Financial Mail - Investors Monthly
Eskom get your house in order
The power utility’s scandals and poor governance are derailing the implementation of much-needed alternative energy
Eskom, the state-owned enterprise which supplies the bulk of electricity in SA, has recently been rocked by allegations of dubious coal supply contracts as well as governance issues. Of particular concern to the energy industry, is Eskom’s role in potentially derailing the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).
The latter had until recently been one of SA,s most successful public-private sector partnerships.
“Corporate governance at Eskom has been systematically undermined through poor board and management appointments,” says Prof Anton Eberhard of the Graduate School of Business at the University of Cape Town (UCT).
“While there may be short-term benefits for a select few in corrupt deals, the broader consequences for the utility and the economy are potentially catastrophic.”
Eberhard says Eskom is not just any other state-owned enterprise; it is by far the largest, with revenues of around R200bn and assets of more than R600bn and is by far the largest producer on the continent with an estimated installed capacity of 42 GW.
That compares to a total capacity of about 90 GW for sub-Saharan Africa.
“Eskom is also an enterprise facing severe stress. Electricity demand is lower than it was a decade ago. Electricity sales are stagnant. Prices have trebled and any further tariff increases will result in further depressed electricity demand,” says Eberhard.
Referring to the REIPPPP, Eberhard says the programme is bogged down because of delays in Eskom signing the Power Purchase Agreements (PPAs) which are essential for financial closure.
The programme, which has been widely regarded as one of the most successful public-private sector partnerships in the world, was introduced in 2011 by the department of energy (DoE) to ensure that renewable energy sources, particularly wind and solar power, for which SA’s conditions are wellsuited, becomes an important part of the energy mix.
The programme employs a bidding process in which vendors bid for allocated amounts of renewable energy, of various types such as wind, solar photovoltaic (PV) and concentrated solar power (CSP). “Between 2011 and 2015 four such bidding rounds have been completed — referred to as bid windows — with an additional round for CSP only. Competition has been fierce, with 390 submissions resulting in just under a quarter (92) of these being selected for procurement of 6,328MW amounting to R193bn in investment,” say Eberhard and Raine Naude, also of UCT’s Graduate School of Business, in a recent report. By September last year 53 of these projects were in operation, supplying 2,800 MW to the national grid. However, in October last year the SA Wind Energy Association declared a dispute requesting the National Energy Regulator of SA (Nersa) to investigate Eskom’s contin- ued unwillingness to honour the DoE’s PPAs. The SA Renewable Energy Council (Sarec), which represents the wind and solar energy sectors, together with a number of IPPs, joined the complaint as interested and affected parties. A Nersa tribunal was set to report on its investigation by the end of last month. According to Sarec, a total of 37 projects are involved. Eberhard says that Eskom’s actions are highly irresponsible and can only be described as malicious compliance.
“They say they adhere to government policy but then raise every possible objection and obstacle to frustrate the entry of IPPs,” he says. Minister of energy Mmamoloko Kubayi, meanwhile, has stated that while IPPs remain a key element of government’s energy strategy, there are problems which need to be addressed.
“We need to acknowledge that there was uncertainty around the
IPP programme. We will need to evaluate whether or not the programme is assisting us to achieve our objectives as initially outlined,” she says. In addition, there has been widespread resistance to government’s plan to build new nuclear power stations. While some commentators point out that nuclear energy is both a safe and clean energy source which will help SA to meet its obligations in terms of climate change mitigation, others have criticised the exorbitant cost of such a programme.
In the latest draft Integrated Resource Plan (IRP) released last year by the DoE, the department suggests that a new nuclear plant would be necessary only in 2037 and envisages total nuclear capacity rising to 20.4 GW by 2050 (comprising 30% of the projected energy mix at that stage).
However, it is emphasised that these projections could change in the final report. “The timing of when the various technologies start producing power is highly sensitive to changes in assumptions such as various primary fuel costs and emission assumptions. As an example, preliminary results from the carbon budget scenario indicate a significant change in the energy mix and timing with increased renewables, no new capacity from coal, and nuclear coming online around 2026,” says the DoE.
Eberhard questions the assumptions made and conditions imposed on the model used in arriving at the conclusions of the draft IRP. “If constraints are removed on the amount of solar and wind energy that can be built in any one year, then nuclear does not appear at all. This latest plan uses conservative cost assumptions for solar and wind energy that are higher than those achieved in SA’s renewable energy IPP programme. If we incorporate latest cost data then nuclear definitely does not appear in any least-cost energy mix,” he says.
Adding to the controversy was the severe drubbing which Nersa received last year when the Western Cape high court ruled that it had acted improperly in allowing government to sign an intergovernmental agreement in 2014 allowing the Russian nuclear power company, Rosatom, to build 9,600 MW of nuclear capacity in SA. Kubayi says she will not be appealing the judgment and that the intention is to sign new agreements with five countries.
Another key issue of concern for the energy industry is the timing and cost overruns of the two 4,800 MW coal-fired power stations which Eskom is building — Medupi in Limpopo province and Kusile in Mpumalanga — typify the organisational and financial challenges faced by Eskom.
Construction of Medupi was announced in 2007 and that of Kusile the following year, for completion of all six units of each of the two power stations by 2013 and 2014 respectively. At this stage only one of Medupi’s units is delivering power to the grid, having entered commercial operation in August 2015 after protracted delays. According to Eskom’s latest revised schedule, all six generating units at Medupi will be in operation by May 2020 and at Kusile by September 2022.
At Kusile the first unit was synchro- nised in December last year and it is understood that the second unit could follow later this year. “Typically, commercial operation starts about six months after synchronisation, which implies that the first unit should enter commercial operation by mid-2017 — about a year ahead of Eskom’s latest revised schedule,” says Chris Yelland of EE Publishers, an energy, electrical, electronics, measurement and automation media company. In addition to the delays there have been major cost overruns at both power stations. According to Yelland, the most recent published estimate of the cost to completion (CTC) of Medupi is R145bn. The figure excludes flue gas desulphurisation (FGD) and interest during construction (IDC). In Kusile’s case the figure is R161.4bn (including FGD but excluding IDC). This compares to the figures of R105bn for Medupi and R118.5bn for Kusile published in May 2013.
Yelland says, based on reasonable estimates of the items omitted from Eskom’s latest published cost estimates, CTC could rise to at least R208bn for Medupi and R239bn for Kusile.
Looking further afield to the rest of Africa, about 645m Africans do not have access to electricity, and electricity consumption per capita in sub-Saharan Africa is among the lowest in the world at an estimated 181 kilowatt/hour (kWh) compared to 6,500 kWh in Europe and 13,000 kWh in the US.
Numerous initiatives have been launched over the years to redress this deficit. These include the Africa Renewable Energy Initiative supported by the G7, the UN’s Sustainable “Energy for All” initiative, and the US’s Power Africa Programme.
The latest of these, the New Deal on Energy for Africa, was launched at the World Economic Forum in Davos, Switzerland last year. It aspires to have universal access to electricity by 2025, whereas the most ambitious previous target — Sustainable Development Goal 7 — envisaged universal access by 2030. It aims to increase on-grid generation capacity by adding 160 GW of capacity and to expand both on and off-grid transmission and distribution to create over 200m new connections by 2025. To achieve this goal, it estimates, will require an investment of $60bn-$90bn/year.
Akinwumi Adesina, president of the African Development Bank Group, which is managing the New Deal on Energy for Africa, said recently that he was pleased with the progress made so far. “The plan is clearly laid out; the political will is now assured by our leaders. What we need now is to work together to significantly increase the pipeline of bankable projects to attract the financing needed.”
He said the bank would invest $12bn between 2016 and 2020 and expected to leverage up to four times as much in co-financing for energy projects in Africa.