Karpowership's R3.3bn-per-year ‘freebie'

The company’s own figures suggest Eskom will be drawing only 40% of Karpowership’s available power, while paying for a minimum of 72.7% — meaning the effective tariff will be nearly double what minister Gwede Mantashe told the public in March.

Karpowership’s R3.3bn-per-year ‘freebie’
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As Karpowership and energy minister Gwede Mantashe battle to keep the risk mitigation independent private power procurement programme (RMI4P) alive, documents scrutinised by amaBhungane appear to disclose the extent to which Eskom is expected to pay the Turkish powership group for “nothing” under a generous “take-or-pay” provision.

While the figures are only available for Karpowership’s bids, the same skewed demand and supply ratios would apply to other RMI4P bids, underlining criticism of the design of the tender which results in much higher pricing than necessary.

When the three controversial powership projects belonging to the Turkish Karadeniz group applied to the National Energy regulator of SA (Nersa) for generation licences, they requested that almost all meaningful economic data be kept secret when a decision is published.

The secrecy has been widely lambasted, but it appears that Nersa slipped up when it approved the licences and published the three heavily redacted reasons-for-decision documents on 29 October.

Links to Nersa documents here and here.

The apparent slip reveals how massively detrimental the Karpowership power purchase agreements will be for Eskom. This is reflected in an “effective” revenue per kWh for Karpowership of almost twice the “evaluation” tariff that minister Mantashe announced in March.

For instance, at the proposed Coega powership project the “effective” tariff will, according to confidential numbers Karpowership gave Nersa, seemingly be R2.77 per kWh instead of the R1.47 per kWh “evaluation” tariff announced by Mantashe. (This compares to preferred bids for wind and solar in the latest Renewable Energy IPP procurement ranging between R0.34 per kWh to R0.61 per kWh.)

The much higher “effective” tariff is seemingly a consequence of Eskom paying for power it does not use due to a remarkably generous “take-or-pay” concession in the “emergency” RMI4P project — the tender in which Karpowership provisionally won most of the available allocation in March.

According to the original tender documents, Eskom has to buy 72.7% of the maximum amount of power the winning bidder can provide under the RMI4P rules. If Eskom for some reason doesn’t want or need that power, then it still has to pay for it. 

When bidders raised it in the course of the tender process, the Department of Mineral Resources and Energy (DMRE) issued a briefing note explaining how it works:

“The Buyer [Eskom] shall dispatch the Project in such a manner to ensure that the Minimum Load Commitment of 72.727% is achieved; However, should the Buyer fail to comply with this obligation, it will compensate the Seller by way of Minimum Load Commitment Payment at the end of the Contract Year.”

The flawed redaction in the Nersa documents allows us to calculate how Karpowership itself expects this to play out, with the take-or-pay element providing a significant chunk of its income.

Using the Nersa documents, amaBhungane estimates that Eskom is expected to pay R3.3-billion for power it won’t use in the first year of the Karpowership contract, which would last 20 years. 

Put differently, Eskom is guaranteed to pay about R7.9-billion to Karpowership in the year, but an estimated 41% of that will likely be for power it simply has to pay for even though it does not use it. 

Take-or-pay concessions are not uncommon in large procurement deals in order to give investors some minimum return to justify capital investment. A guaranteed offtake of 72.7% is however arguably high enough to undermine the entire premise of the RMI4P being an “emergency” stopgap against load shedding.

This is a far higher commitment than would make sense for a “peaker” solution to blackouts that would be used on short notice in emergencies, which is the key requirement for RMI4P projects.

The Nersa documents and their flawed redaction show how Karpowership expects to sell Eskom far less than 72.7% of its potential production under the RMI4P rules but will reap the rewards of selling the full 72.7%.

A crucial piece of context is that these figures are for the first year of operation in a planned 20-year contract. Over the course of this contract, Eskom’s need for the ostensibly “emergency” capacity provided by Karpowership and others should progressively reduce as local capacity grows from new investments. 

That means the take-or-pay element of the RMI4P could progressively become an ever-larger “freebie” compared to power Eskom actually wants or needs from relatively expensive fossil fuel providers like Karpowership.

The alternative scenario is that Eskom instead starts paying RMI4P providers more than the minimum take-or-pay level because it buys far more power than anticipated. That would be a complete reversal of the assumptions in the Nersa document and imply a progressive deterioration of Eskom capacity over the next 20 years.

How we got to the numbers

Nersa compared the (redacted) effective tariff to the tariff ascribed to the existing open-cycle gas turbines Eskom uses for emergency generation using diesel. That tariff is R4.80 per kWh, claims Nersa. It then asserts that this is between 69% and 73% more than the  Karpowership projects’ “effective” tariffs.

That means “effective” tariffs of R2.77 per kWh at Karpowership’s Coega and Richards Bay projects compared to the “evaluation tariffs” of R1.47 and R1.50 Mantashe announced in March. At Saldanha, the effective tariff is R2.84 compared to the announced R1.69 per kWh.

The fact that the “effective” tariff is higher than the advertised one means that Karpowership expects to provide far less than the amount of power for which it will be paid. 

The advertised tariffs are also admittedly provisional due to the unknown proportion reflecting variable gas prices. We have, however, used the advertised prices as a fair guide.

The RMI4P rules set out in the original Request for Proposals and subsequent amendments, provide for the 72.7% guaranteed offtake. We multiplied this by the capacity of the proposed powerships and the advertised tariffs to get the minimum amount Karpowership will be paid in a year: R7.9-billion

If you divide this R7.9-billion by the “effective” tariff that was accidentally revealed you get the amount of power Karpowership actually expects to sell to Eskom: (2,840,505,068 kWh) which is 57% of the amount it has to be paid for (4,987,360,000 kWh).

In other words, the company’s own figures suggest Eskom will be drawing only 40% of Karpowership’s available power, while paying for a minimum of 72.7%, pushing up the effective tariff for power actually used. 

Karpowership acknowledged receipt of our detailed questions about these figures but did not respond.

Nersa declined to answer as well after first telling us that internal experts were being consulted over the course of two weeks:

“After careful consideration of your query, please be informed that Nersa will not be able to respond to your questions as this would require Nersa to divulge the confidential financial information of the applicant. The redacted information has been approved to be confidential by the Energy Regulator.”

The DMRE likewise declined to explain the gulf between the “effective” tariffs and the “evaluation” tariffs it had announced in March:

“The DMRE cannot comment due to it (the DMRE) not having insight into the assumptions and methodology used to calculate these revenue figures.”

Eskom spokesperson Sikonathi Mantshantsha told amaBhungane that Eskom’s board and management would consider the deal ultimately given to them by the DMRE and make a decision based on their “fiduciary duties”.

Eskom cannot negotiate tariffs or elements like the take-or-pay arrangements and its discretion largely relates to getting a guarantee from Nersa that it will be allowed to pass through the cost of the IPPs to consumers and not be worse off itself.

“Eskom is not in a position to discuss Karpowership specifically,” he said. DM

[hearken id=”daily-maverick/8881″]

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