Cabinet has approved the building of a third coal-fired power station by Eskom. Minister of Trade and Industry, Rob Davies announced that although no time lines or costs have been approved, construction of the power station, dubbed “Coal 3”, was not likely to begin until Eskom’s two current coal-fired projects, Medupi and Kusile, were complete.
This announcement would have earned the applause of consumers and businesses if the Minister had said that independent power producers (IPPs) were to be allowed to build coal-fired plants (not Eskom) and that the grid would be opened up on a basis acceptable to the IPPs in a first step towards allowing competition in an electricity market. It would have heralded the fact that South Africa would have not only benefitted from an increased electricity supply but also the beginnings of a real market in electricity. Instead, we are filled with utter dismay that Eskom is being handed yet another major project on which to squander our scarce resources.
In August, Eskom announced that Medupi would cost a maximum of R105bn, excluding interest during construction (IDC). The IDC is conservatively estimated at R30bn which thus increases the price of Medupi to R135bn. This figure, however, excludes the cost of therequired flue gas desulphurisation (FGD) plant, so we have to add on yet another R10/R15bn. Thus, Medupi is likely to cost at least between R145bn and R150bn, around three times more than Eskom's original estimate of R52bn announced in January 2007
According to Eskom, Medupi’s first unit, which should have started generating power in January 2010, is now likely to do so in the second half of 2014. Only 54 months late. A similar situation is unfolding at Kusile where massive delays and cost overruns are also being encountered. As the project manager responsible for the performance of its contractors, these delays must be laid squarely at the feet of Eskom.
It makes no sense that Eskom should build another large coal-fired power station. “Coal 3” should be broken down into smaller units and put out to tender so that private companies can bid to build, own and operate the power stations. Private companies, using their own money instead of that of taxpayers to build the power plants will be more adept at enforcing tight controls over the contractors employed in the build process. Any cost overruns would be borne by the private owners and not by taxpaying South Africans. These stations will cost some R 22m/MW vs. Medupi at R 31.5m/MW, i.e., about one-third less.
When given the opportunity to supply electricity, the private sector has demonstrated that it is able to produce it at prices lower than Eskom. Through the government’s Renewable Energy Independent Power Producers (REIPP) programme, IPPs that have been permitted to supply electricity generated from renewable sources have been steadily reducing the cost of electricity. For example, in Round 1, the average wind energy price was 114c/kWh. In Round 2, the average price was 89 cents/kWh with prices as low as 79 cents/kWh. All indications are that prices will be lower in Round 3, despite significant adverse movement in interest rate, exchange rate and rising inflation. Increased competition amongst IPPs producing electricity from solar power has also seen significant price declines from one round to the next.
South Africa’s outdated power model, where one single entity is responsible for all of the generation, transmission and a large part of the distribution, has been abandoned in every commercially competitive country worldwide.
Government’s Independent System and Market Operator (ISMO) Bill offered the possibility that it would remove the system and market operations of the electricity supply industry from the hands of Eskom. As a separate independent state-owned entity, the ISMO would be expected to carry out its task independently without being dominated by Eskom.
The creation of an ISMO is an important step. It will level the playing field and allow independent power producers (IPPs) to access the transmission grid. Another important step would be to unbundle the “wires business”, which means separating the transmission grid from Eskom. If these remain in the hands of Eskom, a conflict of interest will remain between IPPs and Eskom, who will be competing with each other in the generation and supply of electricity.The ISMO, as described in the Bill, is bound to have difficulty managing the relationships between Eskom and IPPs regarding matters such as connections to the grid.
In a surprise move in July this year, however, government removed the ISMO Bill from the parliamentary schedule. This could be perceived as good if government is considering including the transmission assets to create an Independent Transmission, System and Market Operator (ITSMO) or Transmission System Operator (TSO). It would be a bad move if it was done to block the creation of a new separate entity and thus ensure that we can expect power blackouts to be a common and more frequent occurrence in the years to come.
Eskom have voiced concern that removal of the transmission grid will severely affect its balance sheet and thus adversely affect its credit rating and the interest it pays on its new build programmes. This argument is unfounded and invalid. Whichever new state-owned entity acquires the transmission grid, the state will still “own” the grid. When it comes to the crunch, the ISMO Bill proposal is simply an accounting formality to transfer assets from one state-owned entity, Eskom, to another, the ITSMO.
Given Eskom’s inability to manage the delays in the build programmes for Medupi and Kusile, and the consequent cost overruns, we should not trust it to build another power station. IPPs are eagerly awaiting the opportunity to build, own and operate power stations. They will not start supplying electricity to customers, though, if Eskom retains the power to be both referee and player in the market. If South Africa is to move into the modern era, it must follow the example of the rest of the world. Unbundle Eskom and allow IPPs to supply electricity to customers without fear of bias and prejudice.
Source: This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.