Electricity capacity planning and Independent Power Producers

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Electricity capacity planning and Independent
Power Producers
SAWEP WORKSHOP12 March 2007

• Koena Moholola
• Director Electricity Supply
• Koena.moholola_at_dme.gov.za

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Presentation Outline

• History of Planning
• Questions and Answers
• Energy White Paper of 1998
• Independent Power Producers and lessons learned
• Single Buyer Model
• Conclusion

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History of Planning

• the NER introduced the development of a National
  Integrated Resource Plan (NIRP) as an independent
  information source to stakeholders and
  decision-makers for insuring security of the
  supply. The first National IRP (NIRP1) was
  completed and published in March
• At the beginning of the year 2003, the NER
  established an IRP Advisory and Review Committee
  (ARC) to provide wide stakeholders' contribution
  to the NIRP process.
• The main functions of the ARC are to approve the
  primary assumptions (technical, economical,
  environmental and social), evaluate the supply-
  and demand options for inclusion in the plan and
  oversee the development process.

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History of Planning

• In 2004, NIRP2 was concluded under the guidance
  and approval of the NER NIRP Advisory and Review
  Committee (ARC) by a NIRP team comprising Eskom
  Resources and Strategy Group, Energy Research
  Institute of UCT and the NER
• Parallel to the NIRP process, Eskom continued to
  develop their own internal plan called Integrated
  System Energy Plan (ISEP)
• In 2007, the DME introduced the Electricity
  Master Plan which was endorsed by Cabinet
• Currently, NERSA is finalising NIRP3 while Eskom
  is continuing to update the ISEP

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Questions and Answers

• Questions
• Why is Electricity planning fragmented?
• Who is responsible for the development of the
  countrys plan?
• What is the role of key stakeholders in the
  planning process i.e. Government, Eskom, NERSA,
  etc
• Answers
• There is a need for a single plan for the country
  to be used for investment decisions
• In terms of the Electricity Regulation Act, the
  Minister of Minerals and Energy is responsible
  for the electricity plan
• Government must take the lead in developing the
  electricity plan and work closely with Eskom,
  NERSA and other key stakeholders. It make sense
  to utilise the resources that are already
  available.

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Independent Power Producers (IPPs)
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Energy White Paper Position

• The Energy White Paper (EWP) of 1998 clearly
  stipulates Governments intention regarding the
  introduction of Independent Power Producers
  (IPPs) in the South African electricity market.
• Stimulating economic development
• Government will encourage competition within
  energy markets.
• Government will adjust electricity market
  structures to achieve effective forms of
  competition
• Securing supply through diversity
• introducing competition into the industry,
  especially the generation sector
• permitting open, non-discriminatory access to the
  transmission system

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Energy White Paper Position cont

• Electricity market structure
• Government will initiate a comprehensive study on
  future market structures for the South African
  electricity supply industry.
• The introduction of Independent Power Producers
  (IPP) will be allowed in the South African
  electricity market.
• Mechanisms will be put in place to ensure that
  equity and environmental goals are achieved, and
  possibly even accelerated, throughout the market
  restructuring process and thereafter.

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Policy Principles and Assumptions.

• Some of the benefits identified by the EWP with
  regard to the introduction of competition and
  private sector participation include
• increased opportunities to exploit cheaper and
  environmentally benign generation options
• the potential to increase the level of supply
  security, at a lower cost, through a regionally
  integrated and diversified supply base
• the potential for efficiency improvements and
• the potential for downward pressure on
  electricity prices.

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What has changed?

• Government decided to re-think its policy
  position regarding competitive electricity
  markets following events around the world
  affecting the electricity industry, the
  California Crisis, the Black out in North America
  and Western Europe, Enron all of these events
  suggested that the state has to put security of
  supply above all and above competition
  especially.
• In line with the government strategy to reduce
  the cost of doing business in South Africa,
  Government focused on improving the governance of
  the electricity sector.
• This was done through the development of the
  electricity regulation regime and by modernising
  the existing Electricity Act. The new
  legislation will created an enabling environment
  for new Independent Power Producers (IPP's) and
  improve governance of the electricity suppliers.

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What has been achieved?

• In December 2003, Government nominated the
  Department of Minerals and Energy (DME) to
  promote the establishment of new, privately-owned
  power generation projects in South Africa.
• Government also required the DME to enhance the
  energy sector by promoting fuel diversity
  private sector competition in financing,
  construction and operation Black Economic
  Empowerment through investment and services
  production of least-cost electricity information
  to guide policy on private versus public sector
  procurement.
• After a rigorous tendering process, the DME has
  appointed a consortium lead by AES as the
  preferred bidder for two peaking power plants.
  It is envisaged that financial closed will be
  reached by the end of the year and the power
  plants will be operational by the last quarter of
  2009.

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Leasons leaned on the IPP process

• Due to the fact that the DME IPP was the first
  green field IPP in the country, there was an
  intention to get it right first time.
• The following parameters were specified upfront
  giving bidders no room to be innovative
• The location/site of the power plant
• The plant specification
• The fuel type
• Suites of agreements (Power Purchase Agreement,
  Implementation Agreement, Transmission Agreement
  etc)
• The longer time you take in the procurement
  process, the more costly it becomes. The supply
  chain situation is very tight (EPC contractors
  and equipment manufacturers are smiling all the
  way to the bank)

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Single Buyer Model

• Cabinet decided that Eskom must be the single
  buyer of all the power produced by IPPs.
• There is a task team that is working on the
  mechanisms (including the rules) of the single
  buyer model as mooted by Cabinet
• However, there is a general consensus that the
  single buyer model is only applicable to large
  scale IPPs. For example, nothing stops the City
  of Cape Town to buy electricity from Darling Wind
  Farm
• DME position is that the procuring entity must be
  separated from the other operations of Eskom

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Conclusions

• DME to provide strategies that inform the country
  plan. Strategies include
• Nuclear strategy
• Renewables strategy
• Imports strategy
• Climate change strategy
• Percentage of investment by IPPs and Eskom
• A critical component of the country plan is
  setting the assumptions. The assumptions
  include
• Plant availability
• Load forecast
• Choice of reserve margin
• Criteria for deciding on projects such on least
  cost basis
• Outlook on independent power producers
• The process of arriving at assumptions must be
  transparent

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Conclusions

• It is evident that the IPPs are needed in the
  South African power generation sector to augment
  Eskoms capacity in meeting the growing energy
  demand. Eskom is currently embarking on a R150
  billion infrastructure roll-out programme.
• With the participation of IPPs in the power
  generation sector, Eskom will have an opportunity
  to pass some of its risks to the private sector
  (IPPs).
• The IPPs are the only vehicles at the disposal
  Government to ensure meaningful BEE participation
  with regard to equity ownership in the power
  generation sector.
• Experience has shown that there is sufficient
  market appetite for private sector participation
  in the power generation sector.

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END