Independent power producers in South Africa

March 6th, 2012, Published in Articles: Energize

by Doug Kuni, South African Independent Power Producers Association (SAIPPA)

Since 2005 when looming power shortages were predicted, IPPs have been assessing opportunities in RSA simply because the market potential presented itself: Eskom was late placing orders for new build and economic growth projections suggested that we would need new power before Eskom could put it into the system.

Doug Kuni, SAIPPA

The first such excursion was undertaken by IPSA Group PLC with their small greenfields cogeneration IPP in Newcastle on the Karbochem site. The plant was licensed by NERSA and operated on a temporary PPA with Eskom which was put on hold pending resolution of the Eskom funding issues and approval from NERSA to purchase from IPPs as a pass-thru cost. Eventually the PPA was re-instated under Eskom’s MTPPP program after the plant stood for almost a year in a power shortage situation.

Well before 2007, when the first power brown-outs started, it was known to government and Eskom that IPPs would be required to make up the gap between what Eskom could supply and the projected demand. Indeed Eskom initiated its MSBL (Multi Site Base Load) program to procure baseload power from IPPs when it was forced to shut down the mining industry for two weeks in Jan 2008. The Global Credit Crunch of 2008 came at a fortuitous moment in our power crisis – relieving the power demand as commodity prices plunged. The slow global recovery meant that we could manage through our power deficit without incurring the burden of forced power blackouts. The MSBL program was suspended in 2009 by Eskom.

The new build program of Eskom is running late – the first Medupi unit was planned to be commissioned in Jun 2011 and has moved to Dec 2013 – Kusile is approximately also two years later than planned and the current power crisis can be expected to continue for many years to come. According to the IRP2010, we are late again with planning – Coal 3 and orders for nuclear should have been placed already.

For the past 8 years IPPs have been urging government to put in place a friendly regulatory framework for them to operate. The State President mentioned in his State of the Nation address in 2011 the formation of an ISMO (Independent System and Market Operator) which is yet to be promulgated. Despite deficiencies in the existing ERA 2006 Act, it held the promise of market participation for IPPs through a willing buyer/seller principle.

The DoE issued a draft 2nd Amendment to the ERA 2006 (Electricity Regulation Act) in Dec 2011, which removes the principle of willing buyer/seller and essentially subjects all power producers to ministerial (section 34) approval. While the “Objects of the Act” clearly expresses support for competition and customer end user choice, the Act expresses no intention to subject Eskom Generation to external competition while leaving the transmission system fully under Eskom ownership and control. The Primary Regulation Act makes no mention of the ISMO or a long term structure for the electricity industry. Neither does it clearly spell out how IPPs will operate in the market. Nor does it spell out the procedures of how ministerial decisions should or will be made.

Such uncertainty in the regulatory environment can only be cause for concern for IPPs. Three coal baseload projects by mining companies have literally spent in excess of a hundred million rand on their development. With the ERA 2006 2nd Amendment being proposed, what should these companies now consider? It would be prudent for all development to be suspended until ministerial approval is obtained – a process which could take another 6 – 12 months since there are no objective prescriptions for the minister to make that decision.

Government policy on a long term electricity structure suffers from constant prevarication. The late planning of new capacity has left the economy in a sorry state, with Eskom resorting to extracting utilised capacity from it to maintain reserve margin. This will reduce GDP output and will also lead to job losses. The conservative estimate of GDP loss for 2008 is of the order of R150-billion. The continuous extraction of productive electricity use from the economy can only damage the economy in the long term and hurt investor sentiment. Until the new capacity is commissioned dependency on the existing capacity is high and reliance on its performance is extreme. Any plant failures means further power cuts.

SA needs to take a critical look at its electricity sector – the capital requirements for investment can place a huge burden on the State for scarce funds which can otherwise be more productively deployed in the economy. Private capital can be a huge boost from IPP’s to help them make up the power deficit. For this to happen, IPPs need a regulatory environment to facilitate that investment. The 2nd Amendment is only adding further hurdles to an existing difficult environment. The legislations and regulations forming the ESI regulatory environment in SA lacks a clear long term vision of the structure of the ESI.

The current RFI issued by the DoE for developers of energy projects makes clear that IPPs at this stage are intended only to be entertained on a purely centralised procurement basis. Eskom, with all its impressive resources, are struggling to construct their new build. Before the banks fund large scale IPP projects they will want to see an ironclad PPA guarantee from the government. With government now borrowing to fund infrastructure expansion, it had better be sure that the execution and implementation of its program happens smoothly. If it wants an indication of how things can go wrong in the implementation it need not look far – we have enough examples at home.

Doug Kuni, SAIPPA

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