Eskom Megawatt Park, courtesy of Eskom's Supplementary and Divisional Report 2013

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How independent power producers will bankrupt Eskom and ruin coal mining

Weekly Xposé team

Eskom faces the risk of financial ruin if it signs Power Purchase Agreements (PPAs) with key renewable energy independent power producers (REIPPs).

Weekly Xposé is in possession of documents which indicate how demand for electricity has slowed down, resulting in significant excess capacity for the power utility. The documents reveal that if the current IPP programmes were to continue at the current pace, and Eskom were to sign further PPAs, then the future outlook for Eskom “is operationally and financially unsustainable”.

“Based on the current growth expectations of 0.8% per annum, should additional IPP programmes go ahead, the completion of Medupi, Kusile and Ingula and the combined effect of the approved IPP power purchase agreements would lead to overcapacity on the system of 14,000MW in 2024. This surplus would lead to Eskom having stranded assets which will likely lead to assets being forced to be put into cold reserve, mothballed or decommissioned,” says one document.

The documents also reveal that if additional IPPs were introduced into the market, this would have a devastating impact on the coal industry and could lead to thousands of job lossses. “The socio-economic impact of the closure of Eskom’s power stations will directly impact approximately 10 000 people that currently service power stations. It will in all likelihood impact the livelihood of various communities in the areas surrounding the affected power stations.”

The documents reveal how Eskom will be required to provide for impairment of some of its assets to the extent of R45bn and incur stiff penalties totalling potentially R23bn and how this could significantly deplete the power utility’s equity of R181bn. “With the risk Eskom receiving lower revenues from its operations, this will have direct impact on its ability to generate adequate cash flows to meet its existing debt commitments. Eskom will be placed in a position where it would potentially have to trigger government guarantees issued to current investors.”

Weekly Xposé has reliably learnt these are some of the reasons that have seen Eskom failing to meet its deadline to sign purchase power agreements with independent power producers. New Minister of Energy Mmamoloko Kubayi has also indicated that she needed to consult further with stakeholders before any further agreements could be signed. Weekly Xposé has also reliably been informed that Eskom has escalated its concerns on the financial and business implications arising from the execution of the outstanding PPAs to both Kubayi and Public Enterprises Mininster Lynne Brown, seeking their intervention in resolving its dispute with several independent power producers regarding the signing of outstanding power purchase agreements.

Labour unions have also entered the fray. The National Union of Metalworkers of SA (NUMSA) as well as the National Union of Mineworkers (NUM) have directed their anger at the IPP pogramme, saying it should not be allowed to cause the loss of about 20 000 jobs. The matter has also been referred to the courts by the Decolonisation Foundation which is asking the courts to set aside Eskom’s decision announced in March to sign power purchase agreements.

In its court papers, the foundation also asks the court to set aside Eskom’s decision to close the 30,000MW Kriel, 1,000MW Komati, 2,000MW Hendrina and 1,600MW Camden power stations. “The overall effect of the signing of the PPAs is that the first respondent (Eskom) will suffer loss of revenue and the public will be forced to pay higher tariffs emanating from such loss. In a nutshell, the electricity will become more expensive to the public,” says the foundation in its affidavit.

Weekly Xposé sent questions to Eskom, which in its response disclosed that it was reviewing the matter of the early closure of coal-fired power stations. Eskom added that it remained committed to “government’s energy procurement programmes and intends to sign budget quotations and power purchase agreements related to these programmes”.

“This commitment will be carried out within a framework that takes into consideration the scale and pace of the roll-out of IPP procurement programmes, the long-term financial sustainability of Eskom and the value for money criteria vis-a-vis whether South Africa’s customer base can afford the current IPP tariffs and their projected trajectory. The uncertainty on the cost recovery mechanism for IPPs’ energy costs remains a key concern to be clarified with Nersa and other relevant stakeholders,” said Eskom.

“Renewable energy remains an important part of South Africa’s future diversified energy mix and it is therefore critical that the implementation of such programmes should be carried out in a multi-stakeholder approach that supports the country’s economic growth and the realisation of its socio-economic ambitions.

“The matter of the early closure of coal-fired power stations is currently being reviewed and we will communicate the outcome in due course,” the power utility said in its statement.

Weekly Xposé
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