/ 9 November 2012

Eskom in power at all costs

Critics maintain that the power transmission grid must be unbundled from Eskom.
Critics maintain that the power transmission grid must be unbundled from Eskom.

This is nearly twice the total capacity now produced by Eskom – and it could be brought to market for far less than what Eskom charges, according to its critics.

But consumers are bearing the brunt of what appears to be the state's determined policy to maintain Eskom's role as the primary source of electricity-generation. This is clear from Eskom's latest tariff application, the third multiyear price determination. It outlines the painful tariff increases in store for the country if Eskom remains the dominant source of electricity.

But the proposed price hikes are sparking a rebellion by customers.

Just to fund the completion of its new power stations – Medupi in Limpopo and Kusile in Mpumu­langa – the state utility has asked for 16% increases in the coming five years, or just less than R1-trillion.

The government asked Eskom to calculate by how much the tariffs would have to rise if it built just 65% or the total 100% of the generation capacity outlined in the state's 2010 electricity policy document, the integrated resource plan.

Eskom could not give the exact capital cost for providing 100% of the scheme or calculate the tariff increases to cover it.

Integrated resource plan
But to provide 65% of the programme, which would mean building a third of the new capacity outlined in the integrated resource plan, Eskom estimated that it would cost at least R3.6-trillion over the next 15 years. This would mean 20% increases in the first five years, followed by five years of 9% increases, before the increases would equal inflation rates for the next five years.

But the increases include the assumption that Eskom will be responsible for rolling out the nuclear procurement programme, although the national development plan, adopted by the Cabinet, has recommended that the nuclear programme be postponed until its costs are better understood.

Eskom's latest tariff application indicates a potential build programme that alone will rival the cost of the state's entire R4-trillion programme to develop infrastructure, which will be run by the presidential infrastructure co-ordinating committee.

Aggravating the cost problem is that the two scenarios outlined have been based on an integrated resource plan that is two years out of date. It has not made allowances for game-changing technologies and discoveries such as electricity produced from gas. The national development plan noted that several of South Africa's neighbours have discovered large resources of natural gas, which could be much cheaper sources of electricity.

The tariff application has been widely criticised, including by the Energy Intensive User Group, which argues that South Africa cannot afford the price increases Eskom wants.

The chairperson of the group, Mike Rossouw, said that commercial and domestic consumers across the board could not afford even the current prices, let alone the poor.  

He said Eskom's internal efficiencies were "not up to standard", which resulted in high levels of in­efficient costs that were already present in the 62c/kWh national average price for electricity.

Eskom was also inefficient in its capital spend, he said.

Lack of credible data
"Medupi and Kusile will cost the consumers anything from 70c/kWh to 95c/kWh, while a comparable independent power producer plant will only cost about 65c/kWh," Rossouw said. The "lack of credible data" on this issue was a major problem, he added.

According to Rossouw, levies and taxes on large consumers could come to constitute more than 30% of their tariffs in the coming five years and things would get much worse for consumers supplied by municipalities.

Eustace Davie, a director of the Free Market Foundation, said the best way to curb the massive projected costs was to introduce competition. This requires the introduction of independent power producers alongside the creation of a working electricity market in the country. It also means establishing an independent system and market operator and the unbundling of the country's transmission grid from Eskom.

Parliament is passing legislation to create an independent systems and marker operator, but deliberations on the Bill will continue only in 2013.

Meanwhile, the department of energy denied that the state was failing to attract independent power producers and said the contracts the government signed this week with 28 independent producers under its renewable energy procurement programme was testament to that.

Conventional power
It said Minister of Energy Dipuo Peters had also determined that additional electricity had to be procured from independent producers and this would be gazetted by the end of the year. It included additional renewable power and power from more conventional sources, including 2652MW from gas, 2609MW from hydro and 2500MW from coal.  

In March, the department published a request for information from independent power producers of conventional power, which revealed a potential of 60 000MW available, proof-of-investment appetite in South Africa.

The department said Eskom had been asked to model the building of 100% of the integrated resource plan because it was the only entity that could collect money either for its own build or for an independent power producer given the monopolistic nature of the electricity business in South Africa. "Eskom, as the buyer of power from independent power producers, must have sufficient revenue to pay them, hence modelling the whole integrated resource plan by Eskom is critical," it said. All power from the new determinations made by the minister would be bought by Eskom.

The department said that once the Independent System and Market Operator Bill became law, the new entity would be responsible for reviewing the integrated resource plan and modelling tariff applications, at least for the wholesale tariff.

The plan did not need to be reviewed because the assumptions in it were unchanged, it said. In addition, it was a policy document used by investors. "Changing the plan every two years, even if there is no need, may create uncertainties to the market which may not be good for the country," it said.