Issue 136 • 11 April, 2008

AES drops IPP plans as Eskom looks to price hikes to tackle supply crisis

Eskom is increasing its imports and has approved another major pumped storage project, but the medium-term supply situation remains very tight – and the prospects of drawing in new investment are not helped by the failure of the government’s planned independent power project.

The South African government’s decision not to continue negotiations with AES Corporation, the preferred bidder announced last August to build two new open-cycle independent power plants to provide 1,000MW in Eastern Cape and KwaZulu-Natal, has highlighted SA’s problems in developing new generation capacity outside the Eskom monopoly. Eskom – which has never liked the IPP model, and lobbied to stop the Department of Minerals and Energy (DME)’s initial plans for the IPP to sell to all comers, rather than go it alone – and the government immediately said they were looking for international partners to come in to help overcome generation capacity shortfalls. But the AES experience is hardly a recommendation to rush into SA.

The highly-qualified US firm complained that project parameters had shifted since it had submitted its bid, altering the risk profile and rendering the deal unattractive – and thus it decided it wasn’t worth posting a R20m ($2.6m) bid bond, to secure the estimated R5bn deal, by the end-March deadline. There were problems across the project structure, including what became irreconcilable differences over price, commercial terms and the timetable for completion – as DME spokesman Bheki Khumalo admitted. According to AES spokesperson Robin Pence, “we decided to end [the contract] because changes were made to the project parameters and the risk profile of the deal that made pursuing it unattractive. We have to make sound financial decisions on behalf of our shareholders and this was no longer attractive.”

Given the time it had taken to negotiate this “fast-track” project, the outcome was no great surprise to the industry – even though IPPs have been promoted up the agenda as SA’s electricity supply crisis has deepened (AE 132/4). With load-shedding a very hot potato indeed, Minerals and Energy Minister Buyelwa Sonjica has come under criticism for not being able to pilot the deal with the AES consortium – which included US-registered AES Pacific Ocean and black economic empowerment partners Tiso Energy, Mbane Power and Kurisani Youth Development Trust – as well as for her overall performance in stewarding this problem sector. Eskom, as usual, shrugged off criticism, arguing that it could live without the peaking plants, and that other developers would be attracted in to invest.

An expected substantial hike in electricity tariffs may help to attract developers and fund Eskom’s huge development plans (AE 133/24). But this will not prove popular with populist politicians nor on the street, adding to pressure on Sonjica, who on 1 April said that even if the increase went ahead, South Africa would “still have the cheapest electricity in the world”. The minister did acknowledge that the increases would affect the price of fuel and food, and said the government was looking at cushioning the poorest households.

The National Energy Regulator of South Africa (Nersa) has said it will announce a decision on 6 June on Eskom’s application to increase tariffs by 53% to fund increases in generating capacity. Nersa said a public hearing on the tariff increases would be held on 23 May, and the electricity subcommittee will meet on 27 May to discuss its recommendation to the regulator. “The Energy Regulator acknowledges that this application is submitted during the national electricity supply emergency and as a result would like to expedite the processing of Eskom’s application,” Nersa said, noting that the process usually took three times as long.

HCB lifeline

To help alleviate the situation, Eskom has signed a five-year agreement to import an additional 250MW of power from Mozambique’s Cahora Bassa hydro plant. The agreement was signed on 3 April, with supply starting the following day. The extra capacity is made available through the Cahora Bassa plant operating all five of its generators. The fifth generator is usually kept on standby for maintenance on one of the other generators. This means the extra capacity will only be available while all five generators are operating.

The Cahora Bassa contribution will be fed through to South Africa over Botswana and Zimbabwe’s infrastructure as there is no spare capacity for direct transmission between South Africa and Mozambique. Now that Hidroeléctrica de Cahora Bassa (HCB) has all but completed the financing of its takeover by Mozambique from Portugal, there will be a further push for the massive hydropower facility’s capacity to be expanded (see Finance and policy and AE view, below).

Project Lima and Ingula

The Eskom board approved plans in late March to develop the 1,500MW Lima pumped-storage project in Mpumalanga province (AE 135/8). Project Lima, which will comprise four 374MW turbines, received environmental authorisation from the Department of Environment last October, after completion of an environmental impact assessment. A feasibility study was completed in November 2000.

Eskom expects to have site access by September to begin tunnel excavation. Full construction is scheduled to start next autumn and is expected to take nearly six years. Project documents indicate that Project Lima’s upper reservoir would be built at the top of the Thaba ya Sekhukune escarpment near the town of Sehlakwane, with the lower reservoir to be sited within the Steelpoort River Valley and be fed by a pipeline from De Hoop Dam on the Steelpoort river, being built by the Department of Water Affairs and Forestry at a cost of R9bn ($1.1bn).

Meanwhile, Eskom is carrying out tunnel excavation at the 1,332MW Ingula pumped-storage project in the Little Drakensberg mountains on the border between Free State and KwaZulu-Natal provinces. The utility plans to award contracts by July for Ingula’s main underground civil works and for dams on two streams, Bramhoek Spruit and Bedford Spruit.

Gariep postponed

However, the Eskom board decided at its meeting on 26 March to postpone plans to upgrade the 360MW Gariep hydropower plant on the Orange River in Eastern Cape, while it evaluates the results of a feasibility study. Eskom said it had planned to refurbish the generators as part of normal maintenance, but a study to identify requirements for a complete capacity upgrade found his would result in additional generation of 80GWh.

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