Opinion: Are renewable IPPs destroying Eskom?

27th September 2019 By: Tobias Bischof-Niemz

Opinion: Are renewable IPPs destroying Eskom?

Photo by: Creamer Media

The argument that renewable-energy independent power producers (IPPs) are destroying Eskom financially is a gross misrepresentation.

Fact is: the State-owned utility bought electricity from renewable IPPs in financial year 2018/19 at an average price of R2.06/kWh. Fact is also: the standard average price at which Eskom sells to its customers is closer to R0.90/kWh. At first glance, this sounds like selling renewable energy at a loss. But it is not. Eskom sells the IPP electricity at the exact same rate as it buys it for.

As a regulated entity, Eskom’s tariff is not the outcome of the market dynamic of supply and demand. Instead, the tariff is determined by the National Energy Regulator of South Africa (Nersa) to ensure that Eskom has sufficient revenues to cover all prudently (doing the right things) and efficiently (doing things right) incurred costs, while earning a regulated return on its asset base. Nersa has never questioned the prudency nor the efficiency of the IPP-related costs included in Eskom’s allowable-revenue applications. And why should it?

First, the Integrated Resource Plan (IRP) 2010 already foresaw wind and solar technologies to dominate the cost-optimal new-build mix. The plan had two extensive public participation processes, and there was widespread consensus for bringing the introduction of these new wind and solar technologies forward. The cost of renewables IPPs cannot be “not prudent” from a regulatory view on Eskom if the decision to procure them was not made by Eskom. Second, renewables IPPs were implemented in an open, transparent and fair competitive procurement process. That ticks the efficiency box.

For the third multiyear price determination (MYPD3), covering Eskom’s five financial years from 2013/14 to 2017/18, as well as for Eskom’s single-year application for 2018/19, Nersa approved all IPP-related costs to be recouped from Eskom’s customers as a 100% pass-through cost item, without any discount or reduction. In the context of IPP costs, Eskom essentially fulfils the role of a cash collector. It collects money from the ratepayer that is directly passed on to the IPPs.

Therefore, under normal operating conditions, IPPs are profit neutral to Eskom. The only risk for Eskom lies in an under- or overestimation of IPPs’ energy production levels or of the average tariff payable to IPPs in the revenue applications. That risk is a liquidity, not a profit risk, as any under- or overrecovery is dealt with through the Regulatory Clearing Account (RCA). The RCA mechanism allows for a backward-looking reconciliation of Eskom’s actual costs against the forward-looking planned and approved costs by the regulator.

During the decision-making process on MYPD3 in early 2013, the high renewable-energy tariffs of the first two bid windows of the Renewable Energy IPP Procurement Programme (see also Engineering News April 5, 2019 ) were the basis for the forecast of the Eskom revenues required to recoup the renewable IPP costs. But renewables tariffs fell sharply – a fact not fully captured in the assumptions for MYPD3. As a result, Eskom’s IPP-related costs during the period were lower than those factored into the Eskom average tariff. Therefore, Eskom’s liquidity was in fact bolstered by IPPs, as it received substantially more money for IPP electricity from the ratepayer than it was actually paying out.

Because the power system has not been in normal operating condition for many years now, renewables IPPs have not only been cash positive for Eskom, but also profit positive. This is because the renewables plants were introduced at a time when Eskom’s coal power stations were not always able to produce the electricity required to meet demand. Therefore, during sustained periods, the utility operated the diesel-fuelled open-cycle gas turbines at far higher rates than was expected when the MYPD3 determination was made.

In the absence of the electricity from the renewables power stations, the diesel costs (which at one stage surged to levels of R1-billion a month) would have been even higher. And unlike the IPP costs, the diesel costs are not fully recoverable from the ratepayer. Nersa disallowed Eskom recouping them through the RCA on the basis that they could have been avoided through the efficient operation of the coal fleet. Hence, Eskom’s losses would have been even larger during the period, had it not been for the electricity provided by the IPPs.

The argument that Eskom could have sold its far cheaper electricity rather than having it displaced by expensive renewables also does not hold. Indeed, in the context of supply shortfalls, it’s simply nonsensical. In fact, had the signing of the cheapest renewables capacity from Bid Window 4 not been delayed, the load-shedding that arose in late 2018 and early 2019 would probably have been avoided entirely, as electricity from those additional 27 wind and solar projects would have been coming on line just as the unplanned and planned outages from the coal fleet were peaking. Further, Eskom would again have saved substantial amounts of money on the purchase of diesel fuel – which would have improved both its liquidity and its profit position.

Even under a stable supply scenario, the argument that Eskom is being weakened financially by buying IPP power ahead of its own-generated energy cannot be substantiated, given the regulatory framework. Under the model, Eskom receives a return on assets, plus it is paid for depreciation, irrespective of whether or not it is using the assets.

The statement that Eskom’s financial wellbeing is being damaged by IPPs is, thus, not only untrue, but is distracting from the real problems afflicting the utility and its long-term sustainability.


Dr Bischof-Niemz is one of the authors of a book titled 'South Africa’s Energy Transition', which offers a roadmap to a decarbonised, low-cost and job-rich energy future. He was the founding head of the CSIR Energy Centre and previously worked for Eskom on the Integrated Resource Plan. He is currently CEO of ENERTRAG South Africa – tobias@bischof-niemz.de