Eskom: a power struggle

2013-03-31 10:01

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Power supplier says something has to give in light of financial woes

Eskom’s nose has been put properly out of joint after the National Energy Regulator of SA (Nersa) granted it only half of the rate increase of 16% per year over the next five years that it requested.

According to the power utility’s chief executive, Brian Dames, Eskom must now get clarity about its mandate and find out whether government will support it financially.

He says: “Eskom’s rate application was based on efficiency, and the rate fixing brings challenges on many fronts. Something will have to give way, or many things will have to give way.”

One example is the cost of coal. This is included in the provision of R355?billion over five years for primary energy that Eskom requested. But Nersa only granted R293?billion.

Dames says there is a limit on how little one can pay for coal. Besides, Eskom has been asking for a long time that coal be declared a strategic commodity to ensure supply, but government has made no decision on this yet.

Nersa also cut Eskom’s provision of R13?billion for demand management back to R5 billion.

This has led to fears that there may be load shedding because Eskom now does not have the finances to continue with power “buy-back” agreements.

These agreements involve the power utility paying major industries to turn their plants off so there is less demand for power. Nersa spoke out strongly against this practice, saying it is ineffective and harms the economy.

But Dames says it’s a misperception that Eskom asked for R8 billion in buy-back agreements.

The provision for demand management, he says, includes amounts to subsidise the installation of solar geysers and similar programmes necessary “to keep the lights on”.

The provision for buy-back agreements did not, therefore, amount to R8 billion.

Furthermore, according to Dames, no customer was forced into it. The agreements were also set up in such a way that workers at these plants kept their jobs.

He says these agreements are still the most cost-effective way to manage the balance between electricity supply and demand.

This is done to make space for the much-needed maintenance of power stations.

The other option is to use Eskom’s two gas turbines, which are only meant to be used in peak periods. Their generating cost is 10 times more expensive than that of Eskom’s coal-fired power stations.

There have been rumours that demand management will be taken out of Eskom’s hands and transferred to the newly established National Energy Efficiency Agency.

But, according to Dames, demand management is one of the critical variables for Eskom to achieve its mandate of keeping the lights on.

He says: “To take that out of our hands is like tying our hands behind our backs. But if the idea is that our mandate must change, then it must change.”

Eskom will first have to hold in-depth talks with government about every aspect of its job, he says, because key aspects have changed.

“We have been asking for a safety net for a long time. We worked out all the details for a compulsory system of power saving that should only be implemented when it becomes necessary, but there has been no decision about this.”

He says the department of energy must publish regulations to enforce this system, as he “does not believe rotational load shedding is the right option”.

In reply to a question on whether it would be fairer to turn off BHP Billiton’s smelters than to plunge the citizens of the country into darkness at different times, Dames said Eskom was bound by its contract with the mining firm.

After a long legal battle, Media24 recently established that BHP Billiton buys 9% of Eskom’s generated power at only 22.65 cents per kWh. This is considerably less than the generating cost of about 41c per kWh.

According to Dames, the contract with BHP Billiton and other large industrial customers allowed Eskom to interrupt the power supply for a limited number of hours per week, if necessary, and Eskom has been doing so for some time.

Dames does not believe the assurances given by Hitachi and Alstom, the main contractors at the Medupi construction project, to correct construction faults and make up lost time.

“They have given assurances in the past, and these did not materialise. They will have to convince me,” he says.

Dames spoke to City Press from Medupi, just outside Lephalale, on Thursday about the struggling project that must supply its first power to the grid before the end of the year.

Because of labour unrest, very little construction work has been done this year, and faulty welding by Hitachi and software problems with Alstom raise further concerns.

Dames said he is now keeping a close eye on these contractors and has sent for their top manager from abroad.

Eskom’s relationship with Hitachi and Alstom has been tense for some time, he says.

“I hold them accountable.

The delays were caused by the contractors. We will take recourse to all contractual remedies if needed.”

This normally includes penalty costs and, in extreme cases, a contract can be suspended due to nonperformance.

The contractors will bear the cost of the strikes, Dames says. “It was their workers who went on strike, not Eskom’s.”

Eskom expects claims from other contractors who have suffered losses because of the effects of the labour unrest at Hitachi and Alstom, but the utility plans to recover this from the two contractors.

Earlier reports suggest this could amount to hundreds of millions of rands.

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