Eskom get your house in or­der

The power util­ity’s scan­dals and poor gov­er­nance are de­rail­ing the im­ple­men­ta­tion of much-needed al­ter­na­tive en­ergy

Financial Mail - Investors Monthly - - Special Report dbsa - David van Biljon

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.

Anton Eber­hard: Poor man­age­ment has re­sulted in Eskom fac­ing se­vere stress

Chris Yel­land: Eskom’s or­gan­i­sa­tional chal­lenges re­sult in costly de­lays in en­ergy in­fra­struc­ture im­ple­men­ta­tion

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