For the third multiyear price determination (MYPD3), covering Eskom’s five financial years from 2013/14 to 2017/18, as well as for Eskom’s single-year application for 2018/19,
Nersa approved all IPP-related costs to be recouped from Eskom’s customers as a 100% pass-through cost item, without any discount or reduction. In the context of IPP costs, Eskom essentially fulfils the role of a cash collector. It collects money from the ratepayer that is directly passed on to the IPPs.
Therefore,
under normal operating conditions, IPPs are profit neutral to Eskom. The only risk for Eskom lies in an under- or overestimation of IPPs’ energy production levels or of the average tariff payable to IPPs in the revenue applications. That risk is a liquidity, not a profit risk, as any under- or over recovery is dealt with through the Regulatory Clearing Account (RCA). The RCA mechanism allows for a backward-looking reconciliation of Eskom’s actual costs against the forward-looking planned and approved costs by the regulator.
During the decision-making process on MYPD3 in early 2013, the high renewable-energy tariffs of the first two bid windows of the Renewable Energy IPP Procurement Programme (
see also Engineering News April 5, 2019 ) were the basis for the forecast of the Eskom revenues required to recoup the renewable IPP costs. But renewables tariffs fell sharply – a fact not fully captured in the assumptions for MYPD3.
As a result, Eskom’s IPP-related costs during the period were lower than those factored into the Eskom average tariff. Therefore, Eskom’s liquidity was in fact bolstered by IPPs, as it received substantially more money for IPP electricity from the ratepayer than it was actually paying out.
Because the power system has not been in normal operating condition for many years now, renewables IPPs have not only been cash positive for Eskom, but also profit positive. This is because the renewables plants were introduced at a time when Eskom’s coal power stations were not always able to produce the electricity required to meet demand. Therefore, during sustained periods, the utility operated the diesel-fuelled open-cycle gas turbines at far higher rates than was expected when the MYPD3 determination was made.
In the absence of the electricity from the renewables power stations, the diesel costs (which at one stage surged to levels of R1-billion a month) would have been even higher. And unlike the IPP costs, the diesel costs are not fully recoverable from the ratepayer. Nersa disallowed Eskom recouping them through the RCA on the basis that they could have been avoided through the efficient operation of the coal fleet. Hence, Eskom’s losses would have been even larger during the period, had it not been for the electricity provided by the IPPs.
The argument that the renewable-energy independent power producers (IPPs) are destroying Eskom financially is a gross misrepresentation. Fact is: the state-owned utility bought electricity form renewable IPPs in financial year 2018/19 at an average price of R2.06/kWh. Fact is also: the standard...
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