Crank up old machine for new tricks

Cape Times
Friday 15 August, 2014

David Lipschitz, Energy Portfolio holder for the Greater Cape Town Civic Alliance

Eskom should be an independent system market operator, writes David Lipschitz.

So far in August, we’ve learnt:

  • Medupi and Kusile, Eskom’s two large 4 800MW coal-fired power stations, have been delayed yet again. We are expecting the first turbine to come on stream in December, after it was delayed until December2013 from July, when the Department of Public Works said “heads would roll” if it was delivered after the end of last year. According to the project brief, the first 800MW unit of the 4 800MW Medupi power station in the Waterberg Coal fields was meant to come on stream in September 2012. Not only this, but we have also now been told that the other 11 units of Medupi and Kusile will come on stream at 12-month intervals instead of nine-month intervals, further exacerbating South Africa’s electricity crisis.
  • Worse than this, South Africa is not following international trends of building many 800MW power stations but, rather, is trying to outdo everyone else by building 2×4 800MW power stations instead of 12x800MW power stations at a lower cost. Science says there are no further economies of scale above 800MW, therefore, what is the point of building such big power stations?
  • Worse even than this, Eskom is not following its environmental impact assessments (EIAs) which it carried out before the build. As far as I know, Flue Gas Desulphurisation technologies to clean the flue (exhaust) gases are not being installed.
  • No one has been fired; no heads have rolled; former ministers of Energy, Public Works, the chief executive of Eskom, etc, have simply been moved around, but not ejected from government so that they can’t do more damage.
  • Eskom acting chief executive Collin Matjila told Parliament that Eskom needed spare capacity of 7 400MW to provide a cushion during necessary maintenance and, I might add, during unexpected outages.
  • Shaun Nel, an adviser to the Energy Intensive User Group, says that the maintenance backlog is a major factor in the current electricity crisis.
  • According to Nel, following maintenance work, the performance of SA’s power plants should improve, but it is in fact decreasing.
  • There is a R50-billion hole in Eskom’s “piggybank”.
  • Eskom is paying penalties to suppliers who built coal mines and water supplies and all sorts of other supplies to supply these giant power stations. As there has been no off-take since September 2012, Eskom has been paying billions of rand to these suppliers, effectively for supplying nothing.
  • New electrical infrastructure will cost the South African taxpayer at least 1 trillion over the next 20 years, that’s R1 trillion or R250 000 a taxpayer, or R2 500 a month of additional electricity bills, without the taxpayer even getting the electricity, which will still require coal, transmission, labour, etc.
  • Eskom has spent more than R10 billion on diesel generators, called combined cycle gas turbines, but the turbines aren’t running on gas; they are running on diesel. The budget for this “spare capacity” is about R2.5bn per annum.
  • Eskom has asked for submissions for demand response (DR) from Industry. DR is an essential part of any electricity grid. It allows the utility to instantaneously reduce demand among users who have agreed to reduce their electricity in exchange for the grid staying stable and the user getting some sort of electricity rebate, discount or payment. Previously, Eskom only did DR with mining and smelter companies, but the agreements with these companies have ended and the promise that Eskom’s two new large-scale coal-power stations would come on stream in the past two years hasn’t materialised. Consequently, the big energy-intensive electricity users aren’t prepared to help Eskom anymore, especially considering that, in some cases, their turnover has decreased by 20 percent over the past five years owing to long-term shutdowns.
  • If South Africa doesn’t get its act together and actually finish its new infrastructure build, which includes Medupi and Kusile, which are costing the taxpayer R130bn each instead of R79bn each and which are two years behind schedule, then Moody’s and other rating agencies will downgrade South Africa’s debt to Junk Bond Status. What this means is that institutional investors, governments and other investors will need to disinvest from South Africa, causing incredible hardship as our stock market crashes and as funding dries up for the major infrastructure build that the South African government is carrying out.
  • Eskom is considering privatisation, but this won’t help, especially if South Africa achieves “Junk Bond Status” and the ANC’s Tripartite Alliance partners don’t want Eskom to be privatised. Furthermore, privatisation without a level playing field where anyone can supply electricity to anyone and anyone can choose from whom they wish to buy electricity is a complete waste of time, as then the profits being made in electricity generation and transmission will simply be in the hands of a private monopoly rather than a public one.
  • Electricity costs for a middle-class home in the City of Cape Town have increased to R1.74 per kWh, and a house using 1 500 kWh per month can expect to pay R2 610, including VAT per month for their electricity.
  • After five years of electricity costs increasing by more than 150 percent in total, we have had two years of electricity costs increasing at 8 percent and, from next year, electricity costs will probably increase by 16 percent a year. This is to be expected as it is in the integrated resource plan of 2010’s 2013 update document.
  • Transnet’s next tranche of its R300bn new rail infrastructure projects has been approved.
  • Strikes will continue as South Africa’s inflation is truly out of control. Part of this wage inflation is owing to above-average increases in the public sector where annual increases of 20 percent are not uncommon. The public sees this and wants the same increase. But the government can print money. The private sector needs to work for it, and cannot pay these exorbitant rates. Hence more strikes and more discontent.

And all this is the news just in the past two weeks.


So how can we solve these problems?

The answer is a lot easier than we expect and is something I, and others, have been saying and writing about for the past five years.

Change Eskom to be the independent system market operator, buying and selling electricity across the grid, from its own power stations and from private producers, and allow people to choose from whom they wish to buy electricity. Eskom will become an Electricity Stock Exchange, dealing in electricity, setting prices potentially per second, and allowing people to buy electricity at a certain tariff in the future (creating an electricity futures exchange), or allowing private home owners and other rooftop owners (RTOs) to supply the grid with electricity at peak time.

Allow private people to invest in power stations before tax and before VAT, just like normal businesses. This will make RTO-based power stations, including batteries, immediately viable. The caveat will be that RTOs who install their own power stations must not use the public grid during peak time, ie 7am to 10am and 5pm to 9pm in the evening in winter, and 6pm to 8pm in the evening in summer.

Investment by the private sector will actually mean that RTOs will be able to sell electricity to Eskom at night and during peak times, and buy electricity from Eskom at off-peak times between 10pm and 6am, when most factories, businesses and shopping centres are closed, and Eskom has immense spare capacity.

Homeowners use half of the grid capacity, ie, 17GW of the grid at peak time. I believe that the 7 400 MW spare capacity requirement referred to above, could be installed by private people at a cost of R250bn or less. And this is private people’s money, not costing the taxpayer anything.

The saviours of South Africa are the private population, including people who live in townships, who also use electricity, and who also can be power stations; for example think of the Khayelitsha Power Station or the Scarborough Power Station.

If RTOs could invest before tax and before VAT in these small power stations, they would be immediately affordable. They would revolutionise South Africa as, firstly, tens of thousands of people will be employed installing these power stations, and then, as these private power stations allow Eskom to specialise in transporting the electricity around the grid and in providing mines and industry and business with the necessary electricity they need, and want, will create massive employment, thus bringing our country out of its poverty cycle.

Eskom and the cities are strangling the South African economy. They are allowing mineral wealth to be exported at an alarming rate and are increasing this export capability, with new rail capacity and new port expansions. Furthermore, they are dramatically increasing South Africa’s coal exports. Other countries are using this coal and their own renewable energy programmes, to make electricity, to convert our raw materials into finished goods using their labour, which South Africa is then reimporting.

We are exporting stuff for R1 and buying it back for R20. The production and the labour is offshore. This low cost export and poor exchange rates (great for the offshore importers) and our high cost imports causes our exchange rate to get even worse, causes our inflation to get even worse, causes our infrastructure and transport costs to get even worse, causes our unemployment to get even worse and causes our cost of living to dramatically increase while our quality of life dramatically decreases.

So let’s use our South African ingenuity to fix our problems. Let us get Eskom to become the central buyer and seller and distributor of electricity, and let us let RTOs and other people provide the electricity infrastructure South Africa needs from 6am to 10pm so that we can get our industry working with the base load they need.

By removing the 17 GW of homeowner use during the day and peak time from the grid, South Africans will solve their own problems, without the need for expensive and perhaps non-independent, foreign consultants, and without the need for expensive resources from the likes of the multinational electricity infrastructure providers and others, who also perhaps have their own home markets’ interests at heart and therefore either don’t finish building our local power stations or simply charge us two to three times what the power stations would have cost if they had built them at home.

Let’s make South Africa great. The unions want localisation. I want localisation. We can do it. But how?

  • Start now with allowing Net Metering with Time of Use Tariffs for any RTO.
  • Allow investment before tax and before VAT for any RTO.
  • Do demand response, where Eskom can ask an RTO to disconnect from the grid with one second’s notice.
  • Allow RTOs to sell electricity to the grid at peak times and in the morning and evening, when Eskom needs electricity.
  • Allow RTOs to use their own capital to build their own systems at no cost to the exchequer. And thereby allow South Africans to be employed, to be proud, and to be caring and kind citizens.


1 comment to Crank up old machine for new tricks

  • Yaj Chetty

    Excellent article by David Lipschitz.
    My own suggestion is to mount a campaign for ESKOM to get its funding for renewable energy infrastructure from the Reserve Bank interest-free.Canada funded all its infrastructure between 1939 and 1974 in thus way. There is also the possibility of a wholly-owned deposit-taking Public Bank mandated to issue loans for green investments like RTO generation of elevtricity.
    Please contact me Yaj Chetty at 0764782414 for further discussion.
    Communications officer ASPO Association for the Study of Peak Oil

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