Feature Article: The Electricity Crisis - Bad to Terrible to Even Worse!

On 7 August, 2012, the FMF published my article The Electricity Crisis - from Bad to Terrible which concluded, "Medupi power station will be 48 months late and cost at least R77.1bn more than the original estimate". I was being optimistic. Since then the issues surrounding the construction of Medupi power station have deteriorated at an astonishing rate.

Eskom's press release issued earlier this week, stated that "As a result of the longer than expected construction time, the cost to completion of Medupi is now expected to increase to a maximum of R105-billion (excluding interest during construction, transmission costs and claims against contractors), from the previous estimate of R91.2-billion. The increase will be funded from existing capex allocations and will not impact electricity tariffs. The cost of Medupi remains within international benchmarks".

But the price they tell us is not the price we will be paying. Include the conservatively estimated R30bn interest during construction (IDC) and the price of Medupi immediately jumps from R105bn to R135bn. This figure, however, excludes the cost of the flue gas desulphurisation (FGD) plant also required, which adds on another R10bn to R15bn. Thus Medupi is more likely to cost us between R145bn and R150bn, which is considerably higher than Eskom's estimate. At the price of R150bn for a 4,764MW station, which equates to R31.4m/MW, Medupiwill be one of, if not, the most expensive coal-fired power stations in the world.

But we should not stop there. The opportunity costs, or indirect costs, of an additional six month delay must also be factored into any calculations. Using the cost of unserved energy (COUE)figure, which incorporates the losses suffered in the economy as a whole due to unavailability of energy, from South Africa's Integrated Resource Plan of 2010 (IRP 2010) of R75/kWh, the cost of this delay will amount to R234bn. If we are optimistic and use the lower COUE figure from the IRP 2010 of R10/kWh, the cost of the delay amounts to a scandalous R31bn.

Adding more gloom to the doom, we have to be prepared for the probability that there will be knock-on effects and all six of the units at Medupi will be delayed. The total COUE for a delay on six units amounts to a staggering R1.408 trillion (R1,408,000,000,000) at R75/kWh (or R186bn at R10/kWh). Regardless of which COUE figure we use, the economic impact on the South Africa's wider economy is horrendous.

Eskom cannot be held responsible for the damage caused by the electricity crisis currently gripping our economy. The party responsible is government. Its failure to implement its own policies when, as far back as 1998, it issued an energy policy, which, amongst other things, included the statement that "To ensure the success of the electricity supply industry as a whole, various developments will have to be considered by government over time, namely: giving customers the right to choose their electricity supplier; introducing competition into the industry, especially the generation sector; permitting open, non-discriminatory access to the transmission system; encouraging private sector participation in the industry" (1998 Energy Policy White Paper).

According to Eskom, Medupi's first unit was supposed to start generating power in January 2010 but now is likely to do so in the second half of 2014. This is, at the very least, 54 months late. The additional cost, of approximately R100bn over and above the original estimate of R52bn quoted in January 2007. All the delay is causing Eskom to lose more than four and half years' worth of revenue from a 4,764MW station - about 169bn kWhs of energy. At a conservative estimate of 50c/kWh, this translates into a cumulative loss of R84.6bn in revenue that could have been used to offset the steep electricity price increases we have been and will still be faced with.

If the South African government had followed its own policy, we probably would not be trapped in the current position where rolling black outs are more than likely to become a regular feature. In a surprising move last month, government withdrew the Independent System and Market Operator (ISMO) Bill from the parliamentary schedule.

If this was done in order to amend it so as to include the transmission assets as per the first published version of the Bill which proposed the transfer of the transmission assets to the envisaged new state enterprise that would act independently of Eskom, then this is a good thing. This vital step would avoid any conflict of interests developing. If the transmission assets were to remain in the hands of Eskom, it would retain the power to effectively preclude Independent Power Producers (IPPs) from wheeling electricity across the grid.

Government must do all it can, as soon as it can, to remedy the situation and make it possible for the economy to function reliably and with certainty so as to ensure some economic growth to sustain the needs of our ever-growing population.

Jasson Urbach is a director of the Free Market Foundation. The views expressed in the article are not necessarily shared by the members of the Foundation.

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