Govt to seek to renegotiate coal, IPP contracts
CREAMER MEDIA EDITOR
Mineral Resources and Energy Minister Gwede Mantashe has confirmed that government intends initiating discussions with both coal miners and independent power producers (IPPs) in an effort to lower the contracted prices currently being paid by struggling State-owned electricity group Eskom.
He reports that a meeting has already been scheduled with domestic coal producers for September 27 and that a meeting is also likely to take place this month with the IPPs involved in the first three bid windows of the Renewable Energy Independent Power Producer Procurement Programme.
Government intends raising the prospect of “indexing” the price of coal supplied to Eskom in a bid to bring the utility’s rampant primary-energy costs under control.
Mantashe insists, however, such an index will not be imposed on miners and will, instead, be the outcome of a negotiation with producers.
“Ideally it should be the coal producers themselves who arrive at the formula,” Mantashe said on Friday. “The coal miners will still make money.”
Separately, government intends raising the prospect of renegotiating power purchase agreements (PPAs) for renewable-energy IPP projects procured in 2011 and 2012.
The prospect has been raised previously by Public Enterprises Minister Pravin Gordhan, whose department is currently drafting a policy paper that will define the approach government will take to the restructuring of Eskom’s debt, as well as the unbundling of the utility into three separate companies of generation, transmission and distribution.
Such a move would be highly controversial, owing to the fact that the 20-year PPAs are the outcome of a competitive bidding process, which is held in high regard both domestically and internationally. It would also bring into question government’s commitment to honouring contracts.
Nevertheless, Mantashe argued that the PPAs were too high, citing the argument that Eskom was paying more than 200c/kWh for the electricity arising from the IPPs, while receiving “only 89c/kWh” through the tariff.
The IPPs argue that the tariff charged does not damage Eskom financially, as it is treated as a pass-through cost item by the National Energy Regulator of South Africa (Nersa) when assessing Eskom’s revenue applications under the multiyear price determination methodology.
They have also pointed out that, in several financial years, the utility had over-recovered renewables-related revenue through the tariff, owing to the fact that the regulator had assumed higher levels of purchases by Eskom from renewables IPPs than had actually occurred.
In July, The South African Renewable Energy Council (SAREC) dismissed the persistent suggestion – raised again in a complaint currently being investigated by the Public Protector – that Eskom’s financial position was being undermined by power purchase agreements with the IPPs.
“Eskom has been awarded full tariff cost recovery by Nersa for all power from IPPs,” SAREC said in a statement.
“As such, Eskom is not subsidising its purchases from IPPs with income generated from its own generation activities. IPPs also fund any upgrades that are required to the grid to ensure that their power is evacuated and services the country as a whole.”
Nevertheless, some IPPs have expressed a willingness to discuss a win-win refinancing proposal to lower the costs of the early renewables IPPs.
One proposal is to allow for a possible ten-year PPA term extension, which would create additional value for the IPPs that could be paid for by lowering the current tariff.
ELECTRICITY PRICES 'TOO HIGH'
Meanwhile, Mantashe has also indicated that he intends consulting with business, labour and Nersa on electricity prices, which he described as too high, especially for energy intensive industries.
He says the engagement should be seen within a context of a broader push by government to lower administered prices more generally, including for electricity, rail and ports.
“The reality of the matter is that we have to reduce the price of electricity. It is killing manufacturing, it is killing mining, and it is killing furnaces.”
Mantashe said he saw the newly consolidated Department of Mineral Resources and Energy as an “economic department”, which needed to play a key role in helping to reignite growth.
His statement came only days after Eskom chairperson Jabu Mabuza told lawmakers that its dire financial predicament could be partly attributed to the fact that its tariff was not yet cost reflective.
“We have not been able to recover that tariff. Sadly, we have not been able to get a fair return on our assets for many years in the pricing policy. Cost savings alone will not solve Eskom’s financial health. The only long-term solution is for the electricity price to migrate to cost reflectivity,” Mabuza said.