Eskom’s financial crisis and the viability of coal-fired power in South Africa: Implications for Kusile and the older coal-fired power stations”

1 Feb 2018 - 17:00

The South African power system has reached a crossroads. Eskom, the national power utility, is experiencing an unprecedented period of demand stagnation and decline, while having simultaneously embarked on an enormous, coal-fired power station construction programme (Medupi 4 764 MW and Kusile 4 800 MW) that has been plagued with delays and cost over-runs. This has forced Eskom to implement the highest tariff increases in recorded history, and has led to a crisis in its financial viability.4 Having recently suffered from capacity shortages, Eskom's inflexible construction programme has now resulted in a significant and growing surplus of generation plant. Recently, Minister Gigaba indicated that Eskom has a surplus capacity of 5 GW (Creamer, 2017)2 . Eskom’s Medium-term System Adequacy Outlook (MTSAO) (Eskom, 2017a), published in July, estimates excess capacity of between 4 and 5 GW in 2019/20, assuming a higher demand than is currently experienced (Eskom, 2017a). The latest MTSAO (Eskom, 2017b) indicates an excess capacity of just over 8 GW in 2022 based on their low demand scenario

South Africa has also embarked on a highly successful renewable energy procurement programme. Although this programme initially resulted in expensive renewables prices, it has more recently produced highly competitive prices for wind and solar power. Despite now being the cheapest source of new electrical energy, the renewables programme has been caught up in Eskom's crises with the utility refusing to sign the power purchase agreements (PPAs) for the most recent procurement rounds.

In this report we present the results of an independent study into several possible strategies to assist with ameliorating Eskom’s critical financial challenges. Essentially, we have investigated two questions:

1. Should Eskom cancel part of its power station construction programme to reduce costs?
2. Should Eskom bring forward the decommissioning of some of its older coal power stations to reduce costs?

We adopted a conservative approach throughout the study. Therefore, with respect to the first question, we focussed on the area where the least progress has been made and therefore where cost savings might be most likely - Kusile power station’s last two units (units 5 and 6). Similarly, we focussed our investigation on the older stations that are likely to be the most uneconomic to continue operating, namely: Camden, Grootvlei, Hendrina, Komati and Arnot. We also investigated the option of simultaneously decommissioning three of the older stations earlier than planned, namely: Grootvlei, Hendrina, and Komati.

In addition to the financial costs coal-fired power stations impose on Eskom, coal power also places enormous economic, social and environmental costs on third parties. These costs take the form of negative impacts on human health and mortality, local pollution impacts on the environment and agriculture and its contribution to climate change. These externality impacts are substantial and should be included in the cost benefit assessment of power generation options. However, given the crises with Eskom’s tariffs and finances, our study focussed on the direct financial impact on Eskom associated with the options under investigation.