Grid unbundling not an immediate obstacle to private power – Eskom

State-owned power utility Eskom expects to sign agreements for 1 425 MW of conventional and renewable energy arising from independent power producer (IPPs) between now and 2013, as well as a further 1 000 to 1 500 MW of cogenerated capacity over the same period.
Six power purchase agreements (PPAs) have already been approved under the medium-term power purchase programme, or MTPPP, with 215 MW of that “operational” and a further 400 MW to be operational by March 2011, divisional executive for systems operations and planning Kannan Lakmeeharan tells Engineering News.
Contracts have been concluded with Sasol, Ipsa, Tangent and Sappi, as well as an additional supplier whose identity has not yet been released.
The National Energy Regulator of South Africa (Nersa) has approved the MTPPP agreements, with four of the six deals having been finalised with the respective IPPs. The utility is awaiting confirmation from the boards of the remaining two IPPs as to their acceptance of the PPA terms.
Lakmeeharan indicates that the utility is also ready to move on the renewable energy feed-in tariff-related, better known as Refit, projects, but that the utility will only be in a position to do so once there is regulatory certainty on the PPAs, in particular, the apportionment of risk between the supplier, the buyer and the government. There is a strong push for government to act as the ultimate guarantor of the agreements.
The finalisation of the selection criteria for Refit projects is also necessary, owing to the fact it is anticipated that more capacity will be tendered than Eskom currently has capacity to recover through the prevailing tariff structure.
Senior regulatory affairs GM Mohamed Adam tells Engineering News that some R11-billion has been set aside for Refit and MTPPP projects in the second multiyear price determination, or MYPD2. “It is a line item that can be spent on IPPs and nothing else,” he explains.
Adam also dismisses arguments that the vertical separation of Eskom’s transmission business is the key immediate impediment to further investments by IPPs.
This argument was aired again recently in an opinion piece written for Business Day by University of Cape Town Graduate School of Business Professor Anton Eberhard, who also sits on The Presidency’s National Planning Commission, and Meridian Economics partner Mark Pickering.
Pickering and Eberhard argue that the immediate unbundling of the Eskom’s transmission business is preferable to the creation of a ring-fenced system operator within the utility, as is currently envisaged.
The development of a new utility company, which they dub ‘Central Power’, would help attract IPPs, the emergence of which had been “painfully slow”. Such a move would also have only a marginal impact on Eskom’s balance sheet and credit rating, owing to the fact that the transmission unit accounts for only R10,5-billion in a total balance sheet worth R246-billion.
But Adam questioned the figures, arguing that the effect of an unbundling exercise on Eskom’s balance sheet would depend on the assets included. “If it is the entire transmission business, it will have a very significant effect on Eskom’s balance sheet,” he tells Engineering News.
Instead, he asserts that the immediate obstacle to the introduction of IPPs relates to the confirmation of the PPA terms and the final selection criteria for the Refit projects.
“Eskom is ready to sign up IPPs under this programme once these two elements are concluded by Nersa and we are anxious to do this to support security of supply and gain momentum and learning in terms of renewable-energy generation.
“We are sure that serious developers want to rather get going as long as there is clarity on the PPA and criteria and the procurement process is transparent,” Adam explains, warning that any unbundling process could delay implementation by a further 18 to 24 months.
The target is to sign up at least 1 025 MW of renewable power under the Refit programme between now and March 31, 2013. The longer-term role of IPPs will be determined by the contents of the second integrated resource plan, or IRP2010, which is currently being drafted and should be published, the Department of Energy says, by early in the fourth quarter.
Adam says that a ring-fenced Eskom system operator will not be conflicted, owing to the fact that the IRP2010 will dictate what new capacity will be introduced.
Further, IPPs will demand “take-or-pay” contracts to make their projects bankable, which means that Eskom will not face a conflict of interest in dispatching such power, as there would be no financial incentive to favour Eskom capacity over IPP production.
“In other words, there is likely to be very little conflict of interest in pursuing a ring-fenced model.
“On the other hand, we have to be cautious, particularly in the context of a tight supply/demand balance, of pursuing a model that further separates the system operator from the generators.
“There is going to be a need for constant communication and planning to get us through this period of tightness,” Adam avers.
South Africa’s power system is expected to become vulnerable again from 2011 through to 2012, ahead of the synchronisation to the grid of Medupi’s first of six 790-MW units in April 2012. Eskom has also cautioned of medium-term supply-side threats, as from 2017, which will emerge unless decisions are made during 2010 about further base-load capacity beyond the R142-billion Kusile power station, for which funding is still being secured.
Therefore, Adam stresses that the IPP programmes are a necessary component of future electricity supply, particularly given that the utility is not in the financial position to build additional power stations beyond the Kusile project, which is under way in Mpumalanga province.
“However, the success of the IPP programme is predicated on the establishment of an appropriate and enabling legislative and regulatory framework,” he concludes
Engineering News.

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