The introduction of independent power producers (IPPs) was partly based on the assumption that Eskom would only be able to build enough generating capacity by 2022. But through disciplined implementation of the plant maintenance programme, Eskom has been able to stabilise the power system, resulting in no load shedding in more than a year.
This turnaround is a game-changer. It will have a significant impact on the expedited IPP bid windows, which are based on Eskom not being able to turn around its operations by 2022.
It significantly improves the medium-term capacity outlook. Most importantly, it has a positive impact on the price that the consumer will pay for electricity going forward.
It is now common knowledge that Eskom’s energy availability improved from 70 percent in October 2015 to 79 percent in August 2016.
The improved plant availability has unlocked more than 3 700 megawatts (MW) of additional capacity from the existing fleet. The new build programme has delivered 666MW from Ingula’s two commercially operational units and 730MW from Medupi unit 6.
Eskom’s corporate plan is based on an electricity growth rate of 0.8 percent compound annual growth rate (CAGR).
The supply is adequate to meet this electricity demand until 2021 with IPPs up to bid window 3. This is based on Medupi and Kusile delivering on their revised schedule and the energy availability factor of 80 percent being achieved by 2021.
At a rate of 0.8 percent CAGR, Eskom is not obliged to contract in additional capacity, as demand can be adequately met using the existing resources at hand. This also applies to a rate of up to 2.4 percent CAGR, at which Eskom is able to meet and exceed the National Energy Regulator of South Africa's 19 percent reserve margin.
However, with a rate of 3.3 percent CAGR, Eskom will need additional capacity up to 2021, which can come from various sources, namely, accelerating the current Eskom new build programme, further improvements in energy availability and extending the life of existing plants from 50 to 60 years.
Able to meet demand
Therefore, even at an exaggerated rate of 3.3 percent CAGR, Eskom is able to meet demand up to 2021 using above mentioned levers to reach the required reserve margin of 19 percent.
The impact on the average electricity price due to purchases from IPPs is not fully appreciated. Excluding short-term IPP contracts, Eskom will buy 7 210 gigawatt-hours (GWh) at a cost of R15.5 billion for the 2016/17 financial year from renewable IPPs at a resultant average unit cost of 214 cents per kilowatt-hour (c/kWh).
Compare this with Eskom’s average selling price of 83c/kWh (including transmission and distribution).
This electricity from renewable IPPs is available when Eskom has sufficient capacity and would otherwise have been able to produce this cheaper from its own resources, incurring only fuel costs.
Assuming Eskom signs up to bid window 4.5, for the 2021/22 financial year, Eskom will buy 20 141GWh at a cost of R 41.4bn from renewable IPPs at a resultant average unit cost of 206c/kWh.
From an annual price increase perspective, the 9.4 percent increase for 2016/17 results in additional revenue of R15bn. Realistically, R5.9bn of that additional revenue, which is 40 percent of Eskom’s revenue increase for the year, is absorbed by the increase in the energy purchased from IPPs.
Given the medium-term outlook can this cost be justified? The electricity system will be adequate until 2021, without contracting additional IPPs.
The expansion of the electricity system after 2021 can only be informed by an updated Integrated Resource Plan (IRP).
The current IRP was last updated in 2010 and does not reflect the current economic and technological realities.
The approved IRP projects 4.5 percent gross domestic product (GDP) growth since 2010 with a resultant electricity growth rate of 2.8 percent year on year. The National Treasury is projecting a 0 percent growth rate in GDP.
Continuing to implement the current plan is ill-advised and will result in surplus capacity with higher prices to consumers than would otherwise have been possible.
It is imperative that this is revised timeously so that the necessary decisions can be taken to ensure the optimal expansion of the system, post 2021.
Over the next 20 years, R1.2 trillion, in nominal terms, is forecast to be spent on approximately 7 300MW from co-generation, Department of Energy peaker plants, renewables, smalls renewable programme and bid windows 1 to 4.5.
It is within this context that the chairman of Eskom has asked for a dialogue. He is merely exercising his fiduciary duties.
Why is he being told to shut up? It is in the national interest to have this debate. Who stands to benefit when this debate is swept under the carpet?
After all, the current expansion plan will bring unnecessary higher costs to consumers and will ultimately increase the cost of doing business in this country, impacting country competitiveness.
* Matshela Koko is Eskom’s group executive for generation.
* The views expressed here do not necessarily reflect those of Independent Media.
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