Category Archives: Actors

Renewable energy to form a vital part of SA’s energy mix – David Mahlobo

Minister of Energy at the Africa Energy Indaba, Sandton, 20 February, 2018

Renewables mentioned 16 times in the speech, no mention of nuclear or coal!

Here is an extract:

“23. For instance, in South Africa, we have launched a Renewable Energy Independent Power Producer Programme (REIPPPP) which has been highly successful. This programme has been supported by other governments who assisted us to develop renewable energy roadmaps which provided investors with information on the renewable energy opportunities in the country. Government provided a clear policy framework which guided the procurement process and communicated to the public the opportunities available. The private investors showed willingness and took the risk to invest. The procurement process was well documented and removed all the risks and perceived uncertainties. 24. Since the renewable energy programme inception, a total of 6 422 MW of electricity have been procured from 112 RE Independent Power Producers (IPPs) in seven bid rounds (as at June 2017). Out of these projects, 3 162 MW of electricity generation capacity from 57 IPP projects are already connected to the national grid. Investment to the value of R201.8 billion, of which R48.8 billion (24%) is foreign investment has been spent on the projects. A total of 32 532 jobs have been created for South African citizens. Socio-economic development contributions of R403.7 million to date have been made to develop rural communities in particular”

So perhaps now the outstanding Power Producer Agreements (PPAs) will be finally signed by Eskom and we can look forward to further bid windows and Kusile 5 and 6 being cancelled!

Here is the full speechSpeech-by-Energy-Minister-at-Africa-Energy-Indaba-2018

Eskom given breathing room as lenders approve of new board and chief

Hilary Joffe, Business Live, 25 January, 2018

Talk is that lenders are lining up to lend to Eskom now that a competent and credible new board is in place, along with a well-regarded interim CEO.

 Eskom had risked default because bankers would not roll over short-term loans — essentially working capital — and declined even to talk to the old board. Now, talks are under way with the banks and immediate funding risk seems on its way to being managed.

 The next task is to ensure Eskom provides its auditors, SizweGobodoNtsaluba, with the information that they have demanded and with enough comfort to enable them to sign off the interim accounts in time to avoid the JSE suspending the listing of Eskom’s bonds.

 Talk about the discipline of the market.

 Interventions by lenders include the Development Bank of Southern Africa and the commercial banks.

 All of that, however, is crisis management in the very short term. Eskom will be back with the begging bowl in February or in 2019 if the new board doesn’t act decisively to put a management team in place that can tackle the fundamental problem: that the utility has done little or nothing in recent years to tailor its inflated cost base to its dwindling sales.

 Enter the National Energy Regulator of SA (Nersa), which has signalled strongly that it will no longer allow Eskom to keep asking for ever-higher tariffs to pay for its ballooning costs.

 In December, Nersa threw out Eskom’s application for a 19% tariff increase for the coming year, starting April 1, and instead granted a 5.2% increase.

 Nersa is expected to publish its reasons for the decision within the next couple of weeks and they are unlikely to reflect well on Eskom’s efficiency.

 Meanwhile, however, Nersa has announced timelines for Eskom’s three regulatory clearing account (RCA) applications, totalling R66.6bn, on which Nersa will now pronounce only at the end of September.

 This may be rather a disappointment to Eskom and to those in the market hoping that the coming year’s tariffs might be boosted by some RCA revenue. If the entire R66bn was to be added back to Eskom’s revenue in a single year it would add another 30% or so to tariffs, though the regulator is likely to treat the RCAs with the same or more scepticism than it did the tariff application. And what money it does allow would be phased over several years, starting in 2019.

 The issue that’s likely to loom large though is why Eskom keeps coming back to Nersa with RCA applications that, peculiarly, seem to be for similar amounts of about R20bn each year — and that puts big question marks over its ability and willingness to forecasts its sales and costs accurately.

 The way it works is that Eskom applies for a pot of revenue each year to cover its “efficiently incurred” costs; that revenue is divided by the projected electricity sales to get a per unit cost, which is the tariff. The regulator scrutinises all this and decides what it will allow, which becomes the tariff.

 The applications have been for five-year periods with the latest running from 2013 to 2018, but the regulatory methodology provides for the possibility that as the years of the tariff determination go by, sales or costs could turn out to be different from the forecasts.

 Eskom can therefore put in these RCAs to claw back some more revenue if costs turn out higher or sales turn out lower than it and the regulator had projected. Whatever clawback the regulator agrees to is added to tariffs in future years.

 The RCA was designed to cater for modest variances in the forecasts, not for huge cost overruns or sales undershoots. But R20bn a year is hardly modest and the regulator is clearly becoming less and less tolerant of the fact that Eskom has done little to improve its forecasting models despite being wrong by wide margins year after year.

 It almost halved the R20bn Eskom applied for for the first year of the 2013-18 tariff period, and a lengthy court challenge, which went in Nersa’s favour, has delayed the next round of RCAs. The three years that will now be considered are for the middle of the five-year period; there is still another to come for the final year.

 Nersa has allowed two months for public comment and it will then go through the public hearing process, as it did with the main tariff application, before it makes its decision.

The process promises to be rough, yet again, for Eskom and the message from the regulator, as from the market, will no doubt be that the utility needs to start responding to the discipline imposed on it.

 That in turn means some tough decisions need to be made by the new board and a new executive team, on measures that may well have to include reviewing coal contracts, shutting power stations, cancelling some huge capex programmes and reducing staff numbers.

 The new board and a new executive team have their work cut out. And they will need plenty of political cover if they are to do what needs to be done to eliminate the risk of default, now and in the future.

 Here is the link to the article

Treasury to approach banks in bid to avert Eskom default

Carol Paton, Business Day, 22 January, 2018.

Eskom executives and the Treasury will approach local banks as early as Monday to restore lending as the company races to avoid the suspension of its bonds by the JSE and to dodge a pending letter of default from the World Bank.

The state-owned company needs to raise R20bn over the next few weeks to persuade its auditors that it is a going concern. This will enable it to publish interim financial statements and allow access to foreign debt capital markets.

If the World Bank issues a default letter during a scheduled meeting with Deputy President Cyril Ramaphosa at the World Economic Forum in Davos, Switzerland this week, it will trigger a 14-day recall on its $3.75bn loan, which could trigger a recall on Eskom’s R350bn debt mountain.

On Saturday, the Presidency announced a new board for Eskom, to be headed by Telkom chairman and business leader Jabu Mabuza.

The new interim group CE is Phakamani Hadebe, a former Absa executive and former Treasury official.

If you are already a subscriber, please click on the following link below to go to the full article: Eskom, Treasury to turn to local banks

How to remove the Eskom albatross from around SA’s neck

Business Day, 22 JANUARY 2018 – 07:01 TOBIAS BISCHOF-NIEMZ AND JOHAN VAN DEN BERG

Eskom’s current debt is R350bn; it needs to raise an additional R150bn or so over the next three to four years. This is almost certainly impossible, even with a government guarantee, say the writers. Picture: Getty Images

There is a simple way to stabilise electricity prices, cast off Eskom’s crippling debt, boost SA’s credit rating and liquidity, kick-start our economy and yet maintain public sector ownership of critical assets in the electricity sector, all while becoming profoundly green.

It requires a shift of perspective, and so we have developed a metaphor: imagine the country as a modern cargo ship in the middle of the Atlantic. It is driven by both sails (wind) and diesel engines. The engines have broken down and there is no wind — the ship is literally in the doldrums.

A mayday message has been sent and a tugboat has arrived, but has run out of fuel. The ship is leaking and sinking deeper in the water. There is inertia: the tugboat cannot pull.

Time passes, the ship sinks deeper. What to do? The situation seems intractable and a pessimistic mood is becoming despair. It seems a matter of time before the ship sinks and the tugboat saves itself by severing the cable.

The cargo could gradually be thrown overboard, but this would only postpone the inevitable.

Then, magically, someone points out that in addition to gold and diamonds, much of the cargo consists of diesel. If the diesel is transferred to the tug, the tug could pull, the ship would get lighter, its speed would gradually increase, the doldrums would pass, the sails would kick in, the ship would safely reach harbour with everything and everyone intact — bar the diesel.

If we regard Eskom generation (specifically its coal power stations) as an eternal asset like gold or diamonds that must be guarded in perpetuity, the ship (the South African economy) will sink.

If, however, we see it as something with a limited lifetime that must be best used before ceasing to exist (like diesel), all will be well.

Marooned ship

Eskom’s current debt is R350bn and it needs to raise perhaps another R150bn over the next three to four years. This is almost certainly impossible, even with a government guarantee. Eskom cannot stay afloat without a gargantuan government bail-out.

The low electricity price increase, announced by watchdog Nersa in December, has mostly passed the responsibility for funding Eskom from the electricity rate payer over to the taxpayer and the fiscus.

It has been widely reported that Eskom will run out of cash by end of February. Just last week Finance Minister Malusi Gigaba said Treasury did not have the funds to bail Eskom out.

Treasury might break it down into periodic components, fund the most immediate need for some months and hope the problem goes away, but the electricity price is well below what Eskom requires for sustainability, and the question will return again and again.

The build programme for Medupi and Kusile may have to be suspended. We will come to the inevitable choice between a slow submerging and a very unpalatable turn to the International Monetary Fund or World Bank. These institutions would likely impose conditions on lending that would conflict fundamentally with government policy and South African opinions on sovereignty. It would be the impasse of the ship, slowly sinking with no solution in sight.

Fuel for safety and prosperity

The equivalent of the diesel in the hold is the Eskom generation fleet, consisting of 15 coal-fired power stations. These all have limited lifetimes and were built to serve the country and economy before being retired and replaced. Scheduled decommissioning dates start soon and end in 2050 or later.

Given that these assets were meant to be extinguished over time for the common good, we can choose to do so in the most beneficial manner. This would be to remove them from the Eskom fold and to dispose of them to public or private entities as described below.

How it would work

1. The existing power stations would be grouped into three categories:

• Category 0: The oldest, which have recently been calculated to be more expensive to keep than to shut them down immediately: Camden, Hendrina, Komati, Grootvlei and Arnot

• Category 1: All others but Medupi and Kusile: Kriel, Matla, Duvha, Tutuka, Lethabo, Matimba, Kendal, Majuba

• Category 2: Medupi and Kusile

2. Power stations of category 0 would remain with Eskom for controlled immediate decommissioning over the next five years (in sync with Medupi and Kusile coming fully online).

Power stations of categories 1 and 2 would be sold in a staggered manner, one by one, over the next five years in competitive auctions.

3. What is up for sale in these auctions is the power station itself, all its power station-specific obligations (staff contracts, coal-supply contracts, supplier contracts, environmental obligations, etcetera) lumped with a power purchase agreement at a predefined, power station-specific tariff.

4. The power purchase agreement is a contract that entitles the new power station owner to supply a specific amount of electricity annually, an electricity budget, over the power station’s lifetime to the Single Buyer Office (hosted in Eskom’s Transmission System Operator division) at the predefined tariff. The amount of electricity will equate to the expected output at normal system-friendly operations.

5. There will be payment for electricity delivered (and only for electricity delivered) and a penalty for not being available (a “capacity nonavailability penalty”). The new owner of the power station will be fully responsible for maintaining and operating the power station, while the Eskom System Operator, in its national control centre, would be responsible for the day-to-day system-optimal dispatch of the power stations within the technical restrictions and the agreed annual electricity budget, broken down into monthly sub-budgets.

6. The agreed electricity budget would constitute both an entitlement and an obligation. The new power station owner would be entitled to have at least the agreed electricity budget bought or paid for (ie, a “take-or-pay contract”), making the power purchase agreement “bankable” — that is, financeable. On the other hand, the new power station owner would be obliged to produce at least that agreed amount of electricity per year if requested by the System Operator, or face penalties.

7. The power station-specific power purchase agreement tariff would be high enough to cover all coal, employee and operational costs and leave a margin. The present value of that margin over the lifetime of the power station, minus the present value of the expected rehabilitation cost, is the amount of money that can be raised through the auction.

8. From the revenue of electricity sales, the new owner must set aside ring-fenced, insolvency-safeguarded funds for closure and rehabilitation of the power station at the end of its lifetime (and the synchronised end of the power purchase agreement lifetime). The cost of rehabilitation is estimated at a substantial R10m per megawatt, which would be available at the time of closure as a fund to pay for the rehabilitation process. For a typical power station that is between R30bn and R40bn.

9. The duration of each power purchase agreement would be linked to the planned decommissioning date, but would be capped at 20 years. The reason for the cap is that additional years at the tail-end of the power purchase agreement contribute little to the achievable sales price, while power purchase agreements of longer than 20 years would lock the country in unnecessarily long, in light of the fact that in 20 years in all likelihood new solar photovoltaic and wind power, plus batteries, will be significantly cheaper than existing coal-fired power stations.

10. In terms of the bid conditions, staff and existing coal contracts would be maintained as before and would be transferred to the buyers. The purchase sum would be payable upfront in a lump sum. Those prospective buyers able to operate most efficiently would be able to bid highest and would win. That means whoever offers the highest lump-sum price for the power station with all its obligations plus the power purchase agreement would be the new owner.

11. One power station of category 1 could be sold first as a trial. After adjustments to the bid rules for lessons learnt, the remaining power stations could then be auctioned one at a time, in the ascending order of their remaining lifetime. No entity may own more than 20% of the overall electricity budget of roughly 200TWh a year, to prevent anticompetitive behaviour.

12. Category 2, Medupi and Kusile, would be sold in a package with higher tariffs, and resulting higher margins, to take into account the fact that enough capital must be raised through the sale to be able to pay back the associated loans on Eskom’s side. They would also be sold last, after full commissioning by Eskom. It is assumed that Eskom would finalise only units 1-4 of Kusile and scrap units 5 and 6, as it has recently been shown it will be cheaper not to complete than to finish them.

13. Eskom continues to own and operate the pumped storage and peaking plants plus the nuclear power station Koeberg, and otherwise to exist as before, being primarily responsible for planning, operating, expanding and balancing the grid.

14. As old power stations are decommissioned by their new owners at the end of the respective power station and power purchase agreement lifetime, new power plants are procured (also on long-term power purchase agreements) that are the lowest cost addition to the electricity at the time while keeping the security of supply at the accepted level. Based on present market conditions and also trends, this overwhelmingly would be solar PV and wind power, mixed with flexible power generators, demand-response and (in future) battery storage.

Cash injection for SA

The proceeds of the auctions would be a function of where the electricity tariff in the power purchase agreements is pegged. The lower the price, the lower the proceeds. The higher the predefined power purchase agreement tariff, the higher the proceeds from the auction. We have chosen to use moderate, but still cost-reflective, rather than subsidised electricity tariffs. The proposed tariffs per power station are sufficient to cover all operational expenses and would leave a margin whose present value over the lifetime, minus the present value of the funds set aside for rehabilitation, determines the achievable sales price.

In category 1 this margin is pegged at 20c/kWh, leading to power purchase agreement tariffs of between 54c/kWh and 72c/kWh, the variance resulting from the different coal costs per power station.

In category 2, Medupi and Kusile, the proposed contribution margin is 60c/kWh, to be able to achieve a sales price sufficient to repay the associated loans on Eskom side. At such margins and tariffs, the country could raise about R450bn from the series of auctions. This would extinguish all Eskom debt and leave some valuable cash to upgrade the grid and recapitalise the new Eskom.

Price and grid stability

A major benefit would be very stable, affordable and predictable electricity prices.

SA has long been beholden to Eskom’s inefficiency and poor governance. These have had to be paid for by the rate payer or taxpayer. It is a bit like trusting someone with a credit card and hoping they will be responsible: if the trust proves to have been misplaced, the only option is to grimace and pay. This pattern has recurred.

With a sold-off Eskom coal fleet, inefficiencies would lead to losses for new owners but not for the public.

The average electricity price is overwhelmingly driven by the cost of Eskom’s coal fleet. This is about 55c/kWh today. The grid (Eskom transmission and Eskom distribution), customer service, metering, billing and all overheads adds roughly another 30c/kWh, for a total of about 85c/kWh. Medupi and Kusile are costing significantly more than 100c/kWh. As they are completed, the average tariff will increase.

New solar photovoltaic and wind power stations cost only about 60c/kWh to 65c/kWh. If we embark on a least-cost expansion path, replacing old coal predominantly with solar PV and wind, the long-term electricity tariff in SA will stabilise at about 100c/kWh: 70c/kWh for generation and 30c/kWh for the grid and all other costs.

Our grid can easily accept an aggressive roll-out of variable renewable energy until at least 2030, given the current coal capacity installed. Between 2025 and 2050, as this winds down, we’d have to assess the state of international progress on electricity storage and dynamic grid management already developing internationally in grids dominated by variable renewable energy. If required, the country can then invest in storage capacity and/or generation capacity that fits well with renewables, like gas or regional hydro.

Government control of key economic assets

It is axiomatic in the prevailing policy discourse that the government should retain ownership or control over key economic assets, of which electricity is one. The present proposal leaves space for this to occur, in two ways:

• Control over the grid practically constitutes control over the electricity industry. It is a natural monopoly and Eskom would retain that control. The government can control where the grid goes, who it serves, who supplies electricity into it, how it is maintained and how it is built to serve broader objectives like the National Development Plan. The electrons travelling on the grid are similar to the cars travelling on the national road network. It isn’t necessary to own every car in order to control transport in the country. Electricity can be procured from independent power producers while retaining control over the electricity system in the country. This has been proven in many countries.

• Beyond this, there is every possibility that public sector entities like the Public Investment Corporation (PIC) could invest in the auctioned Eskom power stations either through equity or debt or a mix of both, and pay a specialised service provider to operate them on its behalf. They would in fact be exchanging a very open-ended and precarious Eskom bond for an equity investment in a long-term infrastructure asset with a very predictable, long-term return — a much better position to be in. While no entity may own more than 20% of the fleet, to ensure fair play, there are different public sector pension funds that might be interested, while it might also be possible to finance equity for the trade unions.

Effects

Taking this route, Eskom generation would cease to be an unbearable drag on the economy. Its sale would stabilise electricity prices, greatly improve liquidity in the country, and bolster our credit rating and leverage investment through a better economic outlook and certainty about the future electricity price. The energy-intensive mining and beneficiation sectors would benefit particularly. Treasury would be rid of a R350bn albatross around its neck and would be left with far lighter offtake guarantee for the electricity delivered to the grid operator (as it would be performance-based — “no electricity, no payment”).

The PIC could greatly lower the risk profile of its South African investments. Mismanagement of any of the coal power stations would lead to lower profits for the owner but would not affect the electricity price. The scope for corruption would have been curbed significantly.

Eskom would be able to concentrate on what it can do very well: design, build and maintain the grid, and operate the power system as a whole. That capability of Eskom is a national asset and could be leveraged to help electrify the continent. Eskom could become the “super grid company” of Africa and one of the largest in the world.

There is precedent for this: in China, grid and generation have been separated since 2002. The former State Power Corporation of China was divided into one grid company, responsible for building, maintaining and operating the grid, and several generation companies. The purpose was to create competition between the generators. The State Grid Corporation of China today is by far the largest utility in the world with almost 1-million employees, and now provides grid services to multiple countries outside China on concession.

In this proposal, rehabilitation of retiring stations would be fully funded and open to scrutiny. As new power came online, SA would gradually become (again) a country with some of the lowest electricity prices in the world, due to superior wind and solar resources, and would converge on a zero-carbon electricity sector.

At a macro level, government would retain control of the electricity sector, jobs would be safeguarded and we would be able to turn our attention to other challenges the country faces in its journey to greater prosperity and equality.

• The authors were appointed to the inaugural Ministerial Advisory Council on Energy. Dr Bischof-Niemz was the founding head of the Energy Centre at the Council for Scientific and Industrial Research and previously worked for Eskom on the Integrated Resource Plan. He is now head of global business development at Enertrag. Van den Berg is an advocate and former CEO of the South African Wind Energy Association who is now MD of Skrander.

EDITORIAL: What is Eskom hiding from us?

BusinessDay, 16 January, 2018.

Eskom’s shareholder may have proved incapable of imposing discipline on the crisis-ridden group, but this week it has, again, been subjected to the discipline of the market. The JSE warned that it could suspend Eskom’s listed bonds if the state-owned utility failed to release its interim results by the end of January. This comes after Eskom missed the end-December deadline, in terms of JSE rules, to publish the results for the six months to end-September. In response, Eskom has promised it will meet the new deadline.

But its reluctance to go public with the numbers has raised all sorts of questions in the market about what it might be hiding — questions that will not help to allay the concerns of bond-market investors. They have already imposed their own discipline on Eskom by, in effect, halting new lending to the utility after its June year-end results were qualified by its auditors, who raised the red flag about at least R3bn of irregular spending.

Asset managers and bankers have made it clear that as long as Eskom’s governance is a disaster and the shareholder refuses to allow it to install stable, clean and competent management, they’re not interested. A transparent set of interim numbers is crucial, though, to enable Eskom to start borrowing on the market again, at least from foreign investors, who are likely to be less wary — as long as Eskom pays well more than the odds for the money.

However, the late interims have prompted concern about whether the auditors are again unhappy. Even more of a concern is the possibility that Eskom is trying to hold back from having to tell the market that it is, quite simply, not a going concern.

Here is the full article