Tag Archive | IPPS

Integrated energy plan (IEP) around the corner

IEP a few months off

Benedict MartinsAn integrated energy plan (IEP) for South Africa covering the full energy spectrum will definitely be published before the year end, according to the director general, department of energy (DOE), a fact also confirmed by minister Ben Martins when addressing an energy conference in Johannesburg recently.

Ms Nellie Magubane, when addressing the relevant portfolio committee under chair, Sisi Njikelana who had called for an update on the energy plan, was accompanied by minister Ben Martins at the time and present for his first meeting in Parliament. The minister acknowledged and highlighted the importance of unfolding the plan as part of the country’s investment credentials as soon as possible.

Continuing energy story

Whilst re-confirming that the strategy was still at public participation stage, DG Magubane said there was “no end-state tomorrow” with the plan but rather a reflection of a “phased approach as the country’s appetite for energy as it  develops”.

The process began, she said, with the 1998 White Paper, the development of independent powers system operators (ISMO) and the accompanying ISMO Bill also awaiting the production of the IEP, the National Energy Act in 2008 and regulations on resources that have followed. The IEP this year would start the energy initiative rolling to be followed by gas development plans.

Not just supply factors

In the years since apartheid, said Magubane, when energy had different directives which were focused primarily on just maintaining supply, what had changed significantly were economic, environmental and social imperatives which now were being drawn in and superimposed. “The fixation with supply capacity is not now the only criteria to be considered in the energy paradigm”, she said.

The liquid fuels shortages of 2005 and subsequent electricity disruptions in the years up to 2008, Magubane said, had shown the need for coordinated planning to avoid disparate plans and contradictory initiatives in the sectors of electricity, liquid fuels and gas.

A twenty-year road map for the liquid fuels industry was in progress by the department, she said, and a gas planning infrastructure plan was to be developed once the extent of resources were better understood.

International view

Through time, and above all because of energy security, Magubane said, scenario planning has changed in South Africa to take in security, environmental and climate response factors. In conjunction to long-term climate change policy and agreements, lessons had been learnt from the IEA, Austria, Belgium, Canada, the Czech Republic, Italy, Japan, the Netherlands, Norway and Spain, she said.

When asked what had been learnt from a study tour of the USA, DG Magubane said that the primary aspect learnt there was the success of establishing localised energy resources, focusing on what mattered most to the USA and reducing dependence on imports. We learnt, for example, that we must not try a change the impossible or employ unrealistic factors but move according to what was a fact locally. “For example, South Africa has a lot of coal but little water and these factors have to be built in, not ignored.”

She said that the overseas studies where different economies and different state policies were involved, due note that the position had changed radically in South Africa had to be acknowledged, as had been the case in many of those countries.

Control of resources

“For example, government has come from a position where in SA we were determining the appropriate level of involvement with the liquid fuel levels industry during transition to a rapidly globalising picture, to now having to maintain a strategic role in shaping all key sectors of the economy.”

In response to queries from parliamentarians, she acknowledged that the IEP to be produced would not incorporate any powers to the minister, who “would rather be able to exercise any powers affecting energy matters through normal regulatory enforcement contained in the many pieces of legislation that applied to the energy sector, such as the Energy and Gas Acts.”

Pricing restructuring

On pricing issues as far as the IEP was concerned, Ms. Magubane responded to questions that national treasury figures had so far been the base of determinations but in the light that submissions and input from stakeholders which were to emerge from the process now in progress, the issue of price factors could in all probability be reshaped.

In answer to complaints that that there was still no indication from her, or DOE, where the country was going in hydrocarbons, electricity or renewables and what pricing factors were involved for urgent investment needs, the chair asked that DOE be given time to develop the final report or “everything would go in different directions”.

DG Magubane assured parliamentarians that the final plan would enable everybody to weigh up infrastructure plans with government policy, even bearing in mind that the position is constantly changing given such issues as hydro input from neighbours, gas exploration in various forms and global tensions.

previous articles on this subject
http://parlyreportsa.co.za//uncategorized/mineral-and-petroleum-development-bill-grabs-resources/
http://parlyreportsa.co.za//cabinetpresidential/president-obama-and-power-africa/
http://parlyreportsa.co.za//cabinetpresidential/nuclear-goes-ahead-maybe-strategic-partner/
http://parlyreportsa.co.za//energy/petrosa-has-high-hopes-with-the-chinese/

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Eskom MYPD electricity call is to sustain ratings

 Eskom stands by its MYPD3 asking price…….

Brian Dames, CEO, Eskom, on their Multi-Year Price Determination (MYPD 3) application to the National Energy Regulator of South Africa (NERSA), told parliamentarians of the trade and industry portfolio committee that price increases were necessary. He said that on one hand they had to have a respectable balance sheet to obtain development money whilst on the other hand, Eskom was coming from a background where investment activity had been inactive over the years.

“To keep the lights on”, Dames said, “there is now a cost.”

Electricity currently below cost

He said that because of historical reasons, electricity was currently charged at below cost-reflective levels and was not sustainable. Electricity prices needed now to have a “transition to cost-reflective levels to support a sustainable electricity industry that had resources to maintain operations and build new generating capacity, guaranteeing future security of supply.”

Dames said that Eskom had also recently issued an “interim integrated report” for the six months ended 30 September 2012 setting out a contextual review of the company’s overall performance from 1 April 2012 and in the light of this had presented the NERSA application.

He said that the current MYPD 2 was ending and consequently Eskom had to submit such an application to NERSA to determine the country’s electricity price adjustment for 2013/14.

However, this time Eskom was proposing a five-year determination for MYPD 3, running from 1 April 2013 to 31 March 2018, which would ensure a more gradual and predictable price path for households, businesses, investors and the country as a whole.

Eskom’s five-year revenue request translated into average electricity price increases of 13% a year for Eskom’s own needs, plus 3% to support the introduction of Independent Power Producers (IPPs), giving a total of 16%, representing a total price increase from the current 61 cents per kilowatt-hour (c/kWh) in 2012/13 to 128c/kW h in 2017/18.

Balance sought between needs of Eskom and poor

The impact of the price increase on the economy had been considered in addition to guidance from the President’s State of the Nation Address in which he requested Eskom to consider a price path which would ensure that Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. Dames said he believed that Eskom’s application achieved an appropriate balance.

In addressing the impact of price increases, Dames said that Eskom believed that poor households should be protected from the impact of electricity price increases through targeted, transparent cross-subsidisation in accordance with a national cross-subsidy framework.

A failure to achieve cost-reflective prices would sooner rather than later impact on South Africa’s economy and its growth prospects, he said.

MPs query what electricity giant has as objective

A number of opposition MPs disagreed and queried the entire cost-reflective process used by Eskom, saying that the tariffs proposed by Eskom rather posed a dangerous threat to economic growth and the future of business in South Africa, as well as job creation.

Whilst Eskom wanted a 4% targeted return in the medium term and 8% in the final year, they said, JSE majors had returned on average 6.6% per year in the last ten years. They asked if Eskom was attempting to build a balance sheet that compared with global corporates just in order to get loans.

The main thrust of certain opposition MPs queries was the sacrifice in growth rate, damage to business development, to job creation. ANC MPs complained of the effect on the poor.

Paul O’Flaherty, finance director at Eskom, said that the only sources of funding available to Eskom were debt; equity injected from Government and operating profit from its revenue. Eskom had requested for an additional equity injection from the state but that was not forthcoming leaving generation of debt to them and raising enough operating profits from its revenue.

He said in terms of depreciation factors on the figures shown, such was regulated by Nersa and that there was no way of getting around the fact that Eskom had to pay its way. According to the cash flow predictions, a trillion rand of revenue would be needed to pay for primary energy costs, employee costs and demand side management, repairs and maintenance.

Eskom must be seen as viable entity for capital programmes

Eskom’s capital program over the next five years included finishing the Kusile power station repayments, plus a further R360bn in debts, which meant that R200bn had to be raised from the market. This had to be done against a successful balance sheet. Eskom got investment status because of Government uplifting, he said. It had to show its cash metrics were moving towards a more sustainable company, he said.

Dames added that Eskom required on its equity a higher return than the sovereign because of the risk involved and in terms of the cost of debt in a normal environment and that the cost of Eskom borrowing was more expensive that the sovereign borrowing. The cost of debt had been arrived at by Eskom working with NERSA as well by as KPMG and the costs included in the MYPD 3 application were appropriate, in his opinion.

Mohamed Adam the legal representative at Eskom said on questions relating to the impact of price increases on the manufacturing sector, that the impact of price increase on the economy had been considered in addition to ensuring that both Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. There was a threshold at which Eskom would also face which amounted to a tipping point if prices were too low.

Unbundling of Eskom not an option

In conclusion, Mr Dames said that the submission of the MYPD 3 application was the beginning of a public process and he rejected MPs suggestions that Eskom was a monopoly that should be broken up.    He said that any unbundling of Eskom accompanied by the introduction of private participants would fail to bring in lower prices since higher returns would be needed by private generators and distributors.

As to whether Eskom would be willing to supply certain municipal customers,  Dames said that local authorities had a constitutional right to supply the customer within their jurisdiction and  Eskom was unable to supply a number of municipal customers anyway based on their relation to the network. Also municipalities would lose revenue.

Dames said that the growth rates in the MYPD 3 submissions were lower than those required in the New Growth Path and the National Development Plan and whilst the energy reserve margin might be held in the immediate future, it would disappear if new generation capacity was not brought on line after the completion of Kusile and if there was growth. The current build programme did not address all the capacity needs of South Africa into the future.

EIUG figures do not reflect current picture

Dames, in addressing the claim by Energy Intensive Users Group (EIUG) that Eskom’s costs of maintenance were higher than they should be, said a considerable quantity of EUIG’s comments were based on inaccurate figures.

Much in the way of numbers quoted by EIUG were based upon “aspirational targets achieved during the 1990s when Eskom’s power stations were a lot younger”, it was said. The constrained power system now existing did not now allow for such philosophical assumptions. There was a balance which Eskom now needed to strike in practical realities as far as keeping the lights on was concerned.

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Final push for renewable energy promised

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First round of IPP producers named for grid supplies

In the first round of allocation of bidders in terms of the department of energy (DOE) renewable energy allocation procurement programme, 39% of the allocated 3625MW for independent power producers has been decided upon.

Parliamentarians were told that the number of “passing bids” was 66.5% of those submitted, resulting in a total capacity of 1415 MW of the 3725MW to be procured being taken up at this stage.

By far the greatest number of projects was solar energy projects, either solar voltaic or solar CSP, with slightly over 30% being wind projects. Twenty eight projects in all were found to be acceptable.

No biomass, biogas, landfill or small hydro projects were submitted in this round, or “window” as it is referred to by DOE.     All projects decided as acceptable were from Eastern, Western and Northern Cape. In all some 68 applications were received.

Ompi Aphane, acting deputy director, DOE, told the portfolio committee of energy that small 100MW projects would be handled separately, the original procurement documents for the bidders for larger scale projects having been released during August 2011 and the compulsory bidders conference held in September for these and for the second window now to be considered.

All documents have been treated as confidential by all parties and are still treated as such in view of the fact that the process is ongoing.

Evaluation of projects on the issue of land rights where, Aphane said, South African law “was antiquated and not clear”, have and might give difficulties. The same applied to municipal issues insofar as relationships and responsibility might be concerned, he said.

On the whole such issues would be the concern of the supplier to sort out but it had to be remembered, Aphane said, that at the same time all such problems were “everybody’s problems and it would serve South Africa best to sort them out at every level.”

On land matters as well, there might be problems in agricultural areas concerning projects that involved good arable farming land but very little in the way of problems were land was fallow had arisen so far or had been pointed out by the evaluators. Registration of leases or proof of land use application had to be shown in submissions.

Commercial legal issues, economic development priorities, financial oversight and technical issues had all been studied and a large evaluation team made up of international legal experts, well known local legal evaluation teams and technical consultants had been assembled. Financial evaluation had been undertaken by Ernst and Young and PricewaterhouseCoopers.

Under questioning by parliamentarians it became evident that all competitors had to be at least 40% South African owned. When asked if there were any landfill, biogas, and biomass projects that had become evident in early bidding under the second window period, Aphane said that such had not arisen at all, nor were they expected to be, mainly because they would be of a minor nature insofar as they would fall under projects providing 100MW or less.

Hydro projects had not arisen. He also commented that projects emanating from “fossilisation processes” were disallowed.

On whether the same extended and expensive evaluation process would be applied to the second and third round of bidding, Aphane said that “DOE had learnt much from the processes applied in the first round” and that the ground rules established by both experts, consultants and official bodies could be applied henceforth.

Questions on final pricing per unit of electricity arose and deputy director general Aphane said that this could not be discussed at this stage for reasons of security but in his mind as the bidding progressed he would expect to see the final price dropping.

DOE was working itself on a figure of something in the region of “R2.75 to R2.80 a unit” before bidding opened. This may go down, he said, but the final price had to apply to all involved in all bids.

Aphane confirmed in answer to questions that the “position with regard to legal difficulties on the licensing of independent operators with NERSA, the national energy regulator, had been resolved”.

Further questioning from parliamentarians resulted in Aphane confirming that the current IPP energy exercise was not in any way connected to the South African government overseas investment exercise with foreign companies on energy renewables, known as SARi.

On finance, once all bidding was completed, the three windows were closed and the final results were known and contracts granted, Aphane said, DOE was particularly aware of the problem of a sudden importation into South Africa of a large quantity of equipment from overseas and the effect this might have upon the rand.   Steps were in hand to counter this, probably by phasing in start dates.

Final questioning came from parliamentarians on the issue of land once again, particularly when the issue of litigation by present land owners arose either on matters of expropriation or proximity.

Aphane said that DOE could not be involved in such matters, which were the supplier’s problem.  However, broadly speaking, if any such problem arose in terms of it becoming a national problem, it would then naturally become a “South African problem as a whole” and this would have to be dealt with. DOE would monitor the situation.

The exercise regarding the “whole question of smaller 100MW or less, self-sustaining and possible minor contributions to the national grid” would be studied at a later date, he said.

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RE producers will take financial pressure off Eskom

The department of energy (DOE) has introduced to Parliament the concept of establishing a licensing entity for independent power producers (IPPs). This would be set aside from Eskom operations but would act as a much needed resource to shore up Eskom’s inability to provide, in terms of its credit rating, sufficient power for all of South Africa.

The ability of licensed IPPs to raise funds separately, particularly for renewable energy resources, will take the pressure away from  Eskom in terms of fund raising, says DOE.

A new Bill, numbered B9 of 2012, allowing independent system and market operators (ISMOs) and setting up an entity, which appears somewhat separated from Eskom to regulate such operators and purchase power, has been tabled in Parliament. Known as the Independent Systems Market Operators (ISMO) Bill, other necessary amendments to anchor legislation such as the current Electricity Regulation Act (ERA) will follow in due course.

Introduced by director general of DOE, Ompi Aphane, the new Bill will assist in providing, through an ISMO board, independent dispatch of power from all ISMO generating facilities to the sole purchaser, Eskom, “in an efficient manner in order to minimize costs’.  Muzi Mkhize, director general, hydrocarbons, described the new Bill “as establishing an autonomous state owned company, mandated to buy power from generation.”

He said that co generation projects will not require government guarantees and thus electricity from such projects “may come at a lower tariff when compared to costs generated by the Eskom build programme”.

The ISMO board, Mkhize told parliamentarians, will assist DOE in planning for “a new generation capacity”. On the basis that the ISMO board does not become involved in power generation itself, the licensing of electricity to distribution and large customers will be enabled independently of Eskom, such licencees being given equal access to the wholesale price.

According to the presentation made, only Eskom will sell electricity to the public. The presentation was made in the form of “electricity wiring diagrams” when describing the electricity generation regime in South Africa, rather than diagrams giving structured industrial relationships. MPs were at a loss to understand this.

In response, Mkhize said, “some of the functions to be performed by IPPs were not licensable activities at present” and therefore the Act would have to be amended at the earliest. However, he told parliamentarians that ISMO, as a body and licensing entity, would have to enter into a contractual arrangement with Eskom for the “execution of functions and contracts to be finalised within three months of the ISMO incorporation date”, i.e. a total staff transfer from Eskom Holdings in order for it to be in operation at the soonest.

The minister of energy, it is proposed, must ensure that ISMO board appointees are representative of the industry and all Eskom Holdings staff employed currently “in the fulfillment of functions contemplated by the establishment of ISMO, including support staff will be transferred to ISMO in terms of the new Bill”.

Mkhize said he believed that such generation licences to be granted and the allocation of MW in terms of government’s renewable energy plans would be addressed under the Electricity Regulation Act amendments. Future electricity tariffs created by the new structuring would require approval from the existing regulator.

The need for independent transmission lines as well was noted, Mkhize said, and this was to be addressed in due course.

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