Wednesday, October 24, 2012

South African Electricity users to pay for switch to private sector power

ONE of the many unpleasant messages in Eskom’s tariff application to the National Energy Regulator of South Africa (Nersa) is that electricity users will have to bear the brunt of the switch to private sector power.

The new multiyear price determination (MYPD) differs from the previous one in many ways. For instance, in the five years covered by the determination, South Africa will, for the first time, introduce thousands of kilowatt hours of electricity capacity from private sector producers. This will be bought at levels higher than Eskom prices.

Eskom says the cost of buying power from independent power producers (IPPs) will increase from R5bn in the 2012-13 financial year to R22bn in 2017-18.

In its application, Eskom says 3% of the 16% tariff hike requested is meant to support the introduction of IPPs into the local power generation market.

This takes into account the renewable energy IPP bid programme which will see Eskom buy 3,725MW of clean power by 2016. The first batch of the projects selected will reach financial close soon.

As the designated buyer of IPP power, Eskom will conclude power purchase agreements with the IPPs and connect them to the national grid.

The 3% also includes the Department of Energy’s peaker plants of 1,020MW, which run only when demand is high. They comprise two open-cycle gas turbine plants to be constructed at Dedisa, near Port Elizabeth, and Avon, near Durban.

The IPP power is just the tip of the iceberg. A renewable energy revolution is waiting in South Africa.

The integrated resource plan for electricity (IRP2010) says 42% or 17,800MW of new electricity between 2010 and 2030 will come from renewable energy technologies such as solar, wind and hydro.

According to IRP2010, South Africa must build 45,000MW of new generating capacity by 2030.

The combined capital costs of the additional capacity will be R3.5-trillion. It should be expected, therefore, that as the country marches to renewable energy, consumers will have to accept that the nascent renewable energy industry rests on their shoulders. This means it may take longer for South Africa to see inflation-level tariff rises.

Eskom CE Brian Dames often refers to this ideal as “the end game”.

The application also reveals Eskom’s dilemma. For a while now, the utility has been begging the government to make decisions on new electricity capacity as part of the IRP 2010.

This is important to avoid power shortages. Power projects tend to have long lead times.

Eskom’s application to Nersa covers the period up to the completion of the Kusile coal-fired power station in the 2018-19 financial year. What happens about capacity beyond 2018?

“Nersa needs to consider the pricing implication of additional capacity beyond Kusile and reach a decision on how to address these … If these issues are not addressed now, Eskom may have to apply to reopen the MYPD 3 application once policy decisions have been made,” Eskom says.

The utility is set to play a central role in the additional capacity envisaged in the IRP2010 document.

“IPPs affect Eskom’s costs in two ways. First, all IPPs have to be integrated into Eskom’s transmission grid.

“Second, once integrated into Eskom’s grid, Eskom has to pay the IPPs for energy purchased at a c/kWh rate,” it says.

This explains Eskom’s nervousness about decisions.

“The dilemma Eskom faces is that the government may decide to allocate a bigger or smaller portion of IRP2010 capacity than the assumed 65%. This makes it impossible to predict Eskom’s exact revenue needs if the IRP2010 requirements were to be included in this application. Unfortunately, the MYPD 3 process cannot be delayed any further,” Eskom says.

If it is asked to build 65% of the new capacity, tariffs would increase by an average 20% a year for five years, followed by 9% per year for another five years and about 5% thereafter.

“Given that expansion projects can take decades to plan, finance and execute, Eskom should start planning towards, and sourcing funding for, IRP 2010 capacity expansion during the MYPD 3 period.”

Mr Dames says Eskom has done its best to highlight the importance of taking decisions in time. It cannot be easy to tell your bosses to hurry up.

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