the good, the bad and the ugly truth about electricity supply by chris yelland ceng
TRANSCRIPT
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?