need for additional renewables and baseload IPPs in light of Eskom’s improved operating performance and its large-scale, albeit delayed, new build programme.

Unless addressed speedily, the letter potentially places a further impediment to the conclusion of the so-called ‘expedited round’  (a scheme deployed to mop up 1 800 MW of bid-ready renewables projects before the REIPPPP framework is comprehensively updated), as well as the Coal Baseload IPP Programme. In addition, it raises serious questions about whether government will move ahead as planned with a tender for some 3 700 MW of gas-to-power, in a procurement programme that will probably be bundled with the development of gas-importation infrastructure.

The IPP Office is well advanced with its evaluation of the REIPPPP expedited-round and coal-baseload bids and any pullback is likely to shake the confidence of domestic and foreign power investors, who have hitherto lauded the REIPPPP, in particular, as evidence of South Africa’s willingness to open its electricity market.

Through the REIPPPP 6 377 MW of mostly wind and solar capacity have already been procured, stimulating nearly R200-billion-worth of investments – a figure that could rise to R255-billion once the current procurement round is closed.

Through the first round of the Coal Baseload IPP Programme, meanwhile, around 900 MW of capacity is set to be procured under a Ministerial determination catering for the eventual procurement of 2 500 MW of private coal-fired generation.

CHANGING CONDITIONS

Eskom spokesperson Khulu Phasiwe tells Engineering News Online that the letter was written in an effort to gain clarify from the DoE, the policy-setting department in the energy milieu, on how to proceed in light of changed demand/supply conditions.

Demand fell again last year to 214 487 GWh at a time when Eskom has made some strides in recovering the energy availability factor (EAF) from its coal-fired power stations. The EAF rose to 78.6% between April and June this year, from only 69.6% during the corresponding period in 2015, adding over 3 700 MW of capacity. As a result of the downturn in demand, Eskom has started to increase its export to the rest of the region.

Should Eskom reach its stated goal, and should its Medupi and Kusile power stations meet revised schedules, Molefe forecasts that the utility will be in a surplus position, with more than 53 GW of capacity available by 2022.

However, the yet-to-be-released IRP update reportedly estimates that this surplus will be absorbed soon after 2022 and that there is a need to invest in additional capacity partly to address demand and partly to close any supply gap that is likely to emerge when some of Eskom’s older plants are retired.

A key imponderable, though, is the outlook for demand, with little clarity currently on how much of the demand forfeited during the load-shedding era has been permanently lost and how much could return should domestic and global economic conditions strengthen.

WAKE-UP CALL

South African Independent Power Producer Association (Saippa) chairperson Sisa Njikelana describes Ngubane’s letter as a “wake -up call”, arguing it is reflective of just how far the country’s electricity planning, policy, regulations and legislation is lagging fast-changing market developments.

Njikelana tells Engineering News Online that emotions should be set aside and that Eskom’s approach to the ministers of energy and public enterprises should be used, instead, as a stimulus for broader consultation on the future shape of the industry.

“We urgently need meaningful engagement,” he argues, adding that it is possible to strike a balance between Eskom’s balance-sheet concerns and the stated policy objective of increasing the role of IPPs to represent 30% of generation capacity.

There is a risk, however, of Eskom securing, through bilateral discussions, a directive that is harmful to IPPs, In that instance, Saippa and others will mount strong, even legal, resistance.

RATINGS RISK

There is also a risk, voiced by Njikelana and others who spoke to Engineering News Online on condition of anonymity, that any move to exclude IPPs from the future mix could affect the outcome of the December review of South Africa’s credit rating. The rating agencies held back from downgrading the country to junk in the June review, but have signalled that South Africa needs to take steps to encourage growth and private investment to avoid a downgrade in December.

“If IPPs are excluded, we should not be surprised if the rating agencies take a dim view,” Njikelana avers.

South African Renewable Energy Council chairperson Johan van den Berg add that, with “85% of foreign direct investment now coming from renewable energy, Eskom’s stance can put major pressure on the rand and contribute to threatening the country’s sovereign credit rating”.

INHERENTLY CONFLICTED

But Van den Berg also describes Eskom’s role of generator and grid operator as inherently conflicted. “It was always inevitable that the dropping prices of renewable energy and the zero-carbon future emerging internationally would lead Eskom to the point where it would, in its narrow self-interest, quixotically try to resist the inevitable transition to a sustainable future.”

Such a stance, he adds, is diametrically against the national interest, as it implies higher electricity prices, as well as a continued reliance on unsustainable energy sources. It also threatens jobs and manufacturing facilities servicing the R192-billion renewables industry.

“We trust, however, that this will be the start of a speedy process to recalibrate Eskom’s mandate to be aligned with the national interest,” Van den Berg concludes.

Professor Anton Eberhard, of the University of Cape Town Graduate School of Business, has also appealed for a rethink, as well as far-reaching restructuring of the electricity supply industry.

Writing in the Business Day, Eberhard calls for a separation of the transmission operator function from Eskom, suggesting that the new ‘Gridco’ should take charge of electricity planning, power procurement and contracting, system operation and balancing and transmission.

“This obviously needs to be independent of Eskom generation and IPPs, so [Gridco] can procure power at the least cost.”

He argued that such restructuring would require vision and leadership, but insisted that it was not naïve to believe the electricity sector could be restructured.

“Instead of Eskom’s leadership defending an old, vertically integrated, monopolistic electricity industry model that international experience shows is moribund, would they not want their legacy to be distinguished by a reforming zeal that sets our country on a different path?”

Edited by Creamer Media Reporter

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