Late on Tuesday night Eskom issued a statement defending its decision to halt the issuing of budget quotes for renewable independent power producers (IPPs) beyond the Department of Energy’s bid window 3, until April 1 2018.
This follows Moneyweb first disclosing on October 9 that this decision may derail government’s renewable energy procurement process, since it will delay financial close on such projects. The projects at risk include 26 projects to the value of almost R50 billion in bid window 4 that have already reached preferred bidder status.
Eskom applied for exemption from the Grid Code provision that obliges it to issue budget quotes within six months from receiving an application for such. Eskom indicated that it first needs a revenue guarantee from energy regulator Nersa to ensure it has the funds to meet the financial obligations that will ensue once the budget quotes have been issued.
Budget quotes are cost estimates of the infrastructure needed to connect generation projects to the grid. While renewable projects bear the cost for such infrastructure, Eskom incurs cost for strengthening the grid where necessary, to ensure reliable transmission of energy from the point of connection. Once the budget quote is issued, it enables the further development of the project towards financial close, including the conclusion of a power purchase agreement, that obliges Eskom to buy power from the IPP at a predetermined price for 20 years when it becomes commercially operational.
Eskom maintains it does not have the money for strengthening the grid and buying the energy from projects beyond bid window 3, since such revenue was not included in its current revenue allocation that applies until March 31 2018 (MYPD3).
Nersa’s electricity sub-committee last week rejected Eskom’s application for exemption. During the discussion at its electricity sub-committee meeting, Nersa chair Jacob Modise called the application “cheeky” and tantamount to “blackmail”. The rejection is expected to be confirmed by the regulator meeting at the end of the month.
It is this statement of Modise that Eskom takes issue with.
Eskom says it fully supports the Department of Energy’s renewable energy procurement programme. It acknowledges that IPPs must play in the South African electricity market, and remains committed to facilitating the entry of IPPs to strengthen the system adequacy and meet the growing electricity demand.
“Total capacity of 5 701MW has been contracted with independent power producers (IPPs) as at March 31 2015, of which 3 887MW relates to contracts under Department of Energy’s RE-IPPP”, Eskom said
It said a total of 1 795MW of renewable energy generation capacity had been connected to the national grid at the end of the previous financial year and points out the load factor of almost 31%. (Load factor, in essence, means efficiency. It is the ratio of actual kilowatt-hours used in a given period, divided by the total possible kilowatt-hours that could have been used in the same period).
Eskom further stated that short- and medium-term contracts which were expiring at the end of March 2015 were renewed for another year so that they can continue to contribute to reducing the supply shortage.
Molefe said: “Eskom is committed to supporting the grid integration of independent power projects as evidenced by the 43 projects connected to date since the inception of the procurement programme in 2011. For the renewable energy rounds 1 to 3 (Bid Windows 1 to 3) Eskom has spent R2.4 billion on the backbone infrastructure at both transmission and distribution level to enable the evacuation of energy from the IPPs. Eskom believes that non-issuance of budget quotes is a temporary measure and that very soon a lasting solution will be found to address this matter.”
He added that the decision to temporarily halt the issuance of budget quotes was taken to protect the financial sustainability of Eskom due to the fact that no capital allocation was accommodated for in the current multi-year pricing regime (MYPD3) for IPPs beyond Bid Window 3. “In essence, Eskom’s current financial plan cannot support any new IPP connections as well as energy purchases.
“While we acknowledge the discomfort that this decision will have on the IPP procurement programme, let me assure you that Eskom is currently engaging with all the relevant stakeholders to resolve this matter as soon as possible. From a Transmission and Distribution perspective, Eskom has committed to continue with the network integration studies, develop and cost the appropriate solutions associated with IPP connection applications received for Bid Widows 4 and the expedited programme. This is to ensure that once the financial situation is resolved, budget quotes can be issued without any further delays,” Molefe added.
“It is against this backdrop that Eskom was surprised to read media reports that quoted Nersa as saying that its application for an exemption from the Grid Code was “cheeky” and “tantamount to blackmail”, the statement continued.
“Eskom believes that its application for exemption from the Grid Code was correct because issuing binding budget quotes without guarantees of how it will source the funding for such a capital intensive project would have been akin to reckless trading.”
Eskom by stating the circumstances described in the Grid Code that allows for exemption, including:
- To provide for existing equipment that has not been designed with consideration for the provisions of the Grid Code
- To facilitate transition through interim arrangements
- To facilitate temporary conditions necessitating exemption.”
And requirements for such applications:
“ All exemption applications should clearly indicate the following:
- the reason for the non-compliance,
- the current capability (even if this is less than what the code specifies)
- the duration of the exemptions
- action plan put in place to fix the non-compliance and
- any other information that can be used to justify why the exemption should be granted.”
“Eskom followed the prescripts of the South African Grid Code in requesting for an exemption from the network code”, Eskom stated.
Eskom group executive for Transmission and Sustainability Thava Govender on Friday told Moneyweb the utility is ready to issue outstanding budget quotes and hopes to come to an agreement with Nersa that will enable it to do so within a week or two.