Is it true that independent power producers (IPPs) are “draining and collapsing” Eskom as Cosatu claimed last week during its strike over a proposed restructuring of Eskom?
Let us consider the facts. Eskom buys the IPPs’ electricity at prices that are agreed in the rounds of auctions that award IPP projects. So if you know nothing more, it seems as if Eskom is having to pay IPPs at prices that are out of its control out of its own resources.
But, the reality is far different. First, IPPs are treated separately when Eskom’s tariff applications are considered by the National Energy Regulator of SA (Nersa). All payments to IPPs get a full pass-through cost into the tariff. So if there were no IPPs, Eskom simply wouldn’t get that element of the tariff. For Eskom’s cash flows, IPPs are therefore entirely neutral — the cost to the utility is perfectly offset by the tariff.
There is one small cost to Eskom, however. This is the infrastructure cost Eskom bears to connect IPPs to its grid. IPPs pay to get the energy to the connection point, but Eskom then hooks them up. This cost is a good reason we should have an independent grid company, so connection costs can be managed equally across Eskom and the IPPs. Whether an IPP or an Eskom plant is being connected shouldn’t make a difference.
Second, the marginal cost of IPP production is far below Eskom’s. The cost of new Eskom builds — Medupi and Kusile — has been a matter of contention. In 2016 the costs of Medupi and Kusile produced electricity were estimated by the Council for Scientific Industrial Research (CSIR) to be R1.05/kWh and R1.16/kWh respectively. But that was before further delays and the revelations, made abundantly clear last week, of serious design and production problems at both stations. When the ash settles, the cost of electricity will be significantly more, perhaps two to three times the 2016 estimates.
In comparison, in the fourth round of the IPP auctions concluded in April 2015, bidders averaged R0.92/kWh. So even an optimistic reading of Medupi and Kusile’s electricity cost is higher than the more recent IPP prices. This fact is often muddied in the debate by reference to the earlier IPP round prices, particularly round 1. This price averaged R2.79/kWh.