Eskom decision puts government renewable programme at risk

Nersa to consider Eskom’s shock decision.

South Africa’s highly successful pogramme to procure renewable energy from independent power producers (IPPs) skidded to a halt after the Eskom board decided to stop issuing so-called budget quotes, required for financial close on these projects.

Moneyweb has obtained a copy of a letter by Juan la Grange, Eskom senior manager in the office of the Group Executive for Transmission Thava Govender, in which Eskom says due to liquidity problems it won’t issue further budget quotes to IPPs until March 31 2018.

This has sent shock waves through the renewable energy industry.

Budget quotes are final quotes and technical specifications for the infrastructure needed to connect renewable energy projects like wind and solar farms to the Eskom grid. They are issued to preferred bidders and are required for financial close on the projects.

The project developers pay for the infrastructure, even though Eskom takes ownership of it. If the budget quote is issued, the procurement process can proceed to the conclusion of a power purchase agreement (PPA) that binds Eskom to buy energy from these projects for 20 years.

Several people close to the process told Moneyweb that Eskom’s decision is aimed at preventing the conclusion of the PPAs and therefore the financial obligation it places on Eskom.

In the letter La Grange says: “Eskom is facing serious liquidity issues, making it impossible to commit to any of the DoE (Department of Energy) REIPP programmes after bid window 3”.

He acknowledges that it will delay the delivery of these projects.

Eskom in the letter puts the blame for its predicament on energy regulator Nersa, saying “the outcomes of the relevant Regulatory Clearing Account (RCA) submissions are not guaranteed so that Eskom cannot responsibly commit to the related expenditures”.

RCA submissions are interim applications to recover the difference between forecast expenditure on which tariff determinations were based and actual expenditure. Eskom has only once before utilised this mechanism, when it claimed R18.4 billion for the tariff period from 2010-2013, but was awarded only R7.8 billion.

Nersa disallowed certain costs, saying it was self-inflicted due to Eskom’s failure to properly maintain its coal-fired power stations.

It is probably this experience that informs Eskom’s reluctance to commit to further IPPs.

Government’s renewable energy procurement programme has been a huge success and is held as a model programme in terms of international standards.

DoE acting director general Dr Wolsey Barnard on Tuesday released a report stating that the programme has so far attracted R192.6 billion, of which R53.2 billion was much needed foreign investment, since it was launched in 2011.

Thirty seven projects have already started commercial operations, adding 1 860MW of dearly-needed generation capacity to the national grid. They are bringing huge economic benefit to rural areas, especially in the Northern and Eastern Cape where economic development and job creation in very poor communities is visible, thanks to these projects.

In April the department announced 13 preferred bidders from its round 4 bid window to the value of R23 billion and subsequently a further 13 to the value of R25 billion were announced. That bid window was significantly over-subscribed and the average tariffs at which the energy will be sold to Eskom has decreased significantly since the first round.

It is these 26 projects and anything thereafter that are now in jeopardy. They will have a joint generation capacity of 2 205MW.

The department in April also announced an expedited bid programme. The submission date for the bids has been postponed twice since June and is set to close on November 2. If the issue is not resolved, the preferred bidders from this process won’t be able to proceed to financial close either.

Some commentators have asked whether the coal and gas IPP procurement programmes may also be impacted.

Nersa regulator member for electricity Thembani Bukula said the regulator’s staff is preparing a submission for its electricity committee meeting next week about the Eskom board decision.

Nersa is the custodian of the National Grid Code that governs, among other things, grid connections. Moneyweb was told that in terms of the Grid Code Eskom has to issue the required budget quote within six months after receiving an application. The purpose of Eskom’s letter is to request exemption from this provision.

Bukula told Moneyweb that Eskom has not made a RCA submission since its application for the re-opening of the current tariff determination, that is in effect until March 31 2018, was rejected because it did not comply with the prescribed methodology.

Eskom could have made a RCA submission directly after the end of the 2013/14 and again the 2014/15 financial years, which fall on March 31 or it could have made one submission for the two periods, but has so far failed to do so.

Asked whether Nersa can guarantee the outcome of an RCA submission, Bukula said Nersa has to comply with the legislation which entitles an effective operator to recover prudently incurred costs and a reasonable return.

It is this prudency test that has been problematic for Eskom. It further stands to reason that Nersa cannot process an application if Eskom fails to submit it.

Eskom spokesperson Khulu Phasiwe was on leave and not available for comment. The DoE IPP unit was not able to comment on Thursday.

South African Independent Power Producers Association (SAIPPA) chair Sisa Njikelana said Eskom’s decision is erroneous and premature. Such a decision can only be effective once Nersa endorses it, he said.

If the decision is allowed to prevail, it will have a devastating effect on IPP’s, he said and will interrupt government’s Renewable Energy IPP Purchase Program (REIPPPP). Njikelana said investors are quite sensitive to such actions.

He said SAIPPA was not been aware of problems or been consulted before it became aware of the Eskom letter.

“Nersa should intensively engage with Eskom to address this matter, especially its root cause. Nersa should further facilitate a broad consultation with various stakeholders before reaching a final decision”, Njikelana said. Such consultation should include IPP’s, Eskom, government departments and Salga, he said.

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Perhaps it is a combination of a few factors?
1. The ANC do not want renewable energy programs as they will be pushing throught the nuclear program which is surely very favourable for them in terms of the bribes. Any other power solution is not what they want.
2. The Eskom board does not really know what they are doing and has very little in the wy of experienced smart capable engineers.
3. Sheer ignorance and mismanagement by the ANC.

Or Eskom is trying to put pressure on Nersa for higher tariffs by making it the scapegoat, rather than following the methodology that has been in place for years.

“Eskom … puts the blame…” How often do we hear this? It’s always someone else’s fault. Even the Germans are doing it in the VW scandal. Either manage and lead properly or move over and let someone more competent do the job. Unlikely ever to happen with SOCs under ANC rule – incompetence is rewarded with ambassadorships or promotions.

Let me tell you this: This mess has nothing to do with budget quotes. It has its origin in market distortions. When a free market is subject to constraints something always gives. In the case of Eskom it is the capacity to supply electricity to South Africa.

I have told MW jounos a dozen or more times that it is time to be more transparent, honest and forthright with the public: People don’t buy power they buy energy. Quoting nameplate capacity on renewable energy sources is at best disinformation and rather disingenuous. A 200MW solar plant cannot be compared with a 200MW coal fired plant. The coal fire plant once cranked up like a supertanker produces 200*24MWh (megawatt hours energy) = 4800MWh in 24 hours. The solar plant will produce 1200MWh energy on a sunny day. On a cloudy winters day maybe 100MWh. NOT THE SAME THING!

The use of power rather than energy is a green ploy to deliberately deceive the ignorant public with false comparisons.

Now, Eskom is a mess simply because it is not run as a business. If the ANC want to subsidize poor people (to do or not to do is a value judgement) then they must pay market rates to Eskom as a business to produce the electricity for the poor. However we have a case where Eskom cannot supply electricity and there is no competition. Eskom can produce electricty at 50c /kWh and they sell it to the municpality at R1.00 per kWH who on sells it to the consumer at R1.50 per kWH. These figures are estimates for illustration only. Now Eskom must buy electricity from renewable sources at R2.00 per kWh and then sell it for R1.00 to municipalities. That makes absolutely no business sense whatsoever except the regime (taxpayer) now chips in a few billion here and there but half of what is promised. This is the regime that is apparently broke and cannot deliver. Take note: the regime is destroying wealth by doing this.

Of course foreign investors are rushing in to leach off the SA taxpayer producing electricity that would not be economic without SA government subsidies. This is not a success story – it is a complete failure.

What to do:

The examples of cases such like British gas lead the way:

Break Up Eskom into power generation (power stations), power distribution “the national grid” and marketing companies (municipal connections, billing etc.)
Withdraw the right of municipalities to supply electricity. This is not core business.
Privatise the three entities listed above.
Allow any reasonable competition to sell power into the grid at what the market will sustain. Externalities to be within the regulatory framework.
Prosecute those who steal electricity.

If there is a shortage it is because the price is too low, the price is regulated and competition is not allowed.

MW journos need to provide the facts to the public and discuss the real issues at hand. Only a free market can fix this mess. However with zubats like Lynn Brown in positions of authority there is no hope for Kuruman.

The article is really about Green journalists being miffed that their pet Green projects (which really contribute diddly squat ENERGY at highly inflated prices) have been set back by t economic distortions of their own making.

Don’t be ridiculous.

I catch your drift, but you are wrong on the relative cost of green energy. Wind and solar energy is now cheaper than new coal or nuclear energy. These green energy projects are in fact subsidizing Eskom. Eskom makes a profit off IPPs as they buy energy from IPPs at a price that is lower than the cost of production for Eskom.
It is all a matter of incompetence on the side of Eskom and competent free-market entrepreneurship on the side of Independent Power Producers.

Eskom would disappear over time if this economy was free at all.

If I am wrong on the cost of green energy then we need some serious investigative journalism which include such things as:

Capital investment on renewables
Weighted average cost of capital for renewables, nuclear and coal
NPV calculations (outlay versus discounted cash flow value)
Price sold into the grid per kWh, marginal costs and how this compares with existing sources’ marginal costs.

I somehow doubt that MW has the capability to do this.

Australian journalists and bloggers have done some serious investigation into the matter and renewable sources simply do not stack up.

I say if renewable energy sources can replace conventional electricity without subsidies at a lower cost then bring it on. Why not?

Let’s see the numbers!

The bidding process for renewable energy leaves no room for bribes and corruption. This is the root of the problem. Allow some bribes and a few billion to disappear here and there and Luthuli House will sort this out in no time!
People that vote for the ANC will get what they deserve- no electricity, water, sanitation or food.

We seem to have a ongoing desire to destroy anything that seems to be successful. Eskom wants the power of a monopoly and if the people see that they can simply, easily and cheaply make their own power, Eskcom will have lost their power over us.

Let me see if I have this straight. The geniuses at ESKOM don’t want to buy power from other suppliers because they are incapable of manufacturing enough themselves to satisfy the market? Bonuses all round to the management for that completely idiotic idea and bad luck consumers of electricity.

As mentioned by some it is once again the blame game or as I call it bully tactics. Escom’s attitude of “well if we don’t get our way then stuff you all we won’t supply power.” Threats and more threats or is it just treason. Without increased tariffs how will we pay ourselves fat bonuses.
Correct me if I am wrong but if we trace a purchase and sale time line here, we have Escom buying from the producer, sell on immediately with a margin, customer pays or gets cut off. Escom has the cash in hand to pay the producer. What am I missing here? a little bleed off somewhere, Fingers in the till. If you run a shop and sell an article you put the margin in your business and the cost price buys a new article for sale.

Seems the ANC are committed to a path of destruction, and that what most people call “unintended consequences” are, in fact, quite deliberate. For example, the visa disaster is all part of the big plan. They want the country to go the Zim route and then they will be able to pick up the pieces and start over. News for you ANC guys, it won’t work.

a bit late to this …. is it not the case though that the tariff payable by Eskom has dropped quite significantly. I stand to be corrected but from what I recall the tariff on Round 1 projects was hugely negative to Eskom and therefore indeed required government funding. I think that was known at the time though and the official line was that it would create many more benefits through other industry etc.

Are you saying that this is incorrect ?

cheers

End of comments.

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