New rules leave Eskom powerless

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BR BUSA ESKOM  4273 Independent Newspapers Business Unity SA acting chief Cas Coovadia (left) listens while outgoing Eskom chief Brian Dames explains issues at a media briefing at Busa's offices. Photo: Simphiwe Mbokazi

Johannesburg - The constraints facing Eskom in generating enough electricity for the needs of the country will continue for some time unless procurement processes are overhauled, according to Cornelis van der Waal, the head of energy at Frost & Sullivan.

He was reacting to comments by Brian Dames, the outgoing chief executive of Eskom, who told a media briefing that the utility was, until recently, only allowed to conclude power purchase agreements with regional independent power producers (IPPs). Dames said while Eskom was committed to using IPPs, most contracts could not be concluded due to high price expectation.

Andrew Etzinger, a spokesman for Eskom, said the new electricity generation regulations, which were gazetted by the Department of Energy in May 2011, left Eskom with only the function to conclude the power purchase agreements (PPAs) and the connection to the grid.

He said everything else was within the ambit of the department, including the procurement from IPPs and the determination of the price.

Van der Waal said the procurement process needed to be overhauled to give Eskom full autonomy in co-generation purchases. “Eskom has to take orders from the department. It feels it is necessary for it to appoint entities, presumably for political and economic reasons. But the media keeps blaming Eskom for the constraints.”

KuduPower, a Namibian IPP, said last week that it expected negotiations to continue with Eskom over the off-take of 600 megawatts from its Kudu gasfield and associated plant. This was in contrast to a statement by Dames that negotiations with the four regional IPPs could not be concluded because prices were too high.

Etzinger said on Thursday: “We have been negotiating more importantly around price. We have not closed the door to regional IPPs.”

Muyenga Muyenga, the project co-ordinator, said Kudu had been negotiating with Eskom, initially from 2005 to 2007, a power export agreement for the surplus power that Namibia would not take.

The contractual structure was that Namibia Power (NamPower) would enter into a PPA with KuduPower, the owner of the Kudu power station, for the 800MW it would generate.

He said NamPower would then enter into power export agreements with secondary off-takers, such as Eskom, for the surplus power.

Muyenga said the gas price that was presented by the Kudu gasfield developers was deemed too high as it translated at the time into an electricity tariff that could not compete with the electricity tariff from coal-based power stations in South Africa.

“This situation has changed considerably as Kudu’s tariff is competitive against any new planned power stations post 2017. The gas price is no longer an issue,” he said.

Van der Waal said the electricity price hikes at Eskom now made the Kudu project attractive compared with 2007.

“If you consider that the rate of electricity increases has been higher than inflation, the Kudu project is becoming economically feasible now. The reason they (Kudu) give 2017 as a date is that it is when plants will be commissioned.”

Muyenga said the second challenge in the negotiations was mainly the foreign exchange currency risk exposure emanating from the gas price from the Kudu gasfield developers, which is denominated in dollars, whereas electricity tariffs in both Namibia and South Africa are denominated in local currencies.

“We needed to find mechanisms as to how to deal with the foreign exchange currency risk exposure. There has been considerable progress that has been made in identifying several instruments to manage that risk exposure, which include, among others, hedging.” - Business Report



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