Business chamber asks Nersa to stop all new IPPs

‘Renegotiate existing, unaffordable contracts’.

The Nelson Mandela Bay Business Chamber has asked energy regulator Nersa to stop the roll-out of new independent power producers (IPPs) due to their “catastrophic impact” on Eskom, and to investigate and renegotiate all existing contracts with IPPs.

The chamber represents about 700 businesses and has been very active in fighting for affordable electricity tariffs at Eskom and municipal level. Nelson Mandela Bay is an industrial hub that consumes about 1.5% of national electricity consumption.

The chamber’s David Mertens told Moneyweb the organisation has nothing against the principle of introducing renewable energy or IPPs, but that the numbers as set out in Eskom’s tariff application “stink”.

The chamber made the call to Nersa in its written submission in response to Eskom’s application to recover revenue totaling R762 billion over the next three financial years from electricity users through increased tariffs.

Eskom is asking for a 15% tariff increase annually from next year to 2021/22. This is over and above an increase of more than 4% Nersa has already granted Eskom for next year in relation to earlier expenses.

Nersa will travel the country in January for public hearings regarding Eskom’s application and the chamber expects to make a presentation during these proceedings.

The IPPs were negotiated by the department of energy and Eskom was obliged to sign an off-take agreement with each of them. The duration of the contracts is mostly for 20 years.

‘Detrimental impact on Eskom’

Former acting Eskom CEO Matshela Koko refused to sign further power purchase agreements with IPPs due to what he saw as their detrimental impact on Eskom. This resulted in a two-year standstill in the roll-out, but energy minister Jeff Radebe oversaw the signing of 27 outstanding contracts earlier this year.

In its tariff application, Eskom states that it prioritises the use of the IPPs over its own fleet, which means the IPP production displaces that of Eskom.

In its submission, the chamber says Eskom plans to buy 45 799 gigawatt hours of IPP power at a cost of R104.6 billion during the three-year application period. “This amounts to an average purchase price of R2.28/KWh (kilowatt hour). Replacing the IPP generation by (cheaper) Eskom generation would reduce the allowable revenue by R88.06 billion or 11.5% of the overall allowed revenue.”

According to the chamber, the tariffs Eskom is applying for are 13% higher than they would be if Eskom generated the “IPP” power in-house using existing or planned generation capacity.

“Eskom has sufficient capacity to replace the IPP power with self-generation,” the Chamber argues.

It further states that contrary to public perception, the effective R/KWh rates from IPPs have been increasing year after year since their inception in 2014.

Mertens told Moneyweb this increase might be the result of the inclusion of the department of energy’s two 1 000 MW peaker plants Avon and Dedisa which are situated in the Eastern Cape and KwaZulu-Natal respectively. Eskom is obliged to contribute to their fixed cost and has budgeted R2.5 billion per year for them alone.

In its application Eskom shows that IPP power purchases represent a growing percentage of its primary energy cost, from 26% in 2019/20 to 31% in 2021/22. The annual expenditure on IPPs will grow from R21.3 billion in 2017/18 to R46.8 billion in 2023/24 due to escalation clauses in the existing contracts and the addition of new ones.

Eskom also shows that its generation market share will shrink from 91% in 2019/20 to 88% in 2023/24 with the IPP market share growing from 5% to 8% over the same period.

The chamber says the “high prices South Africa pays for the IPPs are unacceptable and are unaffordable. The IPPs contribute very little value at an enormous cost.

“In view of the known adverse impact of IPPs on electricity tariffs, it makes compelling economic sense for Eskom to suspend the installation of further IPP capacity until additional IPP capacity will contribute to overall competitive pricing.”

The chamber calls on Nersa to explain how it approved contracts leading to “such extremely high costs”. It says to ensure prudency, the methodology for the determination of Eskom’s tariffs requires Nersa to review the efficiency of all contracts before it concludes the contracts.

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