SA power market too large for only one player

There was no question that there was ample room and need for independent power producers (IPPs) and cogenerators in South Africa, as the power market was way too large to be served by only one player, Norconsulting and CIC Energy representative Tore Horvei said on Tuesday.
He told delegates at the Cogeneration World Africa 2010 conference that a country and its economy could be at risk by relying on only one large electricity supplier.
Horvei noted that the latest capital costs for both Eskom’s new Medupi and Kusile coal-fired power stations had likely been underestimated.
Further, a one-year delay in the Medupi power station would likely result in an additional R11-billion in finance costs, while the expected two- to three-year delay in the Kusile power station would likely add an additional R30-billion in finance costs to the overall project cost.
In a statement issued by Eskom on Tuesday afternoon, it denied that the Medupi power station was delayed by a year or two years, saying that such reports by third parties were not true.
The utility said that, as it had previously indicated, the Medupi power station was facing a potential three-month delay in terms of the commissioning of the first unit to September 2012. The additional units would come on stream every six to eight months thereafter.
The utility further noted that the costs for Medupi amounted to R125-billion, and for the Kusile power plant to R140-billion. This included estimated interest to be capitalised on money borrowed to fund these projects, it said.
The cost to generate power from these two power stations would likely be higher than what many IPPs could manage, asserted Horvei.
This left plenty of room for renewable energy players, cogenerators and base-load IPP players to participate in the local power market.
Dewey & LeBoeuf South Africa partner Scott Brodsky agreed that the electricity generated by Eskom’s new build power stations would likely be more expensive than what the IPPs could provide, stating that there was enough need for power in the country to allow more participants in the market.
Eskom currently had a 40 000-MW capacity and the country would require a further 50 000 MW of electricity generation by 2028, assuming that 10 000 MW of capacity had been retired at that stage.
This represented a doubling in the power generation capacity of Eskom, Brodsky pointed out, adding that future load shedding would be likely.
Cogeneration and self-generation power plants would thus make sense, but it was essential to get the process right as delays could make investors wary.
Exxaro Resources energy manager Thomas Garner said that the capital cost of building the Medupi power station had nearly doubled from the starting point of R80-billion.
It would cost the utility $5 500/MW to build Medupi, whereas some IPPs could build a power station at a cost of between $3 800/MW and $4 200/MW, he stated.
The lower cost was mainly as a result of the contracting strategy used by IPPs, which generally entailed only a single turnkey engineering, procurement and construction contractor, said Garner.
Horvei agreed that Eskom’s contracting strategy, which entailed 38 contracts and several subcontractors, was leading to some difficulties.
He noted that the “messy” project management strategy was causing delays, adding that claims between contractors and subcontractors on the Medupi contract were rising on a daily basis.
Garner asserted that government needed to be more transparent about the delays in its new build programme, as industry leaders were misinformed about where the country stood in terms of energy security.
Cogeneration was the lowest-hanging fruit that should be pursued by South Africa, said Garner, questioning why more industrial players with waste heat were not considering cogeneration or self-generation opportunities.
He indicated that at least 2 000 MW to 3 000 MW of electricity could be generated in this manner.
Meanwhile, Horvei and IPP NuPlanet MD Anton-Louis Olivier emphasised that the government and State entities tasked with concluding the power purchase agreements with the private sector had to be capacitated to deal with the increase in potential agreements.
Currently, these entities were expected to be overwhelmed by the increase in applications, said Horvei.
Olivier indicated that the cogeneration sector could face the same challenges faced by the larger renewable energy sector in terms of the renewable energy feed-in tariff system, where larger less viable projects were often favoured above more viable smaller projects, as a result of a lack of capacity within the overseeing entities.