Registered users can save articles to their personal articles list. Login here or sign up here

Business chamber asks Nersa to stop all new IPPs

‘Renegotiate existing, unaffordable contracts’.

The Nelson Mandela Bay Business Chamber has asked energy regulator Nersa to stop the roll-out of new independent power producers (IPPs) due to their “catastrophic impact” on Eskom, and to investigate and renegotiate all existing contracts with IPPs.

The chamber represents about 700 businesses and has been very active in fighting for affordable electricity tariffs at Eskom and municipal level. Nelson Mandela Bay is an industrial hub that consumes about 1.5% of national electricity consumption.

The chamber’s David Mertens told Moneyweb the organisation has nothing against the principle of introducing renewable energy or IPPs, but that the numbers as set out in Eskom’s tariff application “stink”.

The chamber made the call to Nersa in its written submission in response to Eskom’s application to recover revenue totaling R762 billion over the next three financial years from electricity users through increased tariffs.

Eskom is asking for a 15% tariff increase annually from next year to 2021/22. This is over and above an increase of more than 4% Nersa has already granted Eskom for next year in relation to earlier expenses.

Nersa will travel the country in January for public hearings regarding Eskom’s application and the chamber expects to make a presentation during these proceedings.

The IPPs were negotiated by the department of energy and Eskom was obliged to sign an off-take agreement with each of them. The duration of the contracts is mostly for 20 years.

‘Detrimental impact on Eskom’

Former acting Eskom CEO Matshela Koko refused to sign further power purchase agreements with IPPs due to what he saw as their detrimental impact on Eskom. This resulted in a two-year standstill in the roll-out, but energy minister Jeff Radebe oversaw the signing of 27 outstanding contracts earlier this year.

In its tariff application, Eskom states that it prioritises the use of the IPPs over its own fleet, which means the IPP production displaces that of Eskom.

In its submission, the chamber says Eskom plans to buy 45 799 gigawatt hours of IPP power at a cost of R104.6 billion during the three-year application period. “This amounts to an average purchase price of R2.28/KWh (kilowatt hour). Replacing the IPP generation by (cheaper) Eskom generation would reduce the allowable revenue by R88.06 billion or 11.5% of the overall allowed revenue.”

According to the chamber, the tariffs Eskom is applying for are 13% higher than they would be if Eskom generated the “IPP” power in-house using existing or planned generation capacity.

“Eskom has sufficient capacity to replace the IPP power with self-generation,” the Chamber argues.

It further states that contrary to public perception, the effective R/KWh rates from IPPs have been increasing year after year since their inception in 2014.

Mertens told Moneyweb this increase might be the result of the inclusion of the department of energy’s two 1 000 MW peaker plants Avon and Dedisa which are situated in the Eastern Cape and KwaZulu-Natal respectively. Eskom is obliged to contribute to their fixed cost and has budgeted R2.5 billion per year for them alone.

Source: Eskom MYPD4 application

In its application Eskom shows that IPP power purchases represent a growing percentage of its primary energy cost, from 26% in 2019/20 to 31% in 2021/22. The annual expenditure on IPPs will grow from R21.3 billion in 2017/18 to R46.8 billion in 2023/24 due to escalation clauses in the existing contracts and the addition of new ones.

Eskom also shows that its generation market share will shrink from 91% in 2019/20 to 88% in 2023/24 with the IPP market share growing from 5% to 8% over the same period.

The chamber says the “high prices South Africa pays for the IPPs are unacceptable and are unaffordable. The IPPs contribute very little value at an enormous cost.

“In view of the known adverse impact of IPPs on electricity tariffs, it makes compelling economic sense for Eskom to suspend the installation of further IPP capacity until additional IPP capacity will contribute to overall competitive pricing.”

The chamber calls on Nersa to explain how it approved contracts leading to “such extremely high costs”. It says to ensure prudency, the methodology for the determination of Eskom’s tariffs requires Nersa to review the efficiency of all contracts before it concludes the contracts.

Source: Eskom

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   19

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

This problem relates to bid windows 1, 2 and 3, which came in at very high costs and has full indexation for 20 years. Expensive school money. It seems that these IPPs are creaming it off while there is blood on the floor all over the rest of electricity industry.

However, if future bid windows can come in at less than 60c/kWh, perhaps even less than 50c, it is the way to go. Lets not throw the baby out with the bath water

Yip, those peaker plants are also very expensive but they are emergency power and running them for load shedding must be quite steep as well.

As with everything in SA, these guys think very short term and also think they can just tear up contracts, not how the world works. I’d think R3 was no where near the levels of R1 & 2, I think I read somewhere there was a 50% reduction in tariff on those and a further close to 50% in the follow up round.

We can’t just decide to break contracts.

Something that the public deserves to be shown is the extent of the early IPP rip-off, and who owns what equity in those very lucrative agreements. There are some big names and former Eskom names.

Back then we figured IRR of over 45%

Maybe we will get something back via SARS, unless large parts of profits found their way to foreign partners.

Right there in the early phases of Bidwindows 1 and 2 I had an argument at a guest house with a Belgian and an Australian, representatives of one of those early successful bidders. I (rightly) said they were ripping us off and blighting our landscape, killing birds and driving man and beast crazy with innefficient technology. We paid through the nose then and the escalation over 20 years is horrendous. Note how the proponents of IPP’s gloss over the costs of the initial contracts. Keep on harping on how cheap it id NOW. Of course, the game is up, now they want to sell at maybe realistic prices. First release us from the stranglehold of those early contracts and then we can talk!

Griet, it sounds as if your sources are Huisgenoot or You magazine. A lot of secondhand emotions mixed in with unfounded statements and the wrong assumptions lead you to a bad conclusion.

The goal with the initial stages of the REIPPP was to incentivize the market to develop, invest in, an produce green energy. The hardware and technology was very expensive then. The manufacturing costs declined since then, because of the scale of production. Without those earlier, more expensive rounds, there would not be the current cheaper generation that is below the cost of coal generation.

If you wish to arbitrarily change a contract with another party then you have no certainty about your own property. If you can renegotiate previous contracts then government will renegotiate all bond payments, all government pension payouts and every salary to a government employee.

Leave that Huisgenoot in the loo where it belongs and read the work of the CSIR and Dr. Tobias Bischof-Niemz about the lowest cost energy mix.

Sensei, I have great respect for your comments in the main. I must have touched a nerve for you to now disappoint me with condescending words and attempting to insult my intelligence (I presume) with your YOU remarks. That is the argument of the weak and you know it. I agree that contracts cannot be renegotiated, but the IPP have their own initial greed to thank for the present reluctance to deal with them. I read across a wide spectrum of publications and have been following the IPP lobby’s arguments closely. Predictable and rampant with omissions. Do not lower yourself to such a poor level of argument again, please.

Griet, I apologize.

Thanks, Sensei.

So the Business Chamber decided to use Eskom’s questionable and corrupted cost figures rather that the scientific and trustworthy figures of the CSIR. They prefer to ignore the excellent work done by Dr. Tobias Bischof-Niemz regarding the lowest cost energy mix for South Africa.

The business chamber decided to support the incompetent criminals at Eskom and to oppose the scientific studies of honorable experts. Eskom is a zombie, just waiting to topple over. We should move beyond Eskom and renewable energy is the only low cost solution on the horizon. Coal generation under the management of Eskom is imploding. Eskom itself is crumbling like in a controlled demolition.

It is holiday season, everybody with half a brain at the business chamber is on leave. This request was drawn up by the only remaining person in the building, the security guard.

Dear Sensei,

The Nelson Mandela Business Chamber has made a comprehensive submission to NERSA in relation to all aspects of Eskom’s MYPD4 application. In our submission, we address all items which leads to Eskom’s excessive tariff application. This includes Eskom’s mismanagement and cost overruns within their own generation business. We are particularly critical in relation to Eskom’s continued overinvestment in coal power stations.
This moneyweb article only covered the IPP section of our application.
In our application, we can only judge the reality of the numbers as presented and react accordingly. The numbers are clear regarding the failure of the IPP program as it is sick in the same bed as many other aspects of Eskom’s business.
This however is by no means a stance from the business chamber not to support renewable energy nor that we would ignore recommendations made by te CSIR. We welcome alternatives which are part of a competitive market.

Dear Mr. Mertens

Thank you for the reply and the explanation. Eskom has become public enemy number one under ANC rule. We are like the child who depends on the tik addicted mother. Eskom abuses us for a short term fix. We have to give it some tough love. Eskom is stealing our furniture to pay for the habit.

The REIPP is our only alternative. Griet’s comment is spot on – I do have a vested interest – I am a South African citizen. I use electricity, and I cannot afford to fund the looting.

Another Matshelo Koko maneuver I suspect, I recall that of the 5% increase the Eskom received in April 18, 1% or the like was for IPPs.

Eskom tariff increases really have very little to do with IPPS and a lot more to do with the disaster of Medupi and Kusile which are the most expensive coal plants on the planet, probably similar on a cost/kWh to most expensive IPPs.

Eskom has multiple plants that are 45 years older or older which can’t be run for much longer without serious capex, are we really going to trust Eskom with replacing this gneeration after the mess they have made of any new projects they have attempted?

Any fool knows that its a bad move to put all your eggs in one basket, ESPECIALLY when that basket is a government utility called ESKOM, with an extremely poor track record of late. We need diversity in our energy supply and we are absolutely obligated to ensure our new energy sources are renewable and ‘clean’. Fossil fuels are not ‘cheap’, they are in fact extremely costly in the damage they cause to our climate and our environment and that is already manifesting itself in the form of extreme weather events like droughts and wildfires. Renewable energy is the future and we should be pursuing it with all due haste. By 2030 significant parts of this planet are going to be uninhabitable if we don’t take steps now to wean ourselves off of fossil fuels. That is just over a decade, we have no time to lose!

The NMB Chamber of Commerce makes this suggestion of all COC’s. Port Elizabeth is a city that has struggled to grow its economy and yet it goes and scores a spectacular own goal by making this recommendation. Do your homework Mr Mertens, your city is home to one of the only wind tower manufacturers in the country. It has struggled for years now due to the interference of crooks like Koko. Further, the Coega IDZ is the primary route used by wind turbine manufacturers to bring their equipment into this country. How many jobs did this create and how much did PE benefit when the happened.
When you have done your homework you will realise that most of the cost increase in the tariff is due to the massive cost overruns and the resulting debt burden that Eskom has amassed since it started building Medupi, Kusile and Ingula. If you are going to recommend anything it should be to stop construction on Kusile and to get new IPPs to meet our generation needs.

Dear R Lee

The Nelson Mandela Bay Business Chamber has made an extensive submission to Nersa in relation to Eskom’s three year MYPD4 tariff application. In this submission, all major issues which are leading to excessive tariffs are being addressed. This covers Eskom’s cost overruns and general mismanagement. The continued overspending on Kusile and Medupi has been widely covered in our submission and we also made clear recommendations in this regard, i.e. to stop further investment in these stations.
The points made in the article just highlighted the IPP section of our submission. Unfortunately, the IPP program is sick in the same bed of mismanagement and poor decisions and this has a significant impact on the overall situation we find ourselves in.
By no means is our stance a plea against renewable energy. We welcome an open market where renewable alternatives are made available. Unfortunately, it is clear that what has happened with the IPP’s is actually burdening further healthy development of renewable energy in South Africa.
The ultimate demonstration of the failures of the IPP program are the DOE peakers. Comissioned in 2016 at a cost of about R10 Billion, it is unlikely these stations will ever be used. They are not planned to be used during the MYPD4 period. Even during load shedding, the stations are standing idle as their running cost is unaffordable for the South African electricity user.

Eskom buys IPP energy at R2.50 per kWh and then transports it and sells it to municipalities for about R1.00 per kWh. This is called grandiose wealth destruction. Wealth destruction makes us all poorer. Eskom can produce electricity at R0.40 per kWh using coal but is obligated to buy expensive electricity from IPPs which it then sells at a loss. This is madness or even one step beyond insanity. No sane person can argue it is a good idea to destroy wealth in an already poor country.

The only solution is to break up this monster (power stations, grid, retail). Sell each power station to the highest bidder. Let the grid owners decide from whom they will buy electricity. Let the IPPs compete in a free market only then we will see who has the lowest costs. Do not write off old coal power stations. Vales Point coal power station in Australia was sold for scrap and the owners are making good money selling very cheap electricity and keeping the grid from collapsing. Its all about private sector innovation and the profit motive to be lean and mean.

Australia has a market regulator called AEMO (Australian Energy Market Operator). Every IPP (solar, coal, diesel or whatever) bids to dispatch their power at a $/kWh. That way the expensive power stations do not get dispatched and the cheaper power stations get dispatched. Beautiful system. A corrupt Eskom, with thr buy in from Nersa will end up in disaster. Every posdr station must be privately owned and must compete to dispach power into the grid. This is really the woy way South Africa can keep the lights on in the long run. Or is China already the new owner of Eskom??

Load All 19 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR
Insider GOLD
ONLY R63pm

Moneyweb's premium subscription is a membership service which will give you access to a number of tools to take charge of your investments.
Or choose a yearly subscription at R630pa - SAVE R126

Get instant access to all our tools and content. Monthly subscription can be suspended at any time.

Podcasts

SHOP NEWSLETTERS TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2