South Africa

AMABHUNGANE

Clumsy Nersa redaction reveals ‘higher’ cost of emergency power

A general view of the Fatmagul Sultan floating power plant moored off the shore of the Lebanese town of Zouk Mosbeh, northern of Beirut, Lebanon, 19 September 2018. EPA-EFE/NABIL MOUNZER

A small slip-up in the extensive redaction of documentation around potential 20-year contracts with the controversial Turkish Karpowership group has seemingly revealed that South Africa will pay far more than advertised.

Correction: This article corrects and replaces an earlier version (Karpowership’s R3,3-billion-per-year ‘freebie’) that contained erroneous calculations that we have withdrawn. We apologise for the error.

The potentially costly design flaws of the risk mitigation independent private power procurement programme (RMI4P) have once again been underscored – this time by what looks like a botched redaction of documents by the National Energy regulator of SA (Nersa).

The apparent slip-up has revealed that Karpowership, by far the main beneficiary if the RMI4P proceeds, expects to receive an “effective” tariff from Eskom almost double the tariffs announced by energy minister Gwede Manatshe for its three planned projects when Karpowership was announced as a preferred bidder in March this year. 

The estimated tariffs that can be inferred from parts of the document left unredacted amount to R2.77 per kWh at Karpowership’s Coega and Richards Bay projects compared to the “evaluation tariffs” of R1.47 and R1.50 that Mantashe announced in March. 

At Saldanha the “effective tariff” appears to be R2.84 compared to the announced R1.69 per kWh.

The effective tariffs of the other preferred bidders in the RMI4P would similarly be more than advertised to varying degrees, making the original announcement misleading, especially in terms of how the RMI4P stacks up against other potential power solutions. 

The much higher “effective” tariff  is seemingly a consequence of Eskom paying for power it does not use due to a generous “take-or-pay” concession in the RMI4P project. 

This fundamentally challenges the design of this ‘emergency’ procurement in the first place.

The problem is that Eskom will be obliged to pay for 72.72% of Karpowership and the other bidders’ capacity no matter how much it actually uses. 

This means that if Eskom procures less than 72,72% at the official tariff it will still pay an additional sum. For the seller this means they are effectively earning more per kWh than the official tariff.

AmaBhungane on Thursday published an article attempting to quantify the total damage this will do to Eskom and hence to power consumers. We have now abandoned that experiment and replaced that article after it became clear our estimate made a fundamental error. 

In short, the error stems from the extent to which a key element of the still-pending deal with Karpowership and the smaller RMI4P preferred bidders remains secret. 

This is the effect of fuel costs on the tariff. We assumed that the “additional sum” earned by Karpowership for power it does not deliver would be based on the full evaluation tariff that Mantashe disclosed. 

In reality it would likely be a lower amount because there will be no fuel burned, meaning that the tariff for the “additional amount” should be the advertised one minus the cost of gas.

Take-or-pay concessions are common in large IPP procurement deals in order to give investors some minimum return to justify capital investment. 

A guaranteed offtake of 72.7% is however arguably high enough to undermine the premise of the RMI4P being an “emergency” stopgap against load-shedding. 

What Nersa let slip

When the three controversial powership projects belonging to the Turkish Karadeniz group applied to Nersa for generation licenses they requested that almost all meaningful economic data be kept secret when a decision is published.

Nersa obliged and virtually no information about costs or tariffs remained when the regulator approved the licenses and published the three heavily redacted reasons-for-decision documents on 29 October.

We however discovered a chink in the otherwise comprehensive redaction when Nersa compared the powerships’ “effective” tariff to that of the existing open cycle gas turbines Eskom currently uses as backup “peaker” plants for emergencies.

That tariff is R4.80 per kWh, claims Nersa. It then asserts that this is between 69% and 73% more than the  Karpowership projects’ “effective” tariffs – at least the one Karpowership itself claims is realistic.

To recap, that suggests “effective” tariffs of R2.77 per kWh at Karpowership’s Coega and Richards Bay projects compared to the “evaluation tariffs” of R1.47 and R1.50. At Saldanha the effective tariff can be inferred to be R2.84 compared to the announced R1.69 per kWh.

However, because the quantification of the gas price in the overall tariff is unknown, we could not extrapolate the overall impact on the estimated annual cost to Eskom or on the level of Eskom’s predicted take-up, versus the contracted 72,72% minimum – as we had attempted to do. 

Count the ways

Experts in the field have pointed out that the real tariffs Karpowership and other bidders in the RMI4P charge could be much higher than the “effective” figure, which was confidentially provided by the company itself.

This number stems from Eskom buying less power than the minimum capacity it has to pay for but assumes that the “evaluation” tariff revealed by Mantashe is otherwise correct.

This is unlikely to be the case due to the gas pass-through. As a rule of thumb fuel constitutes 60% of the cost of a power plant like Karpowership’s using liquified natural gas.

Gas prices have recently escalated massively. Even if the advertised “evaluation” tariff from March were accurate then it would now be several times higher due to the gas pass-through.

A crucial piece of context is that the figures given to Nersa are for the first year of operation in a planned 20-year contract. 

Over the course of this contract Eskom’s need for the ostensibly “emergency” capacity provided by Karpowership and others should progressively reduce as local capacity grows from new investments.

That means the take-or-pay element of the RMI4P could progressively become an ever larger “freebie” compared to power Eskom actually wants or needs from relatively expensive providers under RMI4P.

By way of comparison, the preferred bids for wind and solar in the latest Renewable Energy IPP procurement round range between R0.34 per kWh to R0.61 per kWh. DM

Gallery
Absa OBP

Comments - share your knowledge and experience

Please note you must be a Maverick Insider to comment. Sign up here or sign in if you are already an Insider.

Everybody has an opinion but not everyone has the knowledge and the experience to contribute meaningfully to a discussion. That’s what we want from our members. Help us learn with your expertise and insights on articles that we publish. We encourage different, respectful viewpoints to further our understanding of the world. View our comments policy here.

All Comments 26

  • This is exactly what many people expected from the Old Fossil but CR must now be forced to confront this sheer crookery and incompetence directly and actually take some responsibility the disgraceful lack of any intellect in his cabinet.

    • Not just the lack of ‘intellect’ …but more importantly, total lack of any integrity and ethics ! Lying to us with a straight face is the order of the day, and ‘engineering’ or manipulating information to suit their continuing lust for state/party control .

  • My understanding is that during off-peak periods, because Eskom won’t be taking, they must pay. One way to confound the economics would be to build some big battery energy storage systems at the off-take points. I’m sure Tesla would be delighted to build us some, in record time too. I’d love to see the business case for that succeed.

    • Why do we need TESLA?! Ingula pumped storage has far more capacity than TESLA can offer at about 1/8th the cost. Not everything imported is better than home-grown!

  • Hi Dewald

    Some decent points raised in the article with a 70% capacity factor being quite high for a take or pay arrangement.

    Two points I would like to raise quite strongly:
    1. The tariffs in the RMIPPPP including those of the Karpowership cannot be compared to those in the latest round of REIPPP as you have done so in paragraph 6 as the RMIPPPP supplies despatchable power versus the non-despatchable power supplied by the REIPPP. It is completely inconsistent and erroneous to suggest the comparison of the tariffs of these programmes and even more so in an attempt to reinforce the notion that the RMIPPPP tariffs are irregularly high. The statement should be removed from the article.
    2. Little discussion is made if the R4.80 cost of the current diesel peakers which is in fact what the RMIPPPP is largely competing against. It will fulfill a midmerit and peaking function.

    Happy to engage further.

    Matthew Kabot
    Power Generation Advisor

    • So, Dewald, are you running a fake (or half) story, or to be kind, a misinformed story, or how are you going to reply to Matthew Kabot, directly on DM, since this is where you posted your article. His comment was posted at 17:15. Can we expect an answer by say 21:00?

    • Matthew: the tariff for not using the ships cannot be the same as when using. In simple terms all of the variable cost MUST be excluded.

      Say Eskom actually uses 40% That 40% would rightly attract fees at 3500h at full rate. The other 2800 hours should only attract fees at the availability rate.

      It would amount to fraud to charge fixed and variable cost for hours that had no variable cost.

      I imagine the comparison to renewables illustrates that when Eskom has to choose whether to use 45c power or 300c power it will always rationally use the 45c Using that power reduces its cost but not when it has to pay for 7300h from the gas ships whether Eskom uses it or not. The scheme effectively makes the corrupt gas ships a fixed cost.

      No sane person anywhere in the world will pay for energy on the basis this contract proposes. Imagine for a moment my council came to me and said from now on I pay for 7300h whether I use it or not. This clause alone would lead a court to overturn the contract as improper.

      • Re your last sentence …. not if you are Xi or Putin or the many other wannabe’s dictatorships around the globe ! They ensure a quasi ‘judiciary’ (invisible to independent scrutiny), that carries out the diktats of the rulers !

  • I cannot believe the ANC runs itself any differently from how it runs the country. It cannot pay salaries, it is broke and due to loss of support has fewer avenues open to it for corruption. Think we are going to see more of these deals that take corruption to the extreme, just fewer of them.

  • Excuse me the Citizens of South Africa No longer will pay for incompetence and thievery.
    We need to stand up against this. Why do they still consider karpowership….. disgraceful ministers. Shame on you. I pray you don’t sleep and night

  • Another outrage from this government. Like the sale of our strategic oil stocks, or the etolls, none of this makes any sense.

    Until you follow the money. Then all will fall into place. Check where it all ends up. First clue… Zero transparency on this.

  • Take or pay agreements are standard in arrangements like this. Karpower is parking a substantial capital asset and can’t be expected to just leave it there in the hope it gets used. Arrangements like this would apply for instance when an industrial gas business builds a atmospheric gas extraction plant to supply gas to a major industry. If it isn’t used to the contracted level a minimum fee must be paid. Your journalist needs educating.

    • Richard is correct. This type of contractual arrangement is in use for years. While I do not support the Karpowership solution technically, I guess the smart thing to do would be to take the 73% and turn down on coal fired systems….close the unrepairable ones and maintain the others. Sweat the Turkish asset while we build a renewable future. It will, however, require a level of intelligence with government, which is in much more short supply than power itself.

      • My sentiments exactly. If we have to accept the corrupt gm arrangement (Which only seems to benefit the corrupt anc), let’s sweat it to smithereens and send the scrap ships back after 20 years.

    • Richard : the agreement simply needs to differentiate a rate (eg kVA per year) that is paid regardless, plus then an energy rate consisting of variable costs for the actual hours used.

      It is not normal for an offtake agreement to apply fixed and variable cost to a minimum hours. Perhaps you need educating?

  • This arrangement is corrupt to the core, and it must be stopped. Continue investigating, DM, and get to the root of who is benefitting from this corrupt arrangement that is completely inappropriate to meet South Africa’s energy needs.

  • None of your commentaries refers to my original question of why a 20 year contract ? Maybe a shorter term will escalate the cost level to ‘pandemic’ levels ? Surely in the next 5 years, intelligent (though in short supply it seems) alternative solutions could be had ? We had the ‘capacity’ to be the first in the world, to identify a new variant of covid after all !

    • Hi Kanu

      Yes, shorter terms would reasonably lead to higher tariffs.

      In terms of energy solutions for the country, unfortunately power networks are complex infrastructure systems that in many cases cannot be “fixed” in the short term (5 years). Often only mitigation can take place in the short term, while long term solutions are being put in place which is exactly what is happening in South Africa.

      Unfortunately one could suggest the biggest mistakes in terms of South Africa’s power security were made ten to fifteen years ago. We are now seeing the effects of those.

  • This is just the other side of the availability charges that users who want to have sunny solar but recourse to grid on cloudy days and dark nights are going to have to pay. Someone has to pay for the idle capacity …

  • The main problem is that government wants to centralise control for their own purposes of revenue for party and cadres.
    We need to privatise – subsidise the installation of solar panels on all buildings ; suburban car parks could be shaded with solar panels – we could rapidly increase the daytime supply. hydro systems could pump up during the day to provide back up power at night. We seem to have huge deposits of helium and natural gas already being privately developed; we have already spent huge amounts of money developing pebble bed reactors and hydrogen technology for longer term.
    I am not knowledgeable but it seems that unleashing private initiatives could solve the problem in so many ways!!!!

  • Hi Dewald. A few fairly critical points below:
    Para. 5 – mention is made of cheaper “other potential power solutions ” could you please elaborate on these. If you are again referring to non-despatchable REIPPP or renewable generation then I must state again that these cannot be compared as they fulfill different roles in the grid.
    Para. 19 and 20 – much is made of the higher effective tariff that was calculated using the NERSA current Peaking Power reference of R4.80 however little mention is made that even this effective tariff is still far lower than this reference. This is in fact the major point, that the RMIPPPP tariffs are cheaper than the alternatives and far cheaper than the costs of power disruption.
    Para. 22 – even with potentially higher gas prices the RMIPPPP tariffs would still be lower than comparable alternatives.
    Para. 27 – the assumption is made that Eskoms reliance on emergency power will diminish. Firstly the open cycle gas technology of the Karpowerships fulfills both a Peaking and a lower mid Merit role in the grid which means it will remain relevant even when South Africa’s requirement for emergency power decreases. Secondly, South Africa’s reduced reliance on emergency power is only one possible scenario with very few people currently able to confidently forecast the future of South Africa’s power security.
    Para. 29 – Erroneous comparison of despatchable and non-despatchable power tariffs.

    Happy to engage
    Matthew Kabot