If Eskom cannot run a simple business of supplying efficient and affordable power to the people, I believe the whole electricity generation sector should be opened up to the private sector – just like the cellular phone and broadcasting industries. Eskom should just be one of the players with no authority.

In light of the current constenation about Eskom’s pending 145% tariff increase, I dusted up a recent interview with Doug Kuni, managing director of the South African Independent Power Producers Association (SAIPPA) by Chris Yelland, managing director of EE Publishers.

In this interview, Chris Yelland, managing director of EE Publishers, questions Doug Kuni, formerly from Eskom Generation, now a private consultant and managing director of the newly formed South African Independent Power Producers Association (SAIPPA), on the issues surrounding Eskom and IPPs in South Africa

Mr. Kuni, to what extent do you believe that South Africa needs IPPs and industrial co-generation as part of the solution to South Africa’s generation capacity crisis, and what advantages do IPPs bring?

If one looks at the future supply-side requirements of the economy of South Africa, it is clear that Eskom, on its own, does not have the resources to meet the demand. The country will need the participation of IPPs. Cogeneration is potentially a quick and effective response as there are many potential participants already in the economy. By Eskom’s own estimation, a potential of about 900 MW from industrial cogeneration exists. The advantage of IPPs is that these plants are not on Eskom’s balance sheet. Further, IPPs share risk in the transaction. When Eskom builds plant, all risk is passed through to the consumer and taxpayer. IPPs can also build and operate faster and more cost effectively than Eskom.

There has been talk of getting IPPs into the generation mix in South Africa for over ten years, but we still see few signs of progress. What is really going on, and what is it that is holding South Africa back?

I see two issues here. Firstly, Eskom and the government do recognise the need for IPP participation. However neither have thus far demonstrated a credible and clear programme to attract IPP participation. Eskom implemented its PNCP and MTPPP program, which elicited a lot of criticism from IPPs. I would like to know how much Eskom spent on financial and legal advisors to compile its power purchase agreements (PPAs), which were then presented fait accompli to the IPPs. In the end, not a single PPA was signed. Secondly, it now turns out that Eskom does not have the funding to support an IPP programme! The DME undertook its own procurement of open cycle gas turbines (OGCTs) at Coega. However, it too did not conclude a successful programme. IPPs, Eskom and government have incurred huge costs without a result. If you were an IPP, how should you react to this situation? Both government and Eskom have been making lots of noises about how important it is for IPPs to come to South Africa, yet the evidenceof their performance so far is quite the opposite of what they purport. Through the NERT process and the publication of the new generation procurement regulations by the DoE, it seems that some concrete steps are now being taken by government to address the situation. The separation of the System Operator as an independent entity is a step in the right direction to deal with IPPs. The identification of funding to support the cogeneration program is very important to get a quick result in the IPP program, and I believe government is now addressing this. This is a positive development.

Do you believe that Eskom can be an honest broker as a generation project specifier, evaluator, adjudicator, power purchaser and competitor of IPPs, or is the conflict of interest a big problem?

In order to ensure an efficient supply-side industry, which this country now desperately needs, there should be competition in generation – fair competition, on level playing fields – which should include the Eskom generating plant. A merit order of power plant dispatch ensures least cost to the consumer. If Eskom is going to compete in generation, there is obviously a conflict of interest. This is not a good signal to IPPs. IPPs are wary of a procurement process which is run by Eskom because of the conflict of interest. The procurement of IPP power should be done by an independent and neutral entity.

To what extent do you believe Eskom is hostile to IPPs and tries to keep them out?

Eskom says one thing but does another. Under the rubric of “good corporate governance”, Eskom has organised itself into a fortress of committees. It is difficult to assess the competency or efficacy of these committees, yet critical decisions are made there. Any enquiry to Eskom is met with a response such as “the committee only sits at the end of the month”. This wall of so-called “governance” serves to keep IPPs out, as numerous committees are required to get a result out of Eskom. There are a lot of listed companies with good corporate governance which function efficiently. Why can’t Eskom be one of them?

Please can you respond to statements often made to justify Eskom’s new build programme, namely that IPPs had not come to the table because they could not compete with Eskom’s very efficient and superior generation operation, and that this was therefore some kind of market failure?

This is a very misleading impression that is put out. Nothing could be further from the truth. Right now, an IPP can construct and commission 600 MW of conventional coal-fired power plant in 30 – 36 months, at a cost of less than or equal to US $2-million per installed MW. Right now Eskom is constructing plant for about $2,5-million per installed MW, and this is likely to increase by the time the plant is commissioned, while taking about six years to commission the first unit. The interest during construction of a 4800 MW plant is enormous. You don’t have to be a rocket scientist to work out whose marginal cost will be better. Eskom cannot compete with IPPs on the price of the next kWh produced. That is a fact. One may justifiably ask why Eskom is undertaking two mega projects of 4800 MW each at this time. Smaller, faster and more manageable projects would have made eminent sense. The financial requirements would have been more manageable, and it turns out that the government, the economy and the consumer would not have been subjected to such unprecedented stress.

Please can you respond to statements often made by Eskom that it generates electricity at about half the price offered by IPPs, and that the country should therefore be wary of the IPP option?

As mentioned above, such statements and arguments are wrong, and, I believe, deliberately misleading. Yet they are repeatedly made or insinuated so often that the general public actually end up believing this. Eskom cannot compete with IPPs on the new cost per MW capacity. This is because Eskom has locked itself into the prices of a suppliers’ market prior to the credit crisis of 2008, with long supply lead times for both Medupi and Kusile. This cannot be undone. It is unfortunate since no-one predicted the global crisis, and Eskom cannot be blamed for that, but this does not defuse the procurement strategy argument. Eskom did not have to commit to such monstrous projects, especially considering its skills shortages. IPPs have sharp pencils and know how to manage their risks.

Eskom has commissioned some 2000 MW of OCGT (open cycle gas turbine) generation in the Cape. Since the operating costs are very high, has this helped or hindered the situation in South Africa, and should this have been left to IPPs?

In my opinion, the choice of OCGTs and their geographic location is dubious. One need only track the price of Brent crude to know that this was a bad choice at the point of decision. Perhaps at the time of impending shortage one could condone Eskom’s actions on the first 1000 MW, since it was probably a response from its Integrated Strategic Electricity Plan (ISEP) analysis. This is where competence tempered with experience plays a bigger role than a strategy document which drives the organisation. The location of Ankerlig is perplexing. Large OCGTs consume tonnes of diesel – about 230 kg/h per MW at sea level – so that no access to a pier or tank farm means that the plant is dependent on road transport. That translates into around 230 tonnes per hour for 1000 MW! One only needs to look at Majuba power station where 650 to 1000 trucks deliver coal everyday. It is no wonder Eskom spends about R2-billion per year repairing roads. On 1 January 2008, oil reached US $100 per barrel, and then continued a climb to about $140 per barrel a few months later. We now have a global recession, and oil is hovering around $70 per barrel. What happens when we come out of the recession and the global economy picks up? Eskom has installed 2000 MW of OCGTs which are potential white elephants, and no guessing as to who is footing the bill!

With the extremely high cost of operating the OCGTs, and the cost of Eskom’s new build programme spiralling upwards, how do IPPs feel about Eskom’s claims that they (IPPs) come at a high cost compared to Eskom?

To claim that IPPs come at a higher cost is to mislead the government and the public in a time of duress. If Eskom’s claim was true, I should be advising our members that South Africa is closed for business. The fact is that IPPs are queuing up to do business precisely because they see the opportunity of demonstrating how true competition works. It may not be long before big business decides that they will risk building their own generating plants. How many industries have, in the past two years, installed their own diesel back-up generators just in case Eskom fails them? They have invested millions as an insurance for security of supply. This is not productive capital. South Africa may have to wait for new power longer that 2012 in the unfortunate event of Medupi and/or Kusile being further delayed. Worse, what happens if one or two large generators fail catastrophically on the Eskom system (e.g. Duvha Unit 5 which was out for two years. Or the famous Koeberg bolt in the generator which took that unit out for months). Which industries would we shut down? And what consequences would there be for jobs and the economy?

Is the current Eskom generation build programme (i.e. the return-to-service of mothballed power stations, OCGTs in the Western Cape, the Medupi and Kusile coal-fired power stations , and the Ingula and Tubatse pumped storage schemes) South Africa’s best and least-cost option for generation capacity to meet the demand forecast over the next 20 years and more?

I have commented on the OCGTs. The return-to-service of the mothballed stations was based on a spend of Rx/MW to return them to service. I think you will find that these costs have spiralled, and have probably doubled, or more. Remember that the Eskom estimates of the cost of construction of Medupi are already out by more than 50%, and we are still far from commissioning. Apart from the cost of return-to-service, it is a fact that these stations will have a low efficiency and their pollution standards are also low. With the trajectory of coal prices, these stations will be expensive to run and maintain. My own opinion, years ago, was to scrap them and build new, more efficient and less polluting stations. Indeed, the position of Eskom in stating it had some 3000 MW of mothballed capacity, was misleading – it gave the impression that the “mothballed” stations could easily be re-commissioned. It is proving much more difficult than anticipated, and their reliability and lifespan is uncertain. Eskom is in the unfortunate position of having succumbed in a pre credit crisis suppliers’ market, placing orders for Medupi and Kusile, and the Ingula and Tubatse pumped storage facilities, at the price peak. I think Tubatse has already been deferred. The rest cannot be easily undone, and the consumer and taxpayer in South Africa will have to bear the brunt of paying for these high costs.

Is there adequate understanding within government, the DoE, DTI, DPE, Treasury, Regulator and Eskom of the electricity supply industry and its dynamics?

The evidence to date shows a lack of understanding. In the 1990s, when Eskom achieved a 90% plant availability (during the period of excess capacity), it planned an entire 3600 MW station out of its supply requirements based on the continuation of such high availability. This was before Eskom engaged with the government to build new stations. When the time came to plan for new capacity, Eskom faced two issues, namely a declining plant availability, and inadequate reserve capacity. I wonder if the government understood that the country was facing a security of supply issue. I have not seen an understanding of these supply issues elucidated before. When load-shedding started in January 2007, and repeated itself in January 2008, suddenly everyone realised that we had a deep problem. Eskom has been fire-fighting ever since. Barely two years ago, no-one was aware of the funding calamity facing the power supply sector. Consumers had no idea what price trajectory was awaiting them. Government did not have any idea that it would need to bail Eskom out. The extent of these issues is seismic in relation to the size of South Africa’s economy. I believe the government wants to be successful, but it is dependent on officials, both at staffing (including Eskom) and elected levels, to advise it appropriately. That advice has not been forthcoming. Overlay all of this with the political drama over the past two years in South Africa, and we have a perfect storm in the power sector. IPSA Group plc, an independent power producer, constructed the first green-fields combined heat and power plant in South Africa, and commissioned it with the intention of participating in the Eskom power purchase programme. Its plant has been idle since October 2008 when Eskom terminated the temporary power purchase agreement. Not one of the entities you mention in your question have to come to the rescue. IPPs are wary and frustrated. What kind of signal is this?

In an environment of severe government and Eskom funding constraints, to what extent can IPPs alleviate the burden being felt by Eskom, the Treasury and the country?

IPPs build plant at their risk – they require no funding from Eskom or government. Sure, a PPA has to be signed, but there are numerous examples globally where this practice is successful. So Eskom’s and the country’s funding issues can be alleviated. IPPs bring skills to the table, and are adept at cutting costs and mitigating risks – this makes them very competitive, and reduces costs to the consumer.

What do you make of the government and Eskom’s funding of the development of the pebble bed modular reactor (PBMR), and should they be involved in this?

The PBMR is a phenomenon. Eskom put in about R1,5-billion. The government has put in about R9-billion. This project is a never-ending work-in-progress, now with a so-called “forth generation” reactor. But all the studies and designs have yet to leave the desktop! For an experimental plant, does this make sense to you? Imagine what R10,5-billion could have achieved in renewable energy investments?

Should Eskom involve itself in wind, concentrating solar, photo-voltaic solar, small hydro and other renewable energy projects, or should this be left to IPPs?

Renewable energy projects should be left to IPPs. The high capital costs of these projects should be project financed, and Eskom should concentrate on its own base-load programme. Eskom has enough problems to deal with, rather than putting resources into renewable energy projects.

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