Tuesday, July 27, 2010

SA: Eskom Finally Opens Up to Independent Power



South Africa: Eskom Finally Opens Up to Independent Power
27 July 2010

Johannesburg � IF YOU'RE looking for a tangible example of how SA's
poor infrastructure constrains economic growth and exports, just ask
Xs near Polokwane, three years ago and it had planned the second phase
for 2013-14. But it has had to put the R5bn Lion 2 (and Lion 3) on
hold because Eskom could not guarantee power supply.
SA has nearly three-quarters of the world's chrome reserves and
ferrochrome is a big export earner. But ferrochrome smelters are
energy-intensive facilities; there is no point building them if there
is any doubt about the security of their power supply. And with SA
going into a period in which Eskom will be extremely stretched to meet
demand, many mining companies are looking twice at new investments.

As it happens, Xs trata is also in the coal business, and is keen to
generate its own power, using its own discarded coal. It could
generate more than enough megawatts to meet the additional demand from
all three Lion phases. And it could build a cost-effective new power
station and connect it to the Eskom grid within two or three years.

Anglo American is looking to do much the same kind of "own
generation", and between them the two mining companies could generate
up to 600MW of power for their own use. Not that anyone would know
whether the electrons their smelters were using were the same ones
their power stations were producing - in practice they would be
selling power into the Eskom grid and buying it back again, with Eskom
charging them a "wheeling tariff" to transport it.

What that tariff should be, and who should determine it, is as yet
unclear. And though these "own generation" projects sound like no-
brainers, the fact that they are coal-based, with implications for
SA's carbon emissions, complicates matters because it touches on
bigger policy debates. So too do big base-load private projects, such
as (coal-fired) Mmabula in Botswana and (gas-fired) Moambo in
Mozambique, which are still uncertain.

But these are among at least four types of private power that SA could
draw on. And after years of much talk but no action, some progress is
now being made to bring at least two types of private generation to
the market - co-generation, where companies generate power from the
waste products of their processes, and renewable energy. Sasol is one
of the companies with which Eskom has now signed a power purchase
agreement; its project is somewhere between "own gen" and "co-gen"-
the company will use its own waste gas to produce power for its own

Eskom has also reached agreements with independent power producer Ipsa
and with one Sappi project and is waiting for confirmation from the
National Energy Regulator of SA (Nersa). Altogether it hopes to close
six deals to generate a total of more than 400MW by March next year.
There is potential for double or triple that.

Then there are the renewables, particularly wind and solar power. The
"Refit" tariff that Nersa set has made investment in renewable energy
so attractive that Eskom has been swamped with applications - more
than 11000MW worth - from potential producers wanting to connect to
the Eskom grid. The question is how many of those are serious
projects. Eskom's Kannan Lakmeeharan reckons Eskom could sign up at
least 1000MW of renewables within the next three years. But there is
potential for up to 6000MW of wind and 500MW of solar.

It's not just that much of this independent power is "green"; it's
also that many of these projects can be built fairly fast, so may help
address the power crunch of the next few years if they are signed up
soon. Perhaps most important is that Eskom doesn't have to fund or to
build them - they draw on sources of finance, and skills, outside of
those that a cash-strapped Eskom can tap into.

And whether from desire or necessity, Eskom is now finally showing
willingness to sign up independent power producers (IPPs). After years
in which it expressed support for IPPs in theory but seemed highly
reluctant in practice, it has suddenly done quite a lot in just six
months. The interministerial process on energy that the Cabinet set up
has helped and there is now closer collaboration between business,
government and Eskom.

But it's not up to Eskom. These are policy decisions and there is
still friction within the government over energy policy. Perhaps the
most immediate issue is who will buy the power from these independent
producers. The government is committed to setting up an independent
system and market operator (Ismo) that will buy power from Eskom and
from private producers. But there's no clarity within the government
as to what this means and it could take years to set up.
Eskom, meanwhile, is going ahead and doing deals with producers. And,
as it revealed at a workshop last week, it has moved to avoid
perceived conflicts of interest by "ring-fencing" the revenues it will
receive from private producers and putting governance structures in
place to make the process transparent and equitable. In essence, it
has moved to circumvent the Ismo debate - at least for now. The
question is whether the government will allow it to do that. If it
doesn't, the quest to bring private producers into the market could be
slowed yet again.

Joffe is senior associate editor.

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