Eskom slams Yelland's electricity cost calculation

Electricity pylons in Beaufort West. Nersa is holding public hearings on Eskom's proposed revenue price determination. (Picture: Chris Kirchhoff/MCSA)
Electricity pylons in Beaufort West. Nersa is holding public hearings on Eskom's proposed revenue price determination. (Picture: Chris Kirchhoff/MCSA)

Cape Town - Eskom said on Friday it categorically rejects the levelised cost of energy (LCOE) calculation put forward by energy analyst Chris Yelland on Medupi, Kusile and the independent power producers (IPPs).

Yelland defines the LCOE from a generation plant as the net present-day monetary cost per present day kWh unit of electricity delivered, which when adjusted for inflation each year over the lifetime of the plant will recover its full costs, including the initial investment, cost of capital (including dividends and interest), fuel and all other fixed and variable operating and maintenance costs.

Yelland said too often, LCOE figures for different power plants or electricity generation technologies are discussed, presented or compared without a clear statement of the parameters and assumptions upon which the calculations are based, in which case the figures have little meaning.

Eskom said it rejects Yelland's calculations, which showed that the LCOE for Medupi and Kusile were higher than those of Eskom’s calculations of R0.71c/kWh (after tax) and R0.82/kWh (after tax) respectively, "as these have been based on Eskom’s internal models that have been verified by external agencies".

Based on a list of assumptions and using the same methodology as that used in the national Integrated Resource Plan for Electricity IRP2010-2030 and the 2013 Draft IRP Update Report, Yelland said the LCOE calculated for Medupi and Kusile was R1.05/kWh and R1.19/kWh. This included the flue gas desulphurisation (FGD) plant.


The power utility said following the publication of the article, it engaged Deloitte to do a principle-based review and given their experience in dealing with LCOE calculations (LCOE). The findings are as follows:

1. The calculation can be useful if the methodology has been consistently applied to all the technologies. If there are broad, proxy assumptions and inconsistent application then it nullifies the impact of the LCOE calculation.

2. A comparison across base-load and intermittent technologies is always difficult to achieve. The key with this is to ensure that the assumptions around the intermittency is transparently defined and not left to interpretation as this would easily lead someone down the wrong path.

3. Typically an LCOE attempts to compare technologies without considering capital structure assumptions. A weighted average cost of capital (WACC) is used for the calculation. Finance charges are therefore not used as one is attempting to compare technological costs without the impact of debt and equity costs.

4. Depreciation is always excluded as it would be a duplication of capital expenditure in the calculation.

5. Irrespective of the outcomes of any comparison, factual or otherwise, Eskom needs to address the understanding and cost implications of the interest during construction in the cases of Medupi and Kusile. These however are not included in an LCOE calculation.

6. The numbers presented for the renewable energy, as stated by Yelland, were not LCOE calculations, but actual contracted values. It would therefore be incorrect to draw comparison with numbers that were calculated for an LCOE.

READ: Understanding the cost of electricity from Medupi, Kusile and IPPs

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