The good, the bad and the uglytruth about electricity supply

by Chris Yelland CEng

Outline

Background The capacity crisis The (knee-jerk) response The global financial crisis What are we doing, and what could we be doing? The proposed funding plan The electricity price trajectory The way forward

Background

Since inception Eskom has been self-funding Initially a public utility, not for profit Generate electricity at least cost for the public good High growth trajectory in the 1960s and 1970s Massive expansion, high price increases Then the apartheid crunch, leading to a generation

capacity surplus

Background (continued)

The De Villiers Commission The Capital Development Fund done away with “Electricity for all” and the “social dividend” Funded by Eskom operations Eskom’s pact with government Electrification and real price reductions over many

years

Background (continued)

The energy intensive destination Mothballing of old power stations The corporatisation of Eskom Company tax, dividends and VAT But no provision for expansion And no provision for replacement of aging assets

The capacity crisis

Underfunding of maintenance and refurbishment While demand grows unabated Aging assets pushed to the limits Government policy inhibits Eskom new build A policy flip-flop – Eskom unshackled (too late) Coal prices rise (off contract coal, high transport costs) Coal quality gets worse Unplanned plant failures Coal stockpiles run down Wet coal Pre-emptive load-shedding

The (knee-jerk) response

Urgent need for new capacity Return to service of mothballed power stations New open cycle gas turbines in the Western Cape

(2 x 1000 MW) Strengthen transmission to the Cape Madupi and Kusile coal-fired power stations

(2 x 4800 MW) Ingula and Tubatse pumped water storage schemes Wind Concentrating solar plant (CSP) Coal 3 Nuclear 1 and 2

The global financial crisis

Demand and sales are down Aluminum prices drop, and revenue drops too Coal and staff costs spiral upward Income statement shows big losses Massive liabilities on embedded derivatives The balance sheet not looking good Tariffs are too low, and credit ratings drop The international credit crunch

The global financial crisis (cont.)

The international credit crunch Eskom cannot borrow the amounts needed Cap in hand to government The cupboard is bare No provision for capacity expansion No provision for replacement of aging assets Government has its own problems The funding plan awaited

Projects on hold or deferred

Some deferred expenditure on Madupi power station Kusile power station delayed by at least one year Tubatse pumped water storage scheme on hold Eskom 100 MW wind farm on hold Eskom 200 MW concentrating solar plant on hold Nuclear build programme on hold Pebble bed modular reactor development on hold All independent power production on hold Industrial co-generation on hold

What are we doing, and what could we be doing? Supply side scorecard…

Return to service 8/10 Coal 8/10 Hydro-electric 4/10 Pumped water storage 5/10 Nuclear 2/10 Open cycle gas turbines 8/10 Combined cycle gas turbines 2/10 Underground gasification 5/10 Wind 0/10 PV solar 0/10 Concentrating solar 2/10 Industrial co-generation 2/10 Independent power producers 2/10 Regional power initiatives 3/10

What are we doing, and what could we be doing? Demand side scorecard…

Price increases 9/10 Energy efficiency 4/10 Energy rationing (ECS) 5/10 Demand growth management 5/10 DSM 3/10 Energy management 2/10 Load control and load shifting 3/10 Ripple control 0/10 Power factor correction 2/10 Domestic time-of-use tariffs 2/10 Smart meters 2/10 Solar water heating 1/10 Reduction of theft and non-payment 1/10

Madupi and Kusile power stations

Two 4800 MW mega projects R85-billion each (US $2,27-milion / MW ) escalating

to R142-billion each (US $3,8-million / MW) Procured pre-global financial crisis Long lead-times Skills and experience issues Built in series Are these the least cost options?

Generation plant pricing estimates 2008 $, Million $/MW net

Generation Plant – Total Plant Cost U.S. India Romania

Gas turbine combined cycle plant, 140 MW $1,41 $1,17 $1,14

Gas turbine simple cycle plant, 580 MW $0,86 $0,72 $0,71

Coal-fired steam plant (sub), 300 MW net $2,73 $1,69 $2,92Coal-fired steam plant (sub), 500 MW net $2,29 $1,44 $2,53Coal-fired steam plant (super), 800 MW net $1,96 $1,29

$2,25Wind farm, 1 MW x 100 = 100 MW $1,63 $1,76 $1,66PV solar array, ground mounted, $/kW (AC) $8,93 $7,84

$8,20

Source: World Bank, Energy Sector Management Assistance Program (ESMAP) report, August 2008

Independent power producers

The South African Independent Power Producers Association (SAIPPA) says:

IPPs can deliver base-load coal-fired power at:US$2-million per MW all in

with a 3-year lead-time (after PPA and regulatory hurdles)

compared to Eskom Medupi at US$3,2-million / MWwith a 7-year lead time

Advantages brought by IPPs

New capital New skills Short lead times Lower capital costs Lower operating and maintenance costs Good cost controls Good risk management Benchmarking and competition

Inhibiting factors for IPPs

Politics and ideology Bureaucratic hurdles Uncertain policy environment Uncertain regulatory environment Unlevel playing fields No independent power purchasing agency No independent system operator No energy market

Funding of new build

R385-billion expenditure over next 5 years, funded by:

Tariff increases: 4x or 5x increase over 5 years Government loan: R60-billion (quasi equity) Government guarantees: R187-billion Shortfall: R30-billion (project finance?) Equity: NIL

Finance minister Pravin Gordhan indicated recently: “There is no new money [from government for Eskom]”

Price trajectory going forward

2008/9 2009/10 2010/11 2011/12 2012/13

1,27 x 1,31 x 1,45 x 1,45 x 1,45 = 5,081,27 x 1,31 x 1,35 x 1,35 x 1,35 = 4,091,27 x 1,31 x 1,25 x 1,25 x 1,25 = 3,25

i.e. price increase of 5 x over 5 yearsOr price increase of 4 x over 5 yearsOr price increase of 3 x over 5 years

National average price trajectory

45% p.a. 35% p.a. 25% p.a.

2008: R0,25/kWh R0,25/kWh R0,25/kWh 2009: R0,33/kWh R0,33/kWh R0,33/kWh2010: R0,48/kWh R0,45/kWh R0,41/kWh2011: R0,69/kWh R0,60/kWh R0,52/kWh2012: R1,00/kWh R0,81/kWh R0,65/kWh

Typical middle class domestic user

Based on consumption of 1500 kWh per month

45% p.a 35% p.a. 25% p.a2008: R800 R800 R8002009: R1048 R1048 R10482010: R1520 R1415 R14232011: R2203 R1910 R17902012: R3185 R2578 R2254

Impact of price increases

Effect on inflation Effect on aluminum producers Effect on other energy intensive industry Effect on general industry Effect on commerce Effect on agriculture Effect on residential users Effect on the poor Effect on the economy

Price trajectory after 2012

Eskom says

The five years to 2012 are “catch-up” to the right levels Thereafter it expects normal inflationary increases

But there are significant EXTRA costs ahead...not just normal growth and cost patterns:

Carbon taxes Nuclear energy Renewable energy Replacement of aging plant

The way forward

Need for visionary leadership A national energy Integrated Resource Plan (IRP) Unbundle Eskom generation Public offering(s) to raise capital Introduce IPPs and industrial co-generation Create an independent system operator Create an independent power procurement agency Rationalise the electricity distribution sector Introduce an energy trading market Expand the regional power grid Encourage regional power initiatives Address the supply and demand side score-card

Conclusion

Will electricity be the oxygen of the economy?

or

Will electricity supply inhibit the economy?