How is Eskom kept out of the renewable energy programme, in favour of independent power producers?
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This piece displays how Eskom Holdings SOC continues to be kept out of the renewable energy programme by the Government of the Republic of South Africa in favour of independent power producers. Government is not bothered that production from Eskom generation sources has been decreasing since 2007 because of a decline in electricity sales and an increase in production from independent power producers leading to a revenue shortfall for Eskom. It is as the result of this revenue shortfall that Eskom is not able to generate sufficient cash flow out of its operations to pay for its operating costs and to cover its debt obligations.
The main reasons for the decline in production from Eskom generation sources is because of self-generation by customers, customers using electricity more efficiently and customers opting for alternate generation technologies due to the increasing electricity costs and load shedding. The reduced demand for Eskom’s electricity is the highest in large power users in the mining and manufacturing sectors due to a low economic growth, commodity market volatility, load shedding and the increasing electricity costs.
The Eskom customer base is growing but this is predominantly due to growth in residential customers, largely because of Eskom’s electrification expansion programme. The customer numbers in the industrial and energy-intensive sectors are declining and this has led to the decline in Eskom sales volume of 1% per annum mainly because of increasing electricity costs and load curtailment.
Eskom considers the current average selling price of electricity of approximately 90c/kWh (FY2019) as unsustainable. According to Eskom, this selling price has a severe consequence on their financial sustainability, going concern status and their ability to service debt commitments. It is for these reasons that Eskom has resolved to increase the average selling price of electricity by a minimum of 12% per annum to achieve a tariff that is cost reflective. The average selling price of electricity has already increased cumulatively by 446% between 2007 and 2019 against cumulative inflation of 98% for the same period.
The higher average selling price of electricity coupled with load shedding is forcing Eskom key customers to invest in energy efficiency and alternative generation technologies for their own power needs. The electricity tariff path of 12% per annum will accelerate the Eskom death spiral. It is obvious that Eskom cannot and should not rely on the tariff increases alone to increase its EBITDA. As a minimum, Eskom must reduce its primary energy cost escalations to below inflation and increase its sales volume by investing in wind, solar, storage technologies and high temperature modular reactors.
This was the reason why Eskom developed large scale, grid connected solar and wind projects between 2011 and 2016 in anticipation of a Ministerial allocation and to participate in the Renewable Energy Programme. Eskom also developed solar projects for its own use to feed into its power stations and other Eskom facilities.
The Eskom Renewables Business Unit was formed in April 2011. The 61MW of small hydro power plants in the Eastern Cape that were managed by the Distribution Group were transferred to this Renewable Business Unit. In March 2015, the Eskom’s 100 MW Sere Wind Farm achieved commercial operation milestone.
Regrettably, the Eskom renewable energy drive was put on hold by the National Treasury. The Eskom application of April 2014 made in terms Section 54(2) of the PFMA to establish the Eskom Renewable Energy Company that was going to be a subsidiary of Eskom Holdings SOC was rejected by the National Treasury in August 2015. In May 2016, Eskom cancelled its concentrated solar energy project.
I submit that the decision by the National Treasury to decline the Eskom Section 54(2) application was irrational and was not in the interest of Eskom. This decision effectively kept Eskom out of the renewable energy business.
Over three years later and on February 5, 2019 Cabinet resolved that the Department of Energy and National Treasury re-negotiate the terms of Bid Windows 1 and 2 of the Renewable Energy independent Power Producers. It approved the unbundling of Eskom but most importantly, Cabinet requested Eskom to re-submit a Business Case in terms of Section 54(2) of the PFMA for further participation in the renewable energy programme.
In its Business case, Eskom wants a Ministerial allocation of 1 500MW of Solar PV and 700MW of Wind for build between 2022 and 2024, and to participate in the next bidding window of REIPPP with 1 700 MW of Solar PV and 2 600 MW of Wind capacity between 2025 and 2030.
The Minister of Mineral Resources and Energy, Gwede Mantashe has other ideas that are not consistent with Eskom’s expectations and those of the Cabinet decision of February 5, 2019. In February 2020, he sent two draft section 34 ministerial determinations to the National Energy Regulator of South Africa.
In terms of these draft determinations, 2 000MW of new generation capacity will be procured between 2019 and 2022, and a further 11 813MW between 2022 and 2027. The two section 34 ministerial determinations, specifically excludes Eskom from building, owning, and operating any of the 13 813MW of new generation capacity until 2027.
The electricity policy is clearly not coordinated, and the centre is not holding. It is an amorphous mess.
* Matshela Koko is a former Eskom CEO.
** The views expressed here are not necessarily those of IOL.