Eskom will not solve the country’s electricity crisis by itself, Xstrata’s Mick Davis told an audience at the Wits Business School this week.
Davis said that Eskom’s power stations cost $3 500 (R25 600) a kilowatt to build versus between $1 500 and $2 000 for “modular” units, now the preferred method of construction for the power-generation industry.
“Companies are taking modular units off the shelf, whereas Eskom is creating bespoke power stations,” he said, noting that this era was over. “It is no longer a valid model,” Davis, a former finance chief at Eskom, said.
Eskom is building two such “bespoke” power stations, Medupi and Kusile, at a combined capacity of 9,6-million kilowatts. Costing $1 500 a kilowatt more than the modular option, this rounds off at just over R100-billion in additional costs.
Eskom’s head of generation, Brian Dames, says Medupi and Kusile’s kilowatt costs are not $3 500. He says this is based on dividing the nominal value by the capacity.
Dames says a comparison that takes into account time-based factors, such as interest, shows that these plants are cost-comparable with similar plants in the United States and Europe. Chinese and Indian plants are cheaper when built in the host countries, but not when built in the Southern African Development Community region.
“We are comparable with benchmark studies,” he said, noting that factors such as interest payable and the location of the plant had to be taken into account.
Dames said capital cost was an important consideration, as was the cost of electricity and the life of the plant.
Eskom and its shareholder, the government, are short of a lot of money to complete Medupi and Kusile.
South Africa went cap in hand at the World Bank, looking to loan R22-billion to help plug a massive funding gap that Eskom faces even after it was granted tariff increases of 25% per year over the next three years by regulator Nersa.
Eskom finance chief Paul O’Flaherty said that after the 25-25-25 increases agreed to by Nersa, Eskom faced a R45-billion funding shortfall in year three, including the World Bank loan.
A report released by Cadiz Securities showed that the tariff increase announced by Nersa is insufficient.
Cadiz’s Kim Silberman said with the 25% increase, Eskom’s shortfall is R100-billion over the next three years, rising to R183-billion in the next five years.
Silberman argued that without Kusile, power shortages will take place in 2013, and that to ensure Kusile is built a minimum 31% tariff increase is needed.
Observers have suggested that Kusile be scrapped or postponed to ease the funding crisis. Nersa said it had also examined this possibility to reduce Eskom’s capital requirements.
“The investigation showed that a delay in Kusile will attract non-value costs such as penalties, site establishment and IDC [interest during construction] costs, which are not desirable. Thus, Eskom’s cash flow position would not necessarily be improved by delaying Kusile to 2015,” Nersa said.
One analyst told the Mail & Guardian that the penalties for not proceeding with Kusile amount to R50-billion, in part because the boilers and turbines for the project have already been procured. This part of the project is controversial as the ANC’s investment arm, Chancellor House, is a beneficiary from the awarding of these contracts.
O’Flaherty indicated that the funding for the boilers and turbines was already mostly secured. From Eskom’s point of view, decoupling of Medupi and Kusile does not appear to be an option, and neither does not proceeding with Kusile.
“It is important to proceed with Kusile. If we don’t have it, we don’t have lights,” said Dames.
O’Flaherty said that following board sessions, various avenues had been listed to raise additional finance. Forty-six options in all have been identified, including Eskom issuing its own bonds and finding strategic partners at project level.
It appears that Eskom has done a poor job in calculating the costs for Medupi and Kusile.
The Nersa document detailing its reasons for awarding the increases said that Eskom’s estimate for building these two power stations had doubled from R33-billion each in 2006 to R66billion each in 2007-2008, and then almost doubled again to R120-billion in 2008-2009. And there are suggestions that the final cost for the two stations could be R140-billion each.
Nersa said that over the course of the development of the stations “from concept stage to contract stage, actual costs replaced estimates and overhead costs were added, including interest during construction”, which resulted in the escalations.
In addition, it said some of this had happened before the world recession was triggered and escalation of the dollar price of a new coal-fired power station added to the increases, with local inflation.
Dames echoed this, saying the R33-billion figure for Medupi in the Nersa report was only for the first few units at Medupi, before Eskom had gone to the market with tenders.
He said that R76-billion was the initial cost estimate for Medupi. Interest payments during construction and a contingency to take into account commodity fluctuations were responsible for more than 50% of the cost escalations to the current R125-billion.
Last week a 2009 public protector’s report was tabled in Parliament, which found that former Eskom chair Valli Moosa was guilty of a conflict of interest when Eskom awarded the contracts for Medupi and Kusile to Hitachi Power Africa, in which Chancellor House has a 25% stake. Moosa was chair of Eskom as well as a member of the ANC’s national executive committee at the time of awarding the contract.
The DA’s Helen Zille, who has been opposing the World Bank loan, said the contracts are worth R1-billion in profit to the ANC.
Stiff opposition to the loan, on both corporate governance grounds and on environmental concerns, prompted the departments of public enterprises, national treasury and environmental affairs to release a statement on Wednesday.
On the Chancellor House matter, it said the government “is mindful of concerns in this regard” and that it “will continue to engage with all concerned stakeholders on this important question, with a view to having a constructive dialogue”.
“We will ensure that we have a transparent framework to deal with matters such as these,” the statement said.
It also pointed to a much larger “funding window” of $6-billion available to SA, which included the $3,75-billion for Eskom. Alongside the Eskom loan, $1,25-billion would be available for emissions reduction measures. A further $1-billion was available, said the statement, but the government was “yet to make a determination” on how it would use it.