Interministerial committee to meet over Eskom, IPP impasse

An interministerial committee will meet in February to decide what is affordable and realistic with regard to the procurement of renewable energy from independent power producers (IPPs), public enterprises minister Lynne Brown said on Tuesday.

Brown addressed criticism aimed at Eskom for its failure to sign power purchase agreements (PPAs) with IPPs who have been selected as preferred bidders in bid window 3.5, 4 and 4.5 of the Department of Energy’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP).

Eskom’s stance is standing in the way of financial close of 37 projects and as a result they cannot proceed with construction. The Renewable Energy Council on January 17 said it got legal opinion from Webber Wentzel senior counsel David Unterhalter that confirms the affected IPPs’ legal position. Unterhalter confirmed that there is a legal obligation on Eskom to sign the PPAs and it would be unlawful for it to try to renegotiate the tariffs the Department of Energy agreed to.

Brown said the Integrated Resource Plan (IRP2010), upon which the REIPPPP is based, assumed an economic growth rate of 5% per annum. In reality it was below 2% and as a result the demand for electricity grew at a much slower pace than the projected 2% per annum. The demand has in fact been flat for the last decade, Brown said.

She said when the country had capacity constraints the IPPs played a critical role in the energy mix, but at a premium price. That price could have been justified against the alternative of the cost of diesel or load shedding,

The situation, however, changed dramatically as Eskom recovered and extra generation capacity from Medupi and Ingula power became available.

Eskom now has excess capacity. The amount it can export to neighbouring countries is limited by the transmission capacity, Brown said.

She said buying more generation capacity while it already has a surplus, would lead to an increase in Eskom’s cost, which would be reflected in a higher electricity tariffs to the consumer.

“In my opinion, the Eskom board would fail in its duty if it did not consider the burden of high costs on consumers.”

She said the interministerial committee will meet in the second half of February. In the meantime Eskom and the Department of Energy are also discussing the issue.

Eskom acting group CEO Matshela Koko told Moneyweb the committee would be chaired by the minister of environmental affairs. The other ministers on the committee are Brown, energy minister Tina Joemat-Pettersson and finance minister Pravin Gordhan.

Koko said Eskom’s surplus at peak currently averages at 5 600MW, including the 2 000MW operational margin. This, he said, is a game changer. Maintenance is ahead of schedule and breakdowns have decreased from 16.2% a year ago to 10.7% of installed capacity. Plant availability was at 77.3% in the three months to the end of December, compared with 70.3% in the third quarter of the previous year.

Exports have increased by 25% over the past year and the excess capacity now allows it to run those power stations that are the cheapest to run first. Eskom expects to realise savings of R238 million by the end of the financial year through this strategy.

Eskom’s obligations to buy electricity from renewable IPPs however results in increased cost, Koko said. He illustrated this by showing a simulation of electricity supply on August 31 2016, using Eskom-owned power generation as opposed to having some of it displaced by renewables.

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The averaged marginal cost from Eskom’s own plants was 23c/kWh. The renewables however cost 193c/kWh. Koko said incorporating renewables on the day resulted in an additional cost of R52 million.

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Eskom hopes to make available on its website within a week the simulation tool that would enable anybody to do a similar exercise on any chosen date.

Koko said the country and Eskom cannot afford the current pace of adding renewable IPPs to the electricity system.

He said Eskom knew all along that renewable energy is costly and proponents such as the CSIR are not telling South Africans the full story. When it did not have enough generation capacity of its own, Eskom was in no position to speak out, but that has changed, he said. He repeated Eskom’s earlier claim that renewables in fact cost the country R9 billion in 2016.

He told Moneyweb that Eskom is aware of the legal implications of changing course and possible reputation damage to the country, but said on the other hand the country cannot proceed to buy costly renewables it doesn’t need and recover the cost from consumers through higher electricity tariffs.

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