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Eskom blames IPP for R50bn deal postponement

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 29 Aug 2016
Over R1.2 trillion is expected to be spent on IPPs if the current energy plan is not revised, says Eskom's Matshela Koko.
Over R1.2 trillion is expected to be spent on IPPs if the current energy plan is not revised, says Eskom's Matshela Koko.

Eskom has not decided to put renewable energy contracts on hold.

This denial follows reports that the power utility last week refused to sign a R50 billion power-purchase agreement for a project that had already been accepted by government.

Eskom this morning told ITWeb it signed power purchase agreements with all successful bidders and is committed to sign all the remaining contracts under the current Department of Energy (DOE) bid window 4.5.

Last week, Eskom was supposed to sign a power purchase agreement with Redstone Solar Thermal Power Project. However, the deal was called off at the last minute. Last month, the power utility also called off the deal with Redstone at the eleventh hour.

Eskom spokesperson Khulu Phasiwe told ITWeb this morning the deal wasn't finalised because Redstone had not signed a budget quote. "A budget quote is a very important document that one needs to sign before entering a contract, especially with IPPs [independent power producers]. If you have not signed it, it means you have not accepted it and can't sign. You have to sign it as a precondition to us signing the power purchase agreement," Phasiwe said.

Redstone could not be reached for comment by the time of publication.

No decision

In a statement, Eskom says all it did was write a letter to the DOE asking for clarity or a dialogue regarding the next contracting phase of IPPs beyond bid window 4.5. That does not mean a decision has been taken to abandon the IPPs, it says.

"Eskom supports the role the IPPs play in the South African electricity market and remains committed to facilitating their entry. We continue to deliver on our commitment to environmental sustainability and reducing our carbon footprint with purchases of renewable energy from IPPs.

"To this end, in the 2015/16 financial year Eskom spent R15.4 billion on procuring power from the IPPs, up from R9.5 billion in the 2014/15 financial year," it notes.

The DOE launched the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) in 2011, which called for 3 725MW of renewable energy technologies. Capacity under existing signed agreements is expected to be in commercial operation by the end of 2018.

Eskom says it has concluded power purchase agreements (PPAs) with successful bidders. "We have received assurance from the National Energy Regulator of SA that these PPA costs will be treated as a pass-through for revenue regulation purposes. Moreover, most of the short- and medium-term IPP contracts that were due to expire at the end of March 2016 have been renewed for another two years."

Eskom points out that to date it has contracted for 3 901MW of renewable IPP capacity (March 2015: 3 887MW), while RE-IPPP capacity of 2 145MW (March 2015: 1 795MW) has been connected to the grid. Renewable IPPs achieved an average load factor of 30.7% during the year (March 2015: 30.9%), while the weighted average cost amounted to 171c/kWh (March 2015: 217c/kWh).

"We expect 1 030MW from the RE-IPPP to be commissioned during 2016/17, including 504MW wind, 510MW solar PV, 4MW hydro and 11MW landfill. Under the DOE gas peaker programme, the 670MW from Avon came into commercial operation last week.

"Furthermore, the contracts awarded under bid windows 3.5, 4 and 4.5 are expected to be concluded during 2016/17 (as well as the remaining 16MW contract under bid window 3), together with the co-generation programme."

R1.2 trillion spend

Matshela Koko, Eskom's group executive for generation, notes that over R1.2 trillion is expected to be spent on IPPs if the current energy plan is not revised.

He points out 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 2016/17 financial year from renewable IPPs, at a resultant average unit cost of 214c per kilowatt hour (c/kWh), says Koko.

"Compare this to Eskom's average selling price of 83c/kWh (including transmission and distribution). This electricity from renewable IPPs is available mainly when Eskom has sufficient capacity and would otherwise have been able to produce this cheaper from its own resources, incurring only fuel cost."

Assuming Eskom signs up to bid window 4.5, for the 2021/22 financial year, he says Eskom will buy 20 141GWh at a cost of R41.4 billion from renewable IPPs, at a resultant average unit cost of 206c/kWh.

From an annual price increase perspective, he says, the 9.4% price increase for 2016/17 results in additional revenue of R15 billion.

"Realistically, R5.9 billion of that additional revenue, which is 40% 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?"

Koko says 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, he adds.

Koko points out that over the next 20 years, R1.2 trillion, in nominal terms, is forecast to be spent on approximately 7 300MW from co-generation, DOE 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 cost to consumers and will ultimately increase the cost of doing business in this country, impacting country competiveness."

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