Nod to high proportion of gas-to-power ships is fishy
Being locked into 20-year emergency contracts long after the supply gap has been closed is irrational
The department of mineral resources & energy announced last week the list of preferred bidders to supply nearly 2,000MW of emergency power to the grid. This is in line with the 2019 Integrated Resource Plan (IRP), which identified the need for emergency procurement of 2,000MW-3,000MW to address SA’s immediate short-term electricity supply gap. What raises suspicion is the fact that gas-to-power ships account for two-thirds of the successful bids.
In the context of SA’s immediate short-term power supply gap it is appropriate to get emergency generation capacity onto the grid urgently, even if at a cost premium. However, these proposed bids are conditional on 20-year power purchase agreements (PPAs). It simply does not make sense to be locked into 20-year “emergency” contracts that would oblige SA to continue paying emergency-solution prices long after the supply gap has been closed.
Power ships are typically deployed in war-torn disaster areas and failed states where electricity infrastructure has been badly damaged. The ships are used as an emergency stopgap while new onshore generation capacity is built or restored. They come ready-to-use and require minimal local infrastructure, but this convenience comes at a price. In this case the Karpower ships would sail from Turkey and be moored off Richards Bay, Koega and Saldanha. Fuel would be imported by sea by liquefied gas carriers, which connect onto the power generator ships. Technically, these ships could be supplying electricity to the grid in as little as 90 days.
To a country faced with rolling blackouts this sounds like a dream come true, but once the emergency is over it is daft to be locked into 20-year contracts at emergency prices. A far more sensible and cost-effective solution would be to procure emergency power to cover the short term supply gap with dispatchable power for only as long as it takes to close the gap at emergency prices. The emergency power could then be phased out as the lower-cost resources are connected.
These additional expenses for electricity procurement would be fed directly through to customers in the form of higher tariffs
For years many independent power producers (IPPs) have been available and ready to provide emergency power to the grid, yet the implementation of the 2019 IRP has been glacially slow. Invitations for bids for new solar, wind and storage were only invited after the emergency preferred bidders were announced on March 18. This has caused a significant delay to new lower-cost alternatives being brought onto the grid.
By fast-tracking the implementation of the energy mix outlined in the 2019 IRP wind, solar photovoltaic and onshore gas could be integrated into the existing system to close the gap at far lower costs than the preferred bidder prices in the emergency procurement round. For example, wind and photovoltaic renewable energy were bid at R620/MWh in the last (expedited) window of the renewable energy IPP programme and costs have dropped substantially since then.
Even more worrying is that it appears the emergency power purchase agreements would mean Eskom is contractually obliged to pay the successful bidders a minimum of 50% of their maximum capacity for 20 years. It is impossible to calculate the exact integrated cost (the cost that makes it comparable to the Karpower ships) at which the new IRP 2019 capacity will be brought online, but it is certain to be much lower. A conservative estimate (in favour of the Karpower bid) would be a maximum of R1,000/MWh. Using this estimate, being obliged to pay the Karpower emergency premium for 15 unnecessary years would cost a staggering R43bn at least, out of a total contract of R123bn over the 15 years.
These already serious problems do not factor in that after the short-term gap is closed in five years — there is no reason it should not be unless the department continues to fail to sign up new power producers at the required pace — there will be no need for the ships. Thus either the ships or the new SA generating capacity will stand idle, incurring additional costs.
As things stand these additional expenses for electricity procurement would be fed directly through to customers in the form of higher tariffs. Households would suffer, more businesses would become uncompetitive and the sort of large-scale industrialisation SA so desperately needs will remain out of reach.
There are other serious problems with contracting these ships for any longer than absolutely necessary to address the immediate power shortage emergency. These include that the ships come ready-made and ready for operation and thus, apart from the connection to the grid, involve no local content and no or very few local jobs. They will also burn imported gas, involving a huge outflow of foreign exchange.
This proposal is almost certain to be challenged, and rightly so. In the absence of a coherent rationale from the department for signing unnecessary 20-year contracts, there is ample reason to cast doubt on its motives for doing so.
Unless the reasoning behind this apparently irrational Karpower scheme is provided, such challenges could be successful, pushing the plan back to square one. At the very least, delays can be expected, extending and deepening the “short-term supply gap” — meaning worse load-shedding, for longer. Instead of mitigating the power shortage, this scheme is likely to worsen it.
If this scheme goes ahead the image of SA will continue to be that of a country that, despite being endowed with some of the world’s best natural energy resources, is unable to manage its electricity supply system. One where madcap schemes in the electricity sector continue to enrich a few to the detriment of all.
This does not bode well for the investments from investors with integrity that are so desperately needed to turn around an economy already pushed deep into the red, not least by energy sector mismanagement.
• Trollip is a research fellow in energy at the University of Cape Town’s Global Risk Governance Programme.
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