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Preliminary Thoughts on the Draft IRP 2018

Having had an opportunity to digest the draft IRP2018 gazetted on Monday 27 August 2018, and consider the ramifications for the supply of electrical energy for the next 12 years, here are some preliminary thoughts.

In my respectful view, the draft probably is the best that Government could do in the present context of national utility 'death spiral', unrest in Eskom's own workforce and broader across inter-connected sectors, other social and economic imperatives (not least a National Treasury stretched to the hilt in commitments and hardly able to underpin further continuing procurement right now), and a national election on our doorstep.

 

Clearly there is an intention is to preserve Eskom for the moment, at least to give it sufficient breathing space to plan and implement its inevitable restructuring (in which respect discussions already have begun), and to cut the electricity supply coat according to to the demand- and financial wherewithal cloth. Obviously, the bet is that completion of the Medupi and Kusile coal-fired power stations, and roll-out of the REIPPPP Round 4 committed capacity, will cover for any interim growth in demand and curtailment arising from the increasing unreliability of the older coal power stations scheduled for decommissioning. Of course, the R4 REIPPPP projects will begin to come on stream from 2020/2021, and past unfortunate experience is that delivery on the mega thermal coal projects is unlikely to be on time, let alone within budget.

 

Not being a betting man, does this mean that we should prepare for perennial load shedding? Or could some of the load be taken off Eskom in bite-sized chunks (and thereby also not further imperil its financial position) through the 'off-procurement' provision of 200MW per year for what has been termed 'embedded generation', understood to cater for smaller private IPP projects which are simpler and quicker to implement if facilitated by the regulators?

This provision for embedded generation' is interesting, but confusing. There are inherent contradictions in the draft IRP between terminology and expressed intentions. This is one area where comment by interested and affected parties could have a significant impact, in seeking clarification and suggesting amendments in order to procure what the Minister appears to want to achieve.

As to the proposed continued procurement of 1000MW of coal-fired new generating capacity, this is not unexpected. Consider the labour and political ramifications of shelving the Coal IPP Programme, especially in the face of the commitment to the decommissioning programme? Moreover, an abandonment of the Coal IPP procurement, with preferred bidders having been selected, would, in my view, destroy the credibility of all procurements going forward. Developers have expended fortunes in pre- and post-award development costs, in the good faith expectation that that money is well spent in 'buying a ticket' to earn the opportunity of being appointed a preferred bidder, and then proceeding with the projects having been so appointed. Government must be seen to be giving effect to its commitments. Should it fail to do so, that would have, I believe, disastrous implications for procurements such as Gas-to-Power, where prospective developers stand to spend many times the pre-award development costs that have been spent in other procurements. Given the hiatus in the various programmes over the past two years, Government has to rebuild trust in the processes, simply to attract interest, let alone commitment and investment. Its 'yes' must be so, and be seen to be so.

Of course, this doesn't address important questions as to our climate change commitments and environmental issues generally. But the IRP does not give the coal IPP projects a 'free ride' into implementation, and such projects will have to deal with those questions on their own merits.

As for the Gas programme, clearly somebody has finally tumbled to the fact that 2500MW of gas-to-power is absolutely insufficient as a base for development of gas import infrastructure, whether by way of LNG regas or cross-border pipeline. 8100MW over 4 years is huge, and itself is a bet on the fact that renewables-plus-storage still will not be in a position to compete by the time the roll-out takes place. The first generating facilities planned for 2026, must account of the 6 to 8 year lead time for getting the gas import infrastructure in place. Consequently, the procurement of such infrastructure must begin very soon. The draft IRP mentions the intention to formulate a regional 'GUMP'. Given that our national gas master plan has been mooted for more than 5 years but nothing produced, can we wait for a regional plan? Entrepreneurial spirits seeing the opportunities for broadening the industrial base for gas usage certainly won't be.

A word on the plan to procure 2500MW of 'large' hydropower. It is easy to forget that South Africa has regional treaty commitments regarding offtake of power generated by Inga/Grand Inga. It is helpful to study the treaty, to determine how South Africa can be held to its promises. Nevertheless, having given those undertakings, South Africa certainly must be seen to be providing for the implementation of this mega-hydro project - ergo its restatement in the draft IRP. Whether Inga/Grand Inga is ever built cannot be divined. I would foresee this particular can being perennially kicked down the road.

This brings us to the provision for other renewable energy resources, particularly wind and solar. The deferring of further procurement for several years is a major discouragement to those banking on the promised Round 5 of REIPPPP, quite apart from being destructive of building up and maintaining local capacity to manufacture and supply key components and equipment. This is especially so in the context of Government having signaled very clearly that local procurement and project ownership will be key elements going forward. That hardly is achievable in the 'stop-start' process that arises from the plan. I expect there will be detailed and robust comment on this issue. The DoE must be encouraged to expedite its planned review of determinations and procurements at the very least. Developers might take some comfort, cold as it might be, from the fact that, given further new generating capacity is required from 2025 onwards, assuming an average 2 year build programme on projects, further assuming a 1 year financial close process, a 6 month bid adjudication process, and a 6 month bid process, the RFP framework for procurement of any such new generating capacity would have to be in place by the end of 2020, in order to meet a 2025 target. Also, one must remember that Government has hedged its bets by reserving the right to accelerate any procurement should circumstances so require. Perhaps a month or two of load shedding might precipitate that.

In the final analysis, the draft IRP2018 appears to be a deft balancing act between a variety of competing interests and drivers. Like any 'good' settlement, there is something for everybody, everybody is required to sacrifice something, and everybody is left somewhat dissatisfied. In my view, one can see this is part and parcel of this new Government's masterfully strategic and tactical approach. In taking a long view, it has infinite patience and is not swayed by our impatient demands.

But that is not a reason for not commenting on the draft, and robustly so. Comments are due before 25 October 2018.

Matt Ash

Cape Town

29 August 2018

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Table courtesy of the Department of Energy, Republic of South Africa, 2018