A call to unbundle Eskom

January 8th, 2014, Published in Articles: Energize

by John Whybrow

This article examines the generation and distribution of electricity in this present volatile environment, and proposes that Eskom should be unbundled, as was recommended in 2010 by a former CEO, into two separate entities which together comprise the utility’s core business. There is good reason for separating generation from distribution, and in the interest of efficiency generation should be privatised.

The generation and supply of electricity is a matter of fundamental concern to all aspects of our society which should not be left in the hands of profit seekers, nor should it be directed by varying political considerations. The search for the most appropriate arrangement is a matter which deserves debate, because the operation of Eskom in recent times has not been free of adverse comment. The Medupi and Kusile projects have been tainted by political interference, progress falling behind the planned schedules, technical difficulties and costs escalating by the hour, the consequences of which will be inevitably passed onto the consumer. Opponents of the unbundling of the utility might bear in mind that where electricity is imported from outside our borders, agreement was reached on the tariff with minimum delay. A similar argument could be made for local private generation and the proposed distributor without the protracted obfuscation as is currently the case.

In 1922 the necessary legislation was passed to permit the birth of the Electricity Supply Commission (Escom) which subsequently became Eskom. In 1970 Eskom went on a massive recruitment drive to attract engineers from overseas to assist the utility to meet the engineering demands created by the rapid growth in the power generation industry. In the 1980s Eskom’s projections for future power demand resulted in an over-capacity of generating capacity. At about the same time Eskom was being re-organised into Strategic Business Units, some of which were expected to show profits. This process changed the organisation’s culture from an engineering-based utility to a profit-orientated entity, which, with the lack of future projects, caused the exodus of many of the engineers which were experienced in project management and system operation. It is this shortage of skilled engineering staff at all levels that has, in the author’s view, contributed to the ever-deepening crises in the new-build projects.

In 2010 the Department of Energy issued the Integrated Resource Plan (IRP) which showed that, based on 4% annual growth, the country needed to install a further 38 GW by 2030, after completion of Medupi and Kusile, to meet the projected power demand. Of that, approximately 15 GW would be classified as mega-projects, including six new nuclear power stations, over a seven year period. This would have been a highly ambitious programme for the Eskom of yesteryear with its full project management capability. Eskom has great difficulty in managing this proposed expansion programme with its current project management capabilities, so the management of those new projects can only be undertaken by others. The State has to raise huge amounts of money to fund these projects. The cost of over-runs on Medupi – amounting to billions of Rand, and the yet-to-be disclosed cost of over-runs on Kusile, are unbudgeted drains on the State. So the need for Independent Power Producers (IPPs) which can finance, build and operate new power generation plants became a necessity.

Two separate entities

Transmission and distribution

Eskom’s transmission and distribution divisions and the system control centre with their respective infrastructures should form the nucleus of an independent system operator (ISO). The strategic nature of the ISO’s responsibilities demands that it should be owned by the State, but the State’s record with other State Owned Enterprises does not augur well for it, such that it could lose its “independent” status. The State could own all the assets but it should consider appointing an independent managing contractor on a fixed term contract to manage and operate those assets and the system on a day to day basis. The contractor must be competent and have a proven track record of operating a power system, employing all necessary checks and balances to ensure reliable and safe operation. The contractor’s management team could be formed from selected parts of the management teams of the old transmission and distribution divisions of Eskom, but the ISO’s chief executive and his deputy must be from the managing contractor’s organisation and could, initially, come from overseas. The contractor would report to the National Energy Regulator (NER), and its customers would be all the existing consumers. The contractor would create a board of directors to oversee the administration of this contract, some of which could be representatives from the various categories of consumers. At no time should there be a majority of government appointed directors.

The ISO

  • Receives power from the various generating sources as required and which each would get paid an agreed amount per kWh. The unit price would vary from one source to the next depending on the cost of generation, the repayment of any loans etc., and any international agreements.
  • Distributes that power to its various customers and receives payment from them.
  • Reports to the regulator on its ability to meet the growth in demand of the consumers and to project the future trends of increasing demand against the total power available, including imported power.
  • Determines any increase in the various tariffs and applies to the regulator for approval.
  • Seeks regulator approval to issue appropriate turnkey enquiries for additional generating plant, as proposed in the IRP2010, giving adequate lead times.
  • Operates and maintains the whole of the transmission and distribution system up to the delivery point of the consumer or the redistributor.
  • Issues enquiries, enters into and manages contracts to increase its transmission capability to meet increasing demand, to replace obsolete plant, or to accept the power output of new generation plants.
  • Liaises with the Chamber of Mines through the regulator to determine the availability of smaller pockets of mineable coal throughout the country which could support smaller power stations of conventional design of up to, for example, 200 MW for at least 20 years. This information is then passed on to those bidding for new generating plant. Available coal reserves include those reserves for older power stations that have been decommissioned but where there is still economically mineable coal deposits available.

Generation

Eskom’s power stations within its Generation Division would operate as a profit centre, with each being required to present financial statements regarding its own cost of generation to the ISO. Each would be paid for the units exported onto the system at an agreed rate which could be different for the various power stations, so that averaging the costs of generation becomes the responsibility of the ISO. The existing power stations would be operated by Eskom Generation but owned by the State, which may decide at some time in the future, to put some of these power stations up for sale. To minimise the effect of the law of unintended consequences on these unbundled components of Eskom, the proposed sale of these power stations should only commence incrementally no earlier than five years after the appointment of the ISO. The sale of these stations would be conditional upon the terms of the energy agreement between the power station and the ISO being honoured by the new owner. Although the cost per unit of energy may increase due to finance charges being incurred by the new owner, these new unit costs would have to be agreed with the ISO and regulator, as the new owner would expect a fair return on its investment. The customer for each of these power stations would be the ISO.

The generation pool

  • Existing high merit (base-load) power stations, include all the newer coal-fired power stations and the nuclear station.
  • Existing mid-merit stations which supplement the base load stations as the demand changes and are usually smaller in output, a little older, conventional and possibly refurbished.
  • Existing low merit power stations, such as gas turbines, hydro and pumped storage.
  • Renewable power sources, such as wind, photovoltaic, concentrated solar power and hydro.
  • Imported power from neighbouring countries.
  • Co-generation supplied by existing consumers.
  • Imported hydro power.
  • Open and closed cycle gas turbines.
  • Nuclear.
  • IPPs.

Renewables

  • The energy source for renewable energy projects is free but is unpredictable. Increasing the number of wind driven turbines or photovoltaic systems may increase the amount of power in MW installed on the system to comply with the IRP2010 and to improve the reserve plant margin, but it does not meet the energy needs of the ISO in MWh.
  • The co-generation units stated in the IRP2010 are generating plant owned and operated by some of the major customers for their own benefit. If these consumers are prepared to export their power onto the grid at the request of the ISO, they should receive credits for the units exported.

Nuclear

  • The siting of nuclear power stations has always been a contentious issue, hence the long lead time to resolve any environmental impact problems and public concern. The Draft Environmental Scoping Report for the nuclear power station originally proposed for the Bantamsklip area (Pearly Beach) in the Western Cape, for example, identifies at least seven HV & EHV power lines emanating from that station, four of which only connect into the existing grid across the mountains at Touwsrivier some 200 km away. Eskom Generation has acquired, over the last 25 years or so, considerable experience in the operation of dry-cooled power stations which use ambient air to condense the turbine exhaust steam. The utility appears to be not using that experience when looking for possible sites for the next few nuclear stations, as all the prospective sites are on the coast using sea water to condense the turbine exhaust steam.
  • Nuclear power stations need a lot of cooling after the turbines have been shut down, due to residual heat in the reactor and nuclear reactions slowly decaying inside the reactor. This problem could be solved if the station were to be located near a large body of water, or some cooling towers were provided to be used for a few days to dissipate the heat from nuclear decay. If that technicality could be resolved and dry-cooling was part of the design criteria for the turbine supplier, then some of those planned nuclear power stations could be located anywhere inland. One suggested site would be alongside Gariep Dam which meets the need for the close proximity to large volumes of water, it is in a sparsely populated area and it is immediately adjacent to the power line links between the Cape and Mpumulanga. This last factor alone could, apart from minimising transmission line connection costs, also help to stabilise the transfer of power on those lines.

Cost of generation

Determining the costs of energy from future sources would involve several pre-conditions:

  • All requests for new power stations must be issued on a turnkey basis to competent and proven contractors, IPPs included. The bidder must quote for the complete project which includes the financing, design, manufacturing, construction, commissioning, operation and maintenance of the power station from the fuel source up to and including the HV generator-transformer synchronising breaker. The potential service provider would also be responsible for the provision of fuel, water, other consumables and waste disposal. The NER will ensure that no individual, company or consortium would be allowed to tender if its accumulated MW capacity already installed on the system would exceed 10% of the total installed capacity on the ISO’s system. The siting of the power station and the cost of acquiring the land would be agreed with the ISO and the regulator.
  • Each bidder must arrange to finance its power station project through an extended credit facility, details of which must be included in the tender, as it would form part of the evaluation process. The repayment process envisaged would be that the suppliers of equipment for the project would get paid by the turnkey contractor from the credit facility once their sub-contracts are completed. The extended credit financier would only start being reimbursed once the project is exporting power.
  • The variable costs of a power station over its lifetime is primarily the cost of fuel, be it coal, oil or nuclear. The potential service provider will know the cost per ton of the fuel delivered to the site and will know the costs and efficiencies of the plant as well as the costs of financing the extended credit. What is unknown is how many units of electrical energy the ISO will demand from the project per annum. The ISO will guarantee a minimum number of units per year corresponding to a load factor of, say, 60% (depending on the merit level) for that power station’s net capacity.  From that guarantee the contractor can determine its cost of generating one unit of electrical energy, depending on the amortisation period stated in the credit facility. The ISO could demand more energy than the minimum guaranteed which would be to the contractor’s benefit.

Staffing

The staffing of these projects during both the construction phase and the operation phase could be a problem as the number of local technical people entering the engineering profession at the moment is not sufficient to meet the country’s needs. The ISO’s managing contractor and the power stations’ turnkey contractors may have to import suitably trained and experienced personnel for the earlier phases and train suitable local staff over time.

Recommendations

The following recommendations are a suggested roadmap for the future of the power industry:

  • Amend legislation to allow Eskom to be unbundled and to allow for the formation of an ISO including the appointment of a managing contractor.
  • Allow the IPPs to finance, build and operate their own power stations and to export the resultant power onto the ISO’s grid.
  • Encourage the IPPs to build smaller power stations, where there are adequate coal deposits, to create job opportunities in depressed areas. It is more important, in the author’s view, to create jobs than to worry about  meeting carbon emissions imposed by other, more developed, countries when our economy is in such a precarious state.
  • Enable group representation for all categories of consumer to have a non-executive voice at board level of the ISO.
  • Revisit the IRP2010 data to determine how the original projections have changed since its inception.
  • Consider the refurbishment of all old power stations rather than decommissioning them.
  • The ISO should co-opt Eskom Generation with its dry-cooling experience to assist in discussions with possible nuclear bidders the pro’s and con’s of using ambient air to condense the exhaust steam, as has been done at Matimba, Kendal and Majuba.
  • Explore methods to minimise the ISO’s financial obligations to the State. According to the former CEO’s comments published in May 2010, Eskom has paid R1,1-billion to the State since 2000 in dividends and R12-billion in company tax. Perhaps the ISO should be registered as a non profit organisation where any trading surplus is reinvested in its own reserve fund, the sole purpose of which would be to contribute towards future expansion and so reduce any financial burden on the consumer.

Conclusion

This concept of an ISO was first mooted in a white paper presented to the cabinet in 1998. It was rejected. According to a report in the Cape Times of 14 November 2013 the parliamentary debate on the Independent System and Market Operator (ISMO) Bill, scheduled for debate before the summer recess, was postponed to 2014, without consultation with the Portfolio Committee on Energy. This, after more than a decade of procrastination. Because the identification of competent and proven bidders for the appointment of a managing contractor is so politically sensitive, the author suggests that the selection and adjudication processes, and the awarding of the eventual contract, should all be administered by the Department of the Public Protector.

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