Are Eskom’s claims of “hardship” imposed by IPPs valid?


In an article published by News24 on 20 June, Paul Herman refers to Eskom “current hardships including oversupply” as one of the reasons for the South African power utility not signing the Renewable Energy IPP Programme power purchase agreements (“PPAs”). Yet the utility has no one but itself to blame for the situation it finds itself in.

Thomas Garner

Eskom has cited “expensive power” from renewable energy IPPs as a main reason for its hardship and also suggested that this in combination with lower demand due to the stalling economy has led to the decision to close some old coal-fired power stations.  As part of the anti-IPP strategy, drivers of coal delivery trucks have been included in the narrative and trade unions have had a field day with the plans to close coal-fired power stations.

The blame game that Eskom is playing is dangerous as it actively seeks to shift the blame of its “hardship” onto IPPs while its hardship is actually of its own making.

In the early 2000s, Eskom was warned that South Africa will run out of peak power supply capacity by 2008. Unfortunately the power utility decided to ignore these warnings.  Eskom experimented with private power production by starting the Pilot National Co-generation Programme during 2006 but failed dismally by not signing up any new projects even after IPP developers had spent millions of rand on feasibility studies.

Subsequently, rolling black-outs hit the country from January 2008 which led to energy intensive industries such as ferro-alloy smelters in the country having to cut back production and put any new investments and projects on hold.  During this period, Eskom actively told investors that it could not guarantee them new electricity connections.  Capital follows certainty, and Eskom made it clear that it was certain that the South African power supply would become a challenge.

In an effort to  return to the historical role that Eskom played in industrialising the country, and as part of its plan to create security of supply, the utility decided to de-mothball some of its older power stations like Camden, Nkomati and Grootvlei.  These power stations are currently operating at a high cost due to being of an older technology, with lower efficiencies and, because coal is being delivered to these power stations by road at a massive cost, at higher than necessary operating cost.

At the same time, Eskom decided to build two new coal-fired power stations, Medupi and Kusile.  The utility assumed it had suitably skilled and experienced individuals in the company who could execute these multi-billion rand projects and has kept the South African government in the dark regarding actual vs. planned progress during construction.  Medupi’s first unit was planned for commissioning in 2011 with planned commercial operation of the whole power station by 2015.  It is now 2017 and only two units have reached commercial operation.

The delayed commercial operation of these two power stations has given the South African economy a knock-out, firstly because of the massive cost of not having reliable power and secondly due to the “interest during construction” (IDC), that Eskom must pay on its loans to finance the power stations.

Eskom had created its own “perfect storm”:  It had massive capital projects running over-budget and over-schedule, lower electricity sales as a result of lower business confidence and energy intensive users closing shop (due to having no certainty about reliable electricity supply) while at the same time doggedly hanging onto its dominant position as a vertically integrated electricity generator and supplier.

In 2012, renewable energy power producers entered the market on the back of a world-class programme crafted by the Department of Energy.  The programme brought certainty and capital flows into the country at a pace seldom seen.  The bidding process worked well and technology improved according to Moore’s law, resulting in renewable energy becoming cheaper than fossil fuel alternatives. At that point IPPs became a real threat to Eskom’s survival in its current form.

Eskom responded to this threat in late 2015 by using its dominant position in the market to refuse to sign PPAs with preferred bidder IPPs.  As a result of this, capital fled the country and many small black owned start-up businesses shut down which led to more job losses.  The current impasse, with no clear leadership shown by government, led to greater uncertainty and international players started to disinvest in South Africa.

The price that South Africa and its citizens has to pay for this failure is high, and it most probably has another angle to it as well, the one of state capture.

The nuclear deal is likely to lead to the massive enrichment of a few individuals, connected politicians and business people.  It will probably be a mirror image of the Medupi and Kusile fiascos in which certain politically connected companies made billions out of deals without delivering the technical goods on time and within stated quality specifications.  They, together with the organs of state capture, have learnt that they can get away with it.  They want the nuclear deal to go ahead, not because it offers clean electricity, and not because it will create jobs, but because these individuals will use it as way of enriching themselves.

The recent inputs into the draft IRP 2016 by all role players in South Africa have shown that a combination of solar PV, wind power and gas will lead to the cheapest electricity tariff for the country.  By 2050, renewable energy could save South Africa R50-billion per annum than if the country were to continue with the alternative where nuclear plays a big role.

It is therefore worrying to see Eskom blaming the better, cheaper alternatives as the reason for its “hardship”.  The utility brought its hardship upon itself.  It should never have put itself into the position of having to de-mothball older power stations.  The utility should have retrained its employees to enable them to become employees in the renewable energy industry.  The utility’s leadership team should have seen that it cannot take the third industrial revolution on by protecting its turf with a second industrial revolution mindset.

As part of this mindset, Eskom blames the closing of older coal-fired power stations on IPPs.  The reality however is that these power stations are old, inefficient, have run out of mine-mouth coal supply and are polluting our environment.  Eskom planned to close them anyway.  Blaming IPPs now is disingenuous as well as being irresponsible in a country where unemployment is such a big challenge.

I challenge the South African government and Eskom to put the interest of South Africa above that of  individuals who have their own agenda of self-enrichment.  I challenge the government to unbundle Eskom into a system and market operator that owns the transmission and distribution infrastructure, receiving power from independent generators.

South Africa needs to to re-industrialised to create jobs, stimulate foreign investment and bring about sustainable development. This will require a commitment from the South African government to open up the electricity market to private players, ensure it maximises flexibility and drives down the electricity tariff.  South Africa cannot be re-industrialised by business alone. It requires a combined effort between government, business and the people of the country.

Electricity is the enabling factor for this re-industrialisation process, yet it is the one factor which is being neglected.  We need to have more electricity supply than we have at this stage to enable economic growth, and we need it a lower cost than what the current plan proposes.

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