City Power takes on Eskom request
Coal cost increase is queried
CITY POWER, Johannesburg’s electricity utility, has punched holes in Eskom’s request to claw back billions of rands for coal costs, and questioned the increase in coal costs, while coal volumes for 2014/15 to 2016/17 fell.
Eskom has applied for recovery of R66 billion in respect for, among others, variances in revenue, coal, independent power producers (IPPs) and Open Cycle Gas Turbines (OCGTs) costs. The revenue variance accounts for 67 percent (R44bn) of the R66bn that Eskom wants to recover, while IPPs and coal account for R7.4bn and R3.5bn, respectively.
Speaking at the National Energy Regulator of South Africa (Nersa) hearings into the application in Soweto, Frank Hinda of City Power on Friday shone the light on possible inefficiencies that might have led to the high coal costs. Hinda said Nersa should apply the prudence and efficiency test on the coal costs. He said the regulator should reject the coal-related variances in the application “in the interest of prudence, simply because Eskom burnt less coal. They should have spent less money instead of more.”
He also questioned the 36 percent increase in the price that Eskom paid for coal from cost-plus mines. “It is not clear why that was not anticipated at the time of the multi-year price determination (MYPD) application, because the costplus and long-term contracts are supposed to have stable prices,” said Hinda.
He said Eskom was increasingly relying on the expensive short-term contracts. “We know that, for the foreseeable future, we will be burning about 110 million tons of coal. That is guaranteed. Why do we have short-term contracts? Those are the things that we ask Nersa to do further assessment of,” he said. Hinda said at least R19bn should be taken out of the application, which would bring Eskom’s claim to R47bn.
In its application, Eskom attributed the high coal costs to underperformance of cost-plus mines. The utility attributed the reduced volumes to lack of funding and investment in costplus mines. As a result, Eskom had to either truck or rail coal from other power stations, resulting in the higher costs.
Eskom general manager for primary energy Dan Mashego on Friday told the Nersa hearings that the new coal contracts that Eskom entered into came at a high price. “The historical cost of sourcing coal has benefited Eskom. That is changing, because new coal contracts come at a higher price,” said Mashego.
Eskom’ acting chief financial officer Caleb Cassim on Friday defended the R66bn that the company wanted to claw back from electricity users. “Variances can be linked to two key sources, which are increases in costs due to a changing environment and assumptions made for purposes of the MYPD 3 revenue decision, which did not materialise. The Regulatory Clearing Account (RCA) methodology allows for certain elements of Eskom’s revenue and costs to be in favour of Eskom, where our costs were higher than anticipated and in favour of the consumer in instances where we spent less than planned,” said Cassim.
Eskom group executive for generation Thava Govender on the other hand explained the rationale for the increased usage of the expensive OCGTs. Govender said the decision to initially exclude Eskom from building new electricity capacity was the genesis for the constrained power system. The subsequent requirement for Eskom to keep the lights on at all costs led to the increased usage of the diesel-guzzling generators.
“As the de facto supplier of last resort, our mandate required us to use whatever resources we had in order to keep the lights on. The electricity system was constrained and a decision was taken to delay maintenance, which then led to deterioration of plant, most of which was already in midlife. This is unfortunately the time when you need to do more intrusive maintenance, but we had to balance demand and supply and didn’t have the opportunity to do maintenance.
“We did manage in subsequent years to remove the requirement to keep the lights on at all costs from our shareholder compact and resumed with proactive maintenance. However, it must be noted that even in retrospect we believe that there is little we could have done differently as a supplier of last resort given the conditions we faced in those years. In this regard, Eskom has agreed to implement the approach to sacrifice the additional OCGT costs and recovering at coal cost equivalent. The costs we have applied for in this RCA were prudently incurred in the implementation of our mandate to supply reliable electricity,” he said.