Grové Steyn’s article (Cancelling part of Kusile could save billions and advance renewables, December 14) refers.
Eskom’s recent ratings assessments, while acknowledging significant further improvement in technical performance and cost efficiency, confirm that significant financial challenges remain. The cause is not excessive operational costs as overall cost efficiency remains in line with international benchmarks and improving. Nor is the cause excessive construction costs at Medupi and Kusile.
The root cause has been stated by the credit risk assessments since 2008 as "continued delays in implementing tariffs that reflect costs". The cost of renewable electricity is also recovered through tariffs, and will cost Eskom nearly R16bn in the current financial year, at an average price of 215c/kWh, which excludes transmission and distribution costs.
Cancelling part of Kusile theoretically only makes sense if the remaining cost to completion, per kilowatt of capacity, and the resultant levellised costs of electricity are greater than any viable alternative.
If 70% of a project cost has been spent, with the balance fully committed contractually, the cost of cancellation could well be similar to the cost of completion.
The renewables selling to Eskom at 215c/kWh are in effect "sunk" costs, even for their future production.
Similarly, most of Kusile’s contracted construction is already "sunk" cost, with incremental discretionary cost to completion relatively minor and incremental cost of electricity mostly its fuel, operation and maintenance costs.
However, new and incremental renewable electricity projects are not yet "sunk", and even at 62c/kWh, the cost is more than double the average variable cost for Eskom’s fleet. Nevertheless, to maintain momentum on the Renewable Energy Independent Power Producer Programme, Eskom could consider new power purchase agreements (PPAs) below 65c/kWh — still implying a significant premium compared to Eskom’s variable cost, for the period of surplus capacity.
Once electricity demand growth requires new capacity, the Integrated Resource Plan’s system optimisation would determine the technology, taking account of the full system cost of nondispatchable renewables.
Prudence and efficiency in economic regulation is not a measure of perfection with the benefit of hindsight but of reasonableness, within the context and circumstances that prevailed at the time of committing to those decisions. Were it not so, the regulator would have to disallow the earlier renewables priced at 215c/kWh this year.
By the time the surplus capacity is fully utilised, the cumulative premium between the cost of these renewables and Eskom’s average variable cost might well exceed R200bn — double the number mentioned in the article as the potential benefit for "cancelling the second half of Kusile".
No one is suggesting, however, that these PPAs be cancelled or disallowed by the regulator as inefficient and not prudent. The same approach should be followed with Kusile.
Divisional executive of corporate affairs, Eskom