Eskom versus IPPs

Brendan Ryan | Wed, 29 Jul 2009 15:09

[miningmx.com] -- DEVELOPMENTS between Eskom and independent power producers (IPPs) have rekindled fears South Africa could be heading for a repeat of the power crisis of January/February 2008.

That’s despite recent comments by Eskom executives that the two new 4,800MW power stations it is building - Kusile and Medupi – are on schedule and the utility is to consider the go-ahead for a third station – either coal or nuclear – within the next 12 to 18 months.

Feeling amongst some energy and mining industry sources is that Eskom and the SA government have “taken their eye off the ball” thanks to the breathing space created by the drop in demand for power caused by the economic slowdown.

They cite the delays to implementation of the first power purchase agreements (PPAs) with potential IPP providers CIC Energy and Ipsa Plc along with the decision last November not to build a new nuclear power station.

That’s denied by Eskom spokesman Fani Zulu who commented, “there’s plenty going on in the background. “

Despite these actions the SA government maintains that it is still policy to source more power from nuclear plants and IPPs.

“The decision to stall construction of the next nuclear plant was a missed opportunity,” said Brian Statham, chairman of the SA National Energy Association.

“The time was right to secure sweet deals from both Areva and Westinghouse because they wanted the business so badly,” he said.

Yet Statham is sympathetic to the reason cited by Eskom for its actions which is the need to nail down the funding arrangements with the government and the National Energy Regulator of SA (Nersa) over future electricity tariffs and how the new build programme will be financed.

“We must have a coherent energy policy supported by a solid funding policy. Eskom must protect its credit rating to be able to raise funds and its credit rating will deteriorate if the rating agencies foresee a slump in group cash flow," he said.

“I suspect we will have to wait for Trevor Manuel and his central planning unit to provide the answers through a master plan for SA’s future development.”

It seems the political upheaval that the country has been through over the past six months has also contributed. Ministers and key civil servants have been shifted around and the new ones responsible for power issues have to get up to speed.

According to one industry source: “In the good times during the late 1980s and 1990s all South Africans enjoyed Eskom’s below inflation tariff increases and the government took a lot of money out of Eskom in large dividends instead of building up Eskom’s capital base.

“Now, when Eskom needs funds, we are all quibbling over the level of our commitment to fund Eskom. ”

But all this does not help the IPP companies whose projects have been delayed by Eskom’s hard line approach and are suffering the financial consequences despite having “acted in good faith” in pushing ahead with their projects.

CIC president Greg Kinross said Eskom and the government had both acknowledged the pressing need for new generating capacity in their discussions with the company.

But, according to one industry source, that’s pure lip service.

“You cannot judge Eskom by what it says, you have to judge it by what it does. The government may want IPPs but Eskom does not. It is using its dominant market position to shut out people who can build power stations cheaper and faster than it can," the source said.

“Look at the cost overruns so far on Medupi and Kusile. Would you put shareholders money in their hands?”

The bottom-line issue is that the main source of new power generation capacity between now and mid 2012 – when the first generating set is due to come on line at Medupi – is the IPPs and co-generation projects.

While Eskom does not have problems meeting power demand at present that could change swiftly depending on the pace of a global economic recovery which may be underway.

The ferro-alloy furnaces that shut down en masse last year are already starting to come back on line. Aside from how fast demand may rise a critical factor is whether Eskom will bring its new capacity on line as forecast.

Eskom chief officer for generation – Brian Dames – recently told media during a visit to Kusile that Eskom was confident it could cut at least 10% from the costs of building the Medupi and Kusile power stations.

Statham is not so sure that can be achieved.

“Trying to run flat out to bring the projects on line while at the same time trying to arm wrestle costs down will be a knife-edge situation. I suspect one of those objectives is going to fall by the wayside.”

That could make the ultimate fate of the 1,200MW CIC Mmamabula plant of key importance because of its size and timing. It is the largest IPP project being developed and was due to come on stream from 2013 although this has now probably been set back another year.

Overall, Statham believed the world was going through a “crisis of leadership” in terms of coping with the energy crisis.

“I don’t see leaders with strong beliefs taking the decisive actions required given the uncertain future.

“Instead, there’s a tendency to analyse everything to the nth degree and, by the time you get the perfect answer, the opportunity has passed by. It does seem that South Africa may also be suffering from this global ill.”