The action on the electricity front moved to the National Energy Regulator of South Africa (Nersa) hearings this week as the regulator heard representations on Eskom’s requested tariff hikes of 35% a year for three years.
Reports from this front line sourced sugar growers in Mpumalanga, as one example, who have warned that the increases will reduce their income from R4000 a hectare to R2 000 a hectare, jeopardising jobs and the food security of 400 000 people.
There was also evidence from the consultancy Genesis Analytics that says Eskom has not used best practice accounting. It says that it would be asking for a 25-25-25 increase if it had followed best practice.
But the real action — or inaction — is not at the Nersa hearings. It is reflected in a terse three-page notice that appeared in the Government Gazette at the end of 2009 — on December 31, to be precise.
The regulation sketches government’s latest Integrated Resource Plan (IRP) as required by the Electricity Regulation Act. The notice lists what new capacity will come on stream between now and 2013.
The fact that the IRP was gazetted over the holiday period meant that even participants close to the policy process missed its promulgation. One observer described it as a “nasty” little document.
The gazetted IRP is required if Eskom is to be able to proceed to raise funding for its R140-billion Kusile project. The IRP is a blow to independent power producers (IPPs), which are sitting on the sidelines waiting to be able to supply power to ease the country’s electricity crisis.
Large power projects typically require a four-year horizon, while the IRP deals only with the next three years.
In particular, it is a blow to the 1200 megawatt Mmamabula plant in Botswana. A bilateral agreement between Botswana and South Africa specifies that we will buy power from Mmamabula.
Mmamabula’s developer, CIC Energy, is in advanced talks with Eskom, having passed several due diligences. CIC Energy has spent R750-million developing its site and getting its regulatory ducks in a row, but now expects to have to wait at least a year before getting the clarity it needs to begin building its power station.
But at least CIC Energy has managed to talk to both our government and Eskom. IPPs, which have been seduced for some years now by talk that government wanted independents to help meet the country’s energy requirements, are bemused.
“Government likes to talk about IPPs,” says Doug Kuni, the managing director of the South African Independent Power Producers’ Association, “but it doesn’t talk to IPPs.”
There are very good reasons why government should be talking to IPPs and why they should have been included in the current IRP.
A key point, as acknowledged by at least one senior Eskom official, is that the country will experience load-shedding from next year, even if the planned build programme proceeds as expected.
Expert outsiders, though, expect load-shedding this year. One analyst says that without cutting power to the aluminium smelters, there will be insufficient electricity to supply the additional needs of 500 000 visitors during the World Cup this year.
Unlike Eskom, IPPs can supply electricity at zero capital cost to the South African taxpayer and consumer. Industry players say that Eskom’s requested tariff hikes are exclusively to help it meet its build programme: increases granted to date cover its operating costs.
The consumer is being asked by government and Eskom to fund giant projects over a short period at great risk to the economy, because the higher tariffs will bring price spikes, slower growth, higher inflation and higher interest rates.
Kuni says that the IPP option, by contrast, means that investors will pay the capital costs through a mixture of debt and equity while consumers will be billed for the new capacity only once the projects come on stream.
He says Medupi, Eskom’s other giant new plant now under construction, is likely to end up being the most expensive coal-fired power station in the world.
This is because most of the contracts for the plant were concluded at the height of the last boom, when demand was high and prices were governed by a sellers’ market.
Medupi is also criticised because Eskom has insisted on playing the role of project manager, even though not a single member of its senior management has overseen the building of a large power station.
The usual practice is to pay a premium to contractors who provide a turnkey solution: they hand over a functioning power station to you and incur penalties for time and cost overruns.
In the case of Medupi, which has already been subject to delays, Eskom assumes the risk. It also carries the can for cost overruns.
A former Eskom strategic adviser, Ted Blom, says that the cost of Eskom’s build programme has escalated from R87-billion in 2006 to R400-billion at present, evidence that the company is out of control. Medupi’s reported cost is R120-billion for a 4800-megawatt plant, but Kuni says that Eskom still cannot provide a figure for the total cost.
This is because Eskom never anticipated that it would need to raise external funding.
Now that it is seeking funding from external parties, including from the World Bank, financing is linked to clean technologies, specifically gas desulphurisation. Medupi will now have to be retrofitted to include these technologies. Kuni estimates the cost of retrofitting could add billions to the total cost.
He says that IPPs offer the major advantage in that they quote and supply electricity at a fixed price, with agreed escalations.
The IPPs have to use their own efficiencies to ensure that they beat this price.
In Eskom’s case, by contrast, when for instance, it mismanages its coal contracts, it sends the bill, via Nersa, to the consumer.
Kuni says that if given the green light he could construct a power station in 30 to 36 months and it would be ready to supply the grid before Medupi comes on stream. Prices would be better than Medupi’s.
Observers say that the three-page IRP has its origins in a longer 71-page draft document which was produced by Eskom at government’s request, the inference being that the department of energy does not have the capacity to produce such a document itself.
Eskom’s version of the IRP describes the giant Medupi and Kusile projects as low risk, but critics see at least two major points of risk.
One is that putting the country’s future energy needs in just two baskets is a major risk in itself.
An IPP solution, which could have brought on, say, 1200 megawatts a year from private sources, could have spread the risk.
Turnkey contracts could have put the risk on the contractors rather than on Eskom, but the utility’s critics say that it has behaved as though it has no risk. They say, cynically, that in a sense it does not carry risk — it just sends its failures to the taxpayer or consumer.
Eskom is wooing private investors to help reduce its capital requirements, proposing that private investors be invited to take up as much as 49% of Kusile’s equity.
The opportunity could be attractive, as Kusile will supply the grid at open-cheque-book prices rather than on the fixed terms under which IPPs will be contracted, but observers doubt that private investors will come in without getting less than 51%, meaning that they control Kusile. This may or may not be palatable to the ANC.
So Medupi and Kusile in, IPPs out.
It was clear ages ago that IPPs were needed. It is blindingly apparent now, yet government is resorting to questionable tactics to keep private providers out of the picture.
The current electricity strategy puts us all at risk.
The ANC’s investment arm, Chancellor House, has a major financial interest in both Medupi and Kusile. This is through Hitachi Africa, a company in which it has a large stake.
The value of these contracts were worth an estimated R5.7-billion, before escalations, when the contracts were issued.
I wanted to know from Kuni how he keeps going as a potential IPP player who has to listen endlessly to government talking about IPPs, yet never actually picking up the phone to see what role they could play.
His answer is simple: large industrial users of electricity have lost faith in Eskom’s ability to supply and are making their own power plans with the aid of the IPPs.
Further, private players see Eskom falling over soon, predicting that government could quickly, and finally, announce IPP1, IPP2 and IPP3.