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Government pulls renewables lever for economic growth

Eskom confirms it will sign power purchase agreements on Tuesday.

Newly appointed energy minister Jeff Radebe on Thursday confidently announced at a media briefing that the 27 outstanding Renewable Energy Power Producer Projects (REIPPP) will be signed on Tuesday, March 13.

Neither Eskom nor the Department of Public Enterprises was represented at the media briefing, but Eskom spokesperson Khulu Phasiwe confirmed to Moneyweb that the power utility will be signing the agreements on Tuesday.

Phasiwe said a resolution to that effect was taken at a meeting of the Eskom board that took place while Radebe was briefing the media. “Further discussions will take place between Eskom and the Department of Energy, but I can confirm that Eskom will sign the agreements.” 

This will bring an end to a two-year delay in finalising the projects after Eskom earlier refused to sign the required power purchase agreements. It later agreed to sign, but only if the tariffs bidders agreed upon with the department of energy were capped.

Read: No end in sight to Eskom delays in signing renewable energy PPAs

Head of the DoE’s independent power producer (IPP) office Karen Breytenbach, told the media briefing that Eskom’s cap of 77c/kWh “could not work” and the average tariff agreed upon across all projects was 86c/kWh in 2017 terms.

The signing will unlock R56 billion of new investment from the DoE’s bid window 3.5 and 4 to stimulate the economy and create 61 600 full-time jobs over the next two to three years, Radebe said. Ninety-five percent of these jobs will be filled by South Africans, according to the minister.

He further announced steps to expedite the 20 projects under the Small Renewable Programme that caters for projects between 1MW and 5MW, has instructed the DoE to sign the two coal IPP projects and the 19 projects under the expedited bid window. All of these projects will unlock a further R105.7 billion of new investment.

Radebe had instructed his department to facilitate the development of a gas market with local and imported resources with the related infrastructure. In this regard, he will work closely with neighbouring countries, he said.

Some of Radebe’s predecessors made similar announcements that were not honoured by Eskom, but the minister was adamant that the utility would sign the agreements on Tuesday.

A total change of the guard since the previous false starts however gives credibility to his announcement. Radebe gave the assurance that the announcement was supported by President Cyril Ramaphosa, finance minister Nhlanhla Nene and public enterprises minister Pravin Gordhan – all newly appointed in their positions.

The REIPPP programme was hailed as the best in the world before it ground to a halt due to Eskom’s resistance. It responds to many of the country’s development goals, including rural development spread across some of the poorest parts of the country and job creation. It further mobilises private sector funding for the development of economic infrastructure.

Radebe said 59% of the jobs created as a result of the projects in bid window 3.5 and 4 will be situated in the Northern Cape, 15% in the Eastern Cape and 13% in North West.

The minister clearly meant business and said: “In the coming months, we will be deploying all our resources, coupled with the strength of our partnership with the private sector, all interested and affected stakeholders and our country partners on the African continent, to mobilise and optimise our endowment of energy resources as a key catalyst to economic growth.”

He said if energy is seen as central to economic growth, it can be the catalyst to build investor confidence and attract investment in the country and the continent.

Breytenbach said some of the 27 projects due to be signed on Tuesday will reach financial close immediately. July 31 has been set as a deadline for the rest. The first projects are expected to start supplying electricity to the grid by 2020.

Breytenbach gave the assurance that the projects will not weigh on the extremely burdened Eskom balance sheet. She said the power utility will never be out of pocket, because its purchases from IPPs are a pass-through approved as part of Nersa’s determination of Eskom’s tariffs.

She said government guarantees the purchases, which will amount to more than R200 billion in total, but will only have to pay the full amount if all the projects are expropriated or nationalised. This is unlikely and is something within government’s control, she said.

Breytenbach added that government provides for a rolling six-month obligation, should Eskom be unable to pay for the purchases. If it has to step in, such payments will be a loan that the power utility will have to repay.

Radebe indicated that he will release two long-awaited and important energy policy documents in the next week or two, namely the Integrated Energy Plan and Integrated Resource Plan. The documents map out the country’s energy mix for decades to come.

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This means an other round of electricity price increase is coming. Somebody has to pay for all these new investments.

These investments are funded by the private sector not by Govt.

Funny that is the most expensive finance possible…poor and the middle class will be burden with paying these ‘masters of capital’..

For a country that is capital poor and have natural resources, including vast amounts of Methane available, how can wqe afford to pay loans on buying expensive ‘clean technologies’?

Shows who is back in control of SA..

Funded by the private sector, but paid for with higher prices to the consumer.

“Eskom confirms it will sign power purchase agreements on Tuesday.”

Eskom is not getting the electricity for free. The whole reason Eskom initially rejected the IPP prices is that they were (and still are) too high. (and because we have a glut of electricity).

Nothing is as cheap as burning coal.

This might actually be the thing that prevents the future drastic increases, if the IPP’s can sell power to ESKOM for cheaper than ESKOM can make it then we the consumers are at least somewhat protected from the rot that is ESKOM

Eskom buys new round electricity from wind projects at half the price of Eskom’s own cost of new production. This means that Eskom’s profit margin on wind energy is more than the profit margin of the wind farms. The consumers are robbed by Eskom because Nersa is incompetent. So no, you won’t need to pay more because Eskom buys green energy. You should actually pay less if you could get competent people on the board of Nersa.

Utter rubbish, increased supply(ie, greater competition) leads to lower prices for the consumer, not higher prices. Simple economics. Eskom’s drones were ordered to sabotage this very successful programme because it was all about the nuclear deal, ie, Zuma’s retirement fund!

Just deregulate and privatise. Competition increases quality and lowers prices.
If only the populace could comprehend tgat simple fact. They keep stifling business with regulations. Who remembers the “outsourcing ” strikes?

Now we have had the britchfest- let’s have some facts. We don’t have 2018 figures yet, so let’s look at the 2017 data:

Eskom’s paid an average of 214c/kWh for renewable electricity in 2017 for 7200GWh i.e. R15.5 billion. Eskom’s marginal costs for producing electricity are on the 30 to 40c/kWh range i.e. what it costs to produce one more kWh. All Rand cents. One must realise that most power stations are already paid for. These capital costs are sunk. This is why the marginal cost of electricity from coal/ nuclear is so low.

To put this in perspective, 7200GWh is about 20% of what one large coal fired station produces in the same time i.e. one year e.g. Duvha, Kendall.

I am not sure what most consumers pay for electricity but it is about R1.50 in a City.

Thus Eskom buys something for R2.14, transports it a long distance (at Eskom’s cost) and sells it to the municipality who marks it up and sells it for R1.50.

That, folks, is dumber than a box of rocks. It’s called wealth destruction. When we indulge in wealth destruction we all lose. We all get poorer. Simple rule of life.

If you don’t believe me, try buying ‘organic’ milk from the farmer at R50 per litre and selling it for R20 per litre after transporting it at your own cost.

Some pertinent questions MW cannot ask, so I will.

If Eskom buys electricity for R0.86 per kWh in the Northern Cape, what is the % loss before it gets to the consumer? The cost is thus 0.86 * 100/(100-loss) + grid costs.

What price are they selling to the Municipality?

What price will the consumer pay?

Who are the suckers?

That thinking (that the stations are paid for so their cost is ignored) is exactly what landed us with the price shocks when we went from 27c in 2007 to over 100c in 2010.

Stations do NOT last forever and must be replaced, for which one must set aside capital and that capital can only from sales revenue.

There is ample proper research (eg Lazard LCOE) that sets out the undubsidized cost of different energy sources. Coal is about $0.08/kWh generation cost.

Where I do agree is that the earlier round RE prices were too high. We should have done a quick auction of 75% of all the old qualified bid capacity. PV cost and currency benefit should sharpen those pencils back by 10c/kWh.

Don’t be ridiculous, Johan. If we were in a court of law, I would object to you assuming facts not in evidence. Nowhere did I say one should ignore capital costs. Eskom don’t ignore capital costs as they don’t sell their product for their marginal cost.

Stations do NOT last forever ? NOT? Ya reckon? *gosh* who wouldda thunk?

All I am doing is questioning the logic of purchasing something for 2X when, a more reliable supply, of the same thing, could be had for x. If you were running a business would you choose the most expensive supplier or would you only move on to more expensive suppliers (less expensive ones first) once the cheaper suppliers had no excess capacity?

That is a rhetorical question BTW.

What would be really smart is to ensure that the new capacity comes on stream when the old capacity has run out. That would be giving ANC/ Eskom credit where no such credit for intelligence exists.

Let me give you another example. All the renewable energy fans will point out that prices are falling faster than a grand piano tossed off the Empire State. They would be correct (after all they can’t always be wrong about everything). Now, hypothetically, if you were in the market for a new Hilux and Hilux prices were falling 5% a week. Would you shell out 500 chips today or hang in there and shell out 450 chips when the market hit the bottom?

That is a rhetorical question BTW.

After all it is about making sound rational business decisions. There is ample proof (e.g. 214c above) that the ANC/ Eskom cannot do this and a good number of people on this forum, who in my opinion are clueless, are goading them on and trying to shut down debate by name calling.

The rational business decision would be for Eskom to include the cost of capital in their pricing structure. When demand is projected (5 -7yr forcast) to exceed supply, prices must rise and new capacity purchased only when it can be transported and sold at a profit. Better still break up the power generation, grid and electricity sales (Municipal function) into separate companies. Privatise this sorry mess and let the market sort it out.

My Parthian shot: Those who think renewables are so wonderful should go and live in South Australia. The highest electricity prices in the world (more than Denmark), the highest unemployment in Australia and the grid collapses routinely. They import coal power from NSW and Victoria when the proverbial hits the fan. But then they are *sold* on renewables.

People who insist that coal is cheaper are deluded… coal itself might be cheap but what about the costs of building coal-fired power stations like Medupi and Khusile. Billions of rands in inflated costs not to mention years of delay. How many years before that is recovered? Solar and wind are far quicker and cheaper to build. And the costs are decreasing all the time. Even Saudi Arabia, the world’s greatest repository of oil, is getting in on the game…
https://www.bloomberg.com/news/articles/2018-01-16/saudi-arabia-plans-up-to-7-billion-of-renewables-this-year

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