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Eskom takes a stand against private power generation

Reluctance might impact returns on renewable projects – Ashburton.

Eskom’s shock decision not to enter into further power purchase agreements beyond the Department of Energy’s bid round 4.5, is in line with its earlier stance towards the renewable energy procurement programme and might impact investors, Ashburton Investments credit risk manager Corneleo Keevy said on Thursday.

Eskom spokesperson Khulu Phasiwe confirmed to Moneyweb that the utility’s chair, Dr Baldwin Ngubane, has written to energy minister Tina Joemat-Pettersson to ask for a meeting to discuss future power purchases from independent power producers (IPPs).

According to Phasiwe, Eskom’s issue is with procuring generation capacity from the private sector and is not limited to the renewable energy independent power producer procurement (REIPPP) programme. The projects Eskom would not at the moment commit to, include the two independent coal power projects for which bids have been submitted, but not yet adjudicated.

Eskom’s decision comes against the background of a growing appreciation of the potential of renewable energy projects as an appropriate alternative investment vehicle for pension funds, with the ability to give consistent inflation-linked returns protected from the volatility of equity markets.

Keevy pointed to the benefits of the renewable energy procurement programme in increasing the country’s electricity supply and diversifying the sources, as well as attracting more than R194 billion in investment – a significant portion of which is from abroad. The average tariffs at which the projects have been awarded, have come down from R2.37/kWh in bid window 1 to R0.77/kWh in bid window 4, he said.

“Despite these successes, there have been increasing reports of Eskom raising concerns around the REIPPP programme.”

Eskom CEO Brian Molefe has made it quite clear at different occasions that he considers renewable energy expensive and inefficient.

Keevy ascribes Eskom’s stance to the challenges it’s experienced in connecting renewable IPPs to the electricity network and the capital investment required in strengthening the network for this purpose.

Phasiwe however does not agree with this analysis. He says Eskom has been stabilised and is moving towards a situation where it will have excess capacity. It wants government to reconsider procuring more generation capacity in light of a possible over-supply, he says.

Eskom’s enthusiasm for nuclear is however stronger than ever. Phasiwe says nuclear would be the appropriate base load technology to replace Eskom’s ageing coal fleet. Some of its older power stations will come to the end of their lives in about ten years’ time. Molefe increasingly mentions nuclear in the context of power exports to neighbouring countries and recently told Moneyweb: “You can never have enough power in Africa.”

Keevy says financial close of renewable projects is increasingly being delayed, mainly impacting bid window 4. The announcement of preferred bidders is being delayed and there is less financial flexibility in projects, as tariffs drop and additional costs are incurred to fund grid connection from bid window 4 and onwards.

This, he says, might impact returns on investment.

He says fund managers will face challenges in deploying funds as projects take longer to reach financial close, with the finalisation being uncertain. “Coupled with an average construction period of 1.8 years, it may result in significant timing delays between capital commitments and investments,” Keevy says.

The credit risk will increase, as projects are increasing gearing levels in an attempt to balance the lower tariffs with acceptable equity returns.

“These developments are to the detriment of lenders as we see increasing loan tenors, more aggressive capital structures and funding of less-conservative production forecasts.”

Ashburton nevertheless considers the exposure to independent renewable energy projects an attractive opportunity to achieve a risk-adjusted return in excess of government inflation-linked instruments, Keevy says.

The selection of the right projects is however key.

“Ashburton has a bias towards the inclusion of projects which are either operating or nearing the completion of the construction process, with the intention to include projects mainly from bid windows 1 to 3.5. These assets ensure that risk-adjusted returns are attractive and that the majority of funds can be deployed shortly after commitment,” Keevy says.

Ashburton’s investment in projects in earlier bid windows allows it to be selective when deciding about the inclusion of bid window 4 projects in its funds, “thereby ensuring the correct projects are selected whilst still offering investors attractive return on a gross yield and risk-adjusted return basis,” Keevy says.

He says Ashburton’s credit research team does an independent analysis of each project that is being considered, with the aim of understanding the technology and underlying risks relating to construction and operations.

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The article points out that the lowest renewables price is R0.77 (in an other article it was R0.68), which is higher than Eskom’s price to large users. It means that all users pay more for electricity because of the high cost of the renewables. The other problem with renewables is that they introduce instability in the network. Germany required a couple of years to solve the instability problem. If the German engineers needed years solve it can you imagine what would happen here with AA engineers? Maybe this worry about network instability is the reason why Eskom is cutting back on using outside generating capacity and on the renewables.

AA engineers? Just because we are talking about power generation, doesn’t mean that one should miss the opportunity for a little racism, I suppose.

What are AA engineers? Presumably since you call yourself the Hun you are highly enamored of German engineers. Anyway, I think you must do more research on your facts and figures Mr Hun. There is a hidden agenda to this decision. It has nothing to do with grid stability and costs and everything to do with lining of pockets of a select few.

They go to Alcoholics Anonymous. I thought every knew that. 🙂

Hun, you are correct, of course. The solution is to break up Eskom and privatise it into:

Power generation (power stations)
Power distribution (the grid)
Power sales (replace the function of corrupt municipalities).

Then largely deregulate electricity supply.

Each of these entities would be free to buy and sell energy from whoever they wish. If renewable power is so reliable and cheap then it will displace the coal fired power stations. Let the free market sort it out.

If the regime wants power to the indigent then let it pay Eskom from tax receipts.

The current situation is that Eskom is force to pay exorbitant costs for energy it does not need. It pays renewable suppliers more than the retail price after using the grid and municipal markup. This makes absolutely no sense.

I intrinsically mistrust ANC henchmen but if Molefe says the sky is blue then I will not argue.

In fact the whole situation is ridiculous and is the direct result of the green left peddling their global warming/ climate change lies. Enough is enough.

Dear Hun, if we follow your logic then no new plants would get built. You need to compare the cost NEW plants. On that basis both wind and solar are now more cost competitive than coal and nuclear.

The price at which electricity is sold to industrial consumers is a grid average price which includes a large fleet of fully depreciated old power plants. Eskoms new coal fired power plants (Medupi and Kusile) will not supply power at a lower cost than solar and wind.

Renewables may lead to grid instability when they become a large proportion of the total generation mix. SA is nowhere near these levels yet. SA needs a combination of renewables + gas fired generation, all sourced from IPP’s. The combination will result in the lowest electricity price and will not require government to spend ridiculous capital on nuclear.

First of all it is generators not generations.
Eishkom /ANC strikes again, they invite private co’s to invest and now they are withdrawing the offer- i think they are scared of being shown up for their incompetence and they might lose control of the gravy re tenders etc.
No wonder there is minimal foreign investment into Azania and 0% growth forecast by the reserve bank ( negative growth more like it )
If there is an oversupply of electricity then the price will drop – the law of supply and demand will prevail )
This country will only flourish when these commies stop interfering in the economy

Hmmm!

More Eskom Hoppyckock!

Simple fact is … Eskom will do its utmost to placate entrants into the energy sector because it has hedgemony.

Renewable IPPs will in fact cut into Eskom’s high margin markets (The non-heavy industrial users all the way down to the municipal end-users (residentials)), and that will not be good for Eskom. Heavy industry already has lond term heavily discounted discounted transactions with Eskom … (Ask BHP, Anglo, Parastatals).

Renewable IPPs should simply go lobby for the legislation to be changed that forces them to sell to Eskom and allow them to negotiate directly with the Municipalities and end users.

Lastly … If the legislation was changed to allow the electricity meters to run in reverse, Renewable IPPs would be highly competitive.

Actually magnetic bearing electricity meters run very well in reverse. I have done so with my own (okay the one at my house) and it is a pleasing sight to behold, albeit illegal. The problem is that about two thirds of the price one pays for electricity is getting the kWh to the consumer (the grid, markups etc). The other third is the cost of generation.

Enter the digital meter. This measures the energy drawn from the grid and also measures the energy you feed into the grid on a separate counter. You get credited with the energy you feed into the grid at a rate of about one third of the price you pay when you draw energy.

That is equitable, however, not as pleasing as having the meter run backwards.

Of course they would make this decision. They want their lovely juicy nuclear deal so Eishkom and the ANC can fleece the nuclear programme to their hearts content. Why people like Andrew Kenny and Kelvin Kemm support such nonsense which is not in the interests of the country and will result in corruption is beyond me. They should be had up for treason!!

End of comments.

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