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Eskom grilled on power price

Lynley Donnelly

Eskom has come clean in Parliament on the costs of building the giant Medupi and Kusile power stations.

The cost of energy generated by the new Medupi power station could be dramatically more expensive than Eskom previously estimated. Photo: Siphiwe Sibeko/Reuters

Revelations that electricity from Medupi could come in at an estimated 97c/kWh suggest South Africa could have got better value from renewable technologies such as wind.

The power utility told parliamentarians that finance charges on its new power stations would be an estimated R25-billion for Medupi in Limpopo and R40-billion for Kusile in Mpumalanga.

When interest costs are included, this could bring the price of Medupi closer to R116.2-billion and Kusile to R158.2-billion.

These figures were given in response to questions from Parliament's portfolio committee on energy and come amid calls from energy experts for an inquiry into the cost overruns and delays in the projects.

MPs questioned what this meant for the ultimate price of electricity generated by power stations such as Medupi.

Lance Greyling, the Democratic Alliance's energy spokesperson, argued that the levelised cost of electricity from Medupi would be dramatically higher than what it is costing Eskom at present to produce electricity, putting it on a par with the price of renewable technologies such as wind.

Operating expenses
He gave a levelised cost – or the all-in price of electricity from a project over its lifetime, including items such as operating expenses – of 97c/kWh. "This is a very worrying factor because we are talking about new generation coming in at an extremely high cost and that is putting huge upward pressure on our electricity pricing path," he said.

The National Energy Regulator of South Africa's Thembani Bukula confirmed that the regulator had calculated that the levelised cost of electricity from Medupi was likely to be about 97c/kWh.

According to Greyling, the price for wind-generated power came in at 89c/kWh under the government's renewable energy procurement programme.

Eskom has previously indicated that the power it is purchasing from independent power producers to meet the current electricity gap costs the company 77c/kWh on average.

It calls into question Eskom's assertion that it can produce electricity at more competitive prices than independent power producers, whether it is electricity from conventional hydrocarbon sources or power from renewable technologies.

But Eskom's chief financial officer, Paul O'Flaherty, was adamant that electricity from Medupi would come in "significantly below" Eskom's average selling price of electricity, which is about 60c/kWh.

According to Eskom, the levelised cost of coal-generated power is between 70c/kWh and 80c/kWh, between 90c/kWh and R1.10/kWh for onshore wind and about R2.50 to R2.60/kWh for concentrated solar power.

Interest charges
O'Flaherty said heavy borrowing costs were a reality because Eskom is funding the build programme with very little equity.  "We are funding [the new build] with debt and our cost of borrowing is just under 10%. We don't have the equity. It doesn't matter whether you allocate it to Medupi or Kusile, we have incurred the funding."

Eskom's borrowings will peak at R350-billion in the next three years to complete the new build programme, which includes Medupi, Kusile and the pumped storage plant Ingula in the Drakensberg.

This amounts to about R35-billion each year in interest charges, which would be paid for over a decade "and beyond", said O'Flaherty.

The debt Eskom has had to take on to complete its delay-plagued build programme will set electricity tariffs on a painfully steep trajectory, despite the temporary reprieve earlier this year when tariff increases were dropped to 16% from 25%.

 "Who's going to pay for it if it's not in the tariff?" said O'Flaherty.

Eskom's new tariff application will be made public at the end of the month.

International benchmarks
Despite criticism that the price tags for Medupi and Kusile have ballooned because of cost overruns, Eskom maintains its costs are well within international benchmarks. It has put Medupi's overnight costs – excluding items such as interest during construction – at R91.2-billion and Kusile's at R118.5-billion.

The build programme has been fraught with problems, including a 10-month delay on the crucial boiler contract for Medupi, which was marred by controversy after it was awarded to Hitachi Power Africa, whose empowerment partner is ANC investment vehicle Chancellor House.

The contract experienced ongoing modifications to the structural steel design, particularly on boiler unit six. O'Flaherty said 2000 modifications were made. Significant logistical issues also contributed to delays, resulting in incorrect steel pieces being delivered to the site. A further 10-month delay was experienced on the civil construction contract, thanks in part to inadequate geo-technical work on the site, he said.

On Tuesday, Mining Weekly reported that national planning commissioner Anton Eberhard had called for a formal inquiry into the cost overruns on Medupi and Kusile.

Eberhard said cost visibility on the projects, as well as the extent to which their budgets exceeded initial estimates, remained unclear, according to the report.

But O'Flaherty has given assurances that Eskom is doing everything it could to manage the performance of its contractors. It has reserved its rights to invoke penalty clauses in the boiler contract, which are in the region of between 10% and 15% of the contract value.

Performance guarantee
"But we must highlight that we are linked to the hip with Hitachi until at least 2018, 2019," O'Flaherty said.

Eskom also has a performance guarantee with parent company Hitachi Japan, and over and above penalties, this can be invoked.

O'Flaherty said Eskom was pleased with the "extraordinary effort" the company had put in to conduct a successful pressure test on boiler unit six in July, a significant milestone in Medupi's construction.   

"The problem is sustainability," O'Flaherty said, citing significant risks, especially on construction projects of this size. "We've made good progress, but we are through only one boiler and it is not yet commissioned. There are 11 to go."

The global financial crisis remains a concern. Eskom has secured 78% of its funding requirements, but this does not mean the health of its contractors is assured.

Electricity capacity
Eskom is also concerned about delayed decisions on power allocations in the Integrated Resource Plan 2010, South Africa's 20-year electricity road map.

The plan requires that the energy minister determines who should build the next round of much-needed electricity capacity, specifically whether it should be an independent power producer, or Eskom.

Some progress has been made on renewable power and a first bidding round for independent power producers has been completed. But further allocations for major base-load capacity, namely nuclear and coal, are yet to be made.

According to O'Flaherty, decisions have to be made now if construction timelines are to be met and enough power is to be brought on stream in the future.

Eskom has no firm plans to build anything beyond 2018 after Kusile comes on line.

 


 

Big customers may fund parastatals' projects

Power utility Eskom is only one of the parastatals ramping up its spend on infrastructure.

As the state sets out to finance its large build programme, Public Enterprises Minister Malusi Gigaba announced a special division that would focus on "innovative funding models" to support the country's state-owned companies' investment programmes.

These include using major customers of state-owned companies "to provide balance sheet support for big projects, particularly when a few companies make up the dominant users of the infrastructure".

"At a minimum, we would expect these companies to enter into long-term take or pay arrangements, which will enable a project finance-type approach," he said at the Progressive Women in Business summit on Monday.

He mentioned countries such as France, where major customers of EDF, the country's power supplier, purchased 20 years of electricity upfront to help it fund its infrastructure programme.

But the state is "acutely aware" that Eskom is the supplier of last resort. "We need to be extremely alert to ensure that adequate capacity is on hand should there be problems in the broader energy roll-out," Gigaba said. "Our planned nuclear programme will require an unprecedented amount of capital."

Eskom chief financial officer Paul O'Flaherty said this week that unless decisions were made now on who would build new coal and nuclear generation capacity, the company could not adequately plan for future funding requirements. - Lynley Donnelly

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