Eskom ‘must weigh IPP cost vs crisis’

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BR Eskom wet coal  0149 Independent Newspapers Eskom says wet coal was the main cause of the load shedding on Thursday last week. Photo: Supplied

Johannesburg - Eskom and the government would have to calculate whether the electricity bought from independent power producers (IPPs) cost the power utility more than running its open gas cycle turbines, an IPP industry representative and an electricity analyst said yesterday.

And the question of whether Eskom could afford not to buy expensive power, while it was faced with an electricity supply crisis, needed to be the centre of the debate around IPP costs, they said. “It is a question of, if IPPs can produce electricity cheaper, why would you run gas turbines?” Doug Kuni, the chief executive of the SA Independent Power Producers Association, said.

“The average cost of Eskom generation blends the new and old power stations that are going to be decommissioned. We should be looking at the cost of the next kilowatt-hour (kWh). IPPs can [produce power] cheaper than Kusile.”

On Friday Eskom chief executive Brian Dames said four cross-border power producers that could have supplied 1 750 megawatts (MW) more to ease the power utility’s electricity supply shortage were not contracted because of their excessive prices.

The “costly” cross-border IPPs generated power using coal, hydro and natural gas.

Eskom has long-term contracts with a number of cross-border IPPs and short-term contracts with several local ones. Under the Department of Energy’s renewable energy IPP procurement programme, it has connected 19 projects to the grid to date.

Eskom said electricity from IPPs procured under the Department of Energy’s renewable energy programme had been more expensive than other IPPs. However, for the third window, the utility had received bids below 70c a kilowatt-hour, which was below the price it paid for municipal generators and the older IPPs.

But Eskom still said that apart from concentrated solar power, the prices of which had come down significantly between the first and third bid windows, the renewable energy programme was a success. The utility’s average cost of all IPP procurement, including renewable energy and other IPPs, was 87c/kWh at the end of January.

The department said yesterday that Eskom was not involved in price negotiations under the renewable energy programme. However, the price caps and wattage to be procured were discussed with Eskom prior to the procurement.

The price caps for wind and solar photovoltaic energy were removed in the third bidding window, but the department said no bidder came in higher than the agreed price caps.

The department further pointed out that the contracts were in rands and that the National Energy Regulator of SA (Nersa) allowed costs associated with the tariff fluctuation in the determination for Eskom.

“The costs associated with the power purchase agreement are regarded as pass-through costs to the consumer. Therefore, there is no financial risk to Eskom,” the department said.

It added that the full cost associated with the IPPs was transferred to the consumer under the agreement signed with Eskom in relation to the revenue shortfall emanating from the contractual arrangement with IPPs.

Anton Eberhard, an electricity analyst from UCT’s Graduate School of Business, said contrary to what Dames claimed, some IPPs were competitive with Eskom’s generation.

“The best example was the Mmamabula project in Botswana. It was offered at 72c/kWh on a long-term contract indexed at rates below inflation,” he said. “This is cheaper than Medupi, which Nersa has estimated as being 97c/kWh.”

Eberhard said given that in the multi-year price determination tariff process a specific allowance could be made for the IPPs, it was possible for Eskom to procure that electricity supply.

Cornelis Van der Waal at Frost & Sullivan said it was understandable that Eskom, as the off-taker of IPPs’ generation, would want to procure that power if it was going to sell it at a cost-reflective price or generate profit. “But the government as a key stakeholder… might take a view that it is more detrimental not to have sufficient electricity… In that case, [the] government would have to step in and assist Eskom financially.”

In the six months to September, it cost Eskom 55.3c to produce each kilowatt-hour of electricity that it sold for 69c. - Business Report



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