MEDIA RELEASE - Medupi is likely to cost 200% more than original budget

The true cost of Medupi is likely to be at least R145-billion and not R105-billion as Eskom is saying.  This is according to the Energy Policy Unit (EPU), part of the Free Market Foundation (FMF) who cautioned that Medupi would not meet its December deadline at a recent media briefing on June 05. Doug Kuni, chairman of SA Independent Power Producers (SAIPP) said that not only was this delay predictable, even mid 2014 will not see Medupi supplying mainstream power to the national grid which is only likely to happen nearer Q4 2014. The cost to the economy of the Medupi delays is immense not only in building the station but in the compounded opportunity cost of lost and delayed growth, capacity and jobs due to constrained power supplies which is unlikely to be recouped.

How much will Medupi finally cost? Following the Eskom announcement of the latest delay, CEO Brian Dames confirmed that the cost of the project had increased from R91.2-billion to R105-billion, excluding interest during construction (IDC). He also stated that IDC is not expected to deviate materially from the R30-billion estimated previously. It is however more likely that this will be in the region of R35-billion.  The official cost also excludes a flue gas desulphurisation (FGD) plant that must be added to the coal-fired power station at a cost of between R10-billion and R15-billion.

Therefore, from available figures, according to power consultant Pieter van Dam, Energy Research Associates (ERA), the likely cost of Medupi will be between R145-billion (105 + 30 +10) and R155-billion (105 + 35 + 15) which is considerably higher than Eskom's quoted R105 bn.

•    In January 2007 Eskom said the planned 4500MW station would cost R52-bn [R11.6m/MW] (incl. IDC)
• In October 2007 Eskom said the planned 4800MW station would cost R78.6-bn [R16.4m/MW] (incl. IDC)
• In November 2009 Eskom said the planned 4764MW station would cost R124.42-bn [R26.1m/MW] (incl. IDC)
• In April 2011 Eskom said the planned 4764MW station would cost R98.9-bn [R20.8m/MW] (excl. IDC)
• In July 2012 Eskom said the planned 4764MW station would cost R91.2-bn [R19.1/MW] (excl IDC) [They excluded Transmission and other costs]
• In July 2013 Eskom said    the planned 4764MW station would cost R105-bn [R22.0m/MW] (excl IDC)

Van Dam said “Although the estimated final cost of the station is R150bn [R31.5m/MW] (incl. IDC and FGD), the probable cost of Medupi is likely to be at least R160bn [R33.6m/MW] (incl. IDC and FGD). This is an increase from R11.6m/MW to R33.6m/MW which represents a 190% increase”.

But SA’s energy woes go further. According to FMF economist Jasson Urbach, “The price we see is not the price we are paying when opportunity costs involved with the delays are counted. Using the cost of unserved energy (COUE) from South Africa’s Integrated Resource Plan of 2010 (IRP 2010) of R75/kWh, the cost of these delays amounts to R234bn for one unit. However, it’s likely that there will be knock-on effects and all 6 units will be delayed. If this is the case then the total cost of unserved energy for a delay on all 6 units amounts to a staggering R1408bn

The EPU believes that the way forward is to abandon the outdated monopolistic model of Eskom as sole generator and distributor; and adopt international proven best practice. This means unbundling the national grid from Eskom into a separate independent unit and introducing private operators able to wheel (buy and sell) electricity over the grid at market determined prices. Also, the state, via Eskom, should not be in the business of building new capacity.  This should be left to the private sector with private capital willing to risk and invest according to the natural laws of the competitive market, which will keep costs down, ensure efficiency and an available and reliable supply of electricity at affordable consumer prices.

Editors Notes
The Free Market Foundation (FMF) is an independent, non-profit, public benefit organisation, created in 1975 by pro-free market business and civil society national bodies to work for a non-racial, free and prosperous South Africa. As a policy organisation it promotes sound economic policies and the principles of good law. As a think tank it seeks and puts forward solutions to some of the country’s most pressing problems: unemployment, poverty, growth, education, health care, electricity supply, and more. The FMF was instrumental in the post apartheid negotiations and directly influenced the Constitutional Commission to include the property rights clause: a critical cornerstone of economic freedom.

The FMF has a wealth of information in papers, articles and opinion pieces available on the website which can influence the public debate and present alternative policies to the people of South Africa. Energy articles can be found by clicking here - FMF Energy Policy Unit

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