Mathabo Le Roux
28 August 2007
Johannesburg — THE government yesterday took a decisive step towards involving the private sector in the energy arena with the appointment of a consortium led by U.S. power producer AES to build two new independent power plants at a cost of more than 5bn.
The minerals and energy department's decision will boost the establishment of independent power producers (IPPs) and dilute power utility Eskom's monopoly.
The two plants, to be built in Durban and Port Elizabeth, will have a combined generating capacity of 1 000MW and will provide much-needed peaking power generation capacity to meet the country's electricity supply challenges.
SA is facing an electricity supply crunch. Unprecedented growth has seen power demand outpacing expectations, pushing Eskom's power reserve margin to below 8%, against the international norm of 15%.
AES, which beat fellow bidding consortium Suez-Inkanyezi, will own and operate two open-cycle gas-turbine peaking power plants, a 760MW plant near Durban and a 342MW plant near Port Elizabeth. The combined 1000MW generating capacity is the equivalent of just under 3% of SA's current generating capacity.
Financial closure is expected by early December and the two plants should be operational before the end of 2009.
Eskom will purchase the electricity from the plants over a period of 15 years.
AES CEO Paul Hanrahan expected that the contract would pave the way for further projects in the region, which could include opportunities in alternative energy.
Industry observers yesterday welcomed the appointment of AES to build the power plants as a significant step to introduce competition into the local market. But an independent power analyst had some reservations, noting that the role of IPPs in the industry for the foreseeable future would be tightly controlled so as not to materially weaken Eskom .
Frost & Sullivan research analyst Jeannot Boussougouth described the naming of AES as preferred bidder to build the two new independent power plants as an "astute move" and an important step in introducing private players into the power generation industry.
"Additional inputs from independent power producers must be part of SA's long-term solution to the country's growing energy requirements. This project signals the government's intention to involve IPPs more prominently," Boussougouth said. But he believed IPPs would be limited to peaking-power generation for the foreseeable future. "The single buyer model with Eskom as the principal is unlikely to change.
"IPPs could at a later stage be allowed to enter the base-load segment. But it remains to be seen to what extent this will happen as the government may not want to weaken the company that represents South African interests in the southern Africa power pool," Boussougouth said in a statement.
A study has shown that the IPP market in SA could be worth up to $13,3bn by 2013 and these players could considerably ease the pressure on Eskom.
However, despite government intentions for years now to encourage the participation of independent players in the industry, an unattractive regulatory environment has kept IPPs at bay. The lacklustre response prompted the government to be more active in trying to attract IPPs.
Announcing AES as the preferred bidder, Minerals and Energy Minister Buyelwa Sonjica said the project was initiated in response to the cabinet's decision to introduce competition to the generation segment of the electricity supply industry.
The government has set a policy requiring that the private sector build 30% of the new generating power through independent power plants.
The two gas turbines are the first of these planned investments by the private sector, and are in addition to Eskom's capital investment programme of R150bn over the next five years.
AES Corporation, with revenue last year of $11,6bn, is one of the largest power companies in the world and has a solid track record.
The 121 power plants it has built around the world have the capacity to generate approximately 40000MW - more than SA's entire current generating capacity.
The company operates in 28 countries, including Cameroon and Nigeria.
AES's local empowerment partners are Tiso Energy, Mbane Power and the Kurisani Youth Development Trust, the investment arm of HIV-awareness programme loveLife.
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