Grandiose plan of power privatisation keeps failing

2014-12-07 15:00

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The Kelvin Power Station in Kempton Park is being sold for the fifth time since it became South Africa’s first experiment in privatising power generation in 2001.

The ancient coal-powered station (its first unit was built in 1957) technically has the capacity to generate a sorely needed 600?megawatts, but none of its successive owners has been able to deliver more than a third of that.

Instead, they have made hasty exits or ceded the station back to its creditors, as happened in 2006 and again last year.

Investec and Nedbank Capital are the joint shareholders after they financed the acquisition of Kelvin via a consortium of fund managers in 2007.

That consortium sold the station to the banks after an initial debt restructuring failed to help them out of “operational difficulties” last year, a spokesperson for the two banks told City Press.

The two banks this week published invitations for expressions of interest in buying the station.

Although Kelvin is minuscule compared with Eskom’s base load stations (at full capacity, it would be equal to one of the six units of the Medupi station being built in Lephalale), it is the only large coal-fired power station in private hands in South Africa and still big in comparison to the various renewable independent power producers setting up shop in the country.

Its 200MW operational capacity amounts to about 10% of Joburg’s power needs – a crucial buffer against the power shortage the country is facing.

The station sells all its power to Joburg’s City Power in terms of a 20-year power purchase agreement signed with the original buyer in 2001, which expires in seven years.

This guarantees cash flow, the banks said in a short information note to prospective buyers.

City Power’s annual reports and budgets are laden with complaints about Kelvin’s failure to deliver the electricity it should in terms of the power purchase agreement.

Another long-standing problem has been that Kelvin’s tariffs get adjusted to reflect the cost of its coal, resulting in large jumps over the years.

The station’s electricity is a lot pricier than Eskom power – about R1 per kilowatt-hour compared with Eskom’s 74c/kWh.

According to City Power’s published business plan for 2014 through to 2016, it spent R745?million on power from Kelvin in the 2013/14 financial year and expected that to increase to R815?million in the current year.

But buying the power can be justified by reselling it to Eskom – while the City buys cheaper Eskom power for its needs.

After the power crisis in 2008, reselling Kelvin’s power earned the municipality several hundreds of millions of rands in additional revenue.

But, according to Eskom, the contract with City Power will end in March next year.

It is one of the stopgaps that the National Energy Regulator of SA wants Eskom to cease, to save money.

In their invitation to potential buyers this week, the banks punted Kelvin as a potential direct supplier to Eskom through the national independent power producer programme.



Kelvin was initially sold to American AES Corporation and a 5% local partner – Global African Power – in 2001 with grand plans to refurbish the plant and return it to its 600MW capacity.

The City of Johannesburg sold the station along with a power purchase agreement lasting 20 years, which guarantees payments for upkeep of capacity.

AES is a major global private sector player in power generation, owning about 28?600MW in capacity across the world – almost as much as Eskom has up and running at any given time.

The Kelvin deal was worth about $57?million, including the costs of refurbishing the plant, press releases from that time show. AES borrowed R375?million from local banks to cover much of that.

But it was not to be.


By March 2003, less than one-and-a-half years after the initial privatisation, AES bailed and sold Kelvin to Globeleq, a power company indirectly owned by the aid-disbursing arm of the British government, the department for international development, through its self-financing CDC Group.

CDC paid £18.8?million for Kelvin and took over almost £50?million in debt tied to the station from AES.

Operations disappointed almost immediately and three years later, CDC wrote down the entire investment to zero, citing Kelvin’s “inability to meet operational availability targets” as well as “impending insolvency”.

Control of Kelvin was sold once again, for a “nominal sum”, into a special-purpose vehicle – in effect ceding control to creditors.


Late in 2007, Kelvin was sold again – this time to a consortium of infrastructure-focused fund managers with Macquarie Group, Old Mutual Investment Group and Kagiso Trust Investments taking the lead.

The Dutch development finance group FMO as well as J&J Infrastructure Holdings also took shares.

This is the point where Nedbank and Investec got involved by refinancing the debt of the previous owners.

A new independent power company called Aldwych became a minority shareholder and the operator of Kelvin. It was created by a group of veterans from the original buyer of Kelvin, AES, which had abandoned the station in 2003.

But by 2013, this consortium sold the station to their banks. Aldwych announced it had signed a new management services agreement with Kelvin. Since then, Aldwych claims to have achieved something like a turnaround, stabilising the power generation at Kelvin between 180MW and 250MW.

According to the banks, it will be up to the eventual buyer of the station to decide if Aldwych stays on.

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