Comment on Peaker Projects Generation License Applications Presentation to NERSA 13 July, 2011 Pretoria
Credentials Premium Pow er is a startup enterprise w ith an interest in aggregating demand response services Premium Pow er w as founded by Mark Pickering and Dr Grové Steyn, w ho together have over 40 years experience w ith policy making, regulation and commercial project development in the South African pow er sector. This presentation to NERSA is concerned w ith both the public interest and our particular commercial interest. 13 July, 2011 NERSA License Hearing 2
Overall Recommendation We recommend that NERSA rejects the Peaker Project licence applications for the follow ing reasons: The original rationale for the project has fallen aw ay since the system has adequate peaking capacity for the short to medium term; The Peaker Project w ill impose unnecessary costs on Eskom and exacerbate retail tariff increases; If additional peaking capacity is required this can be met through Demand Response programmes in a more cost effective and flexible manner; and Neither the applicant or the sponsor (the Department of Energy) have provided adequate information for the general public and NERSA to reach an informed opinion. 13 July, 2011 NERSA License Hearing 3
Historical Context Cabinet decision of 2004 We understand that the Peaker Project arose from a cabinet decision in October 2004 that the then Department of Minerals and Energy (DME) should procure about 1,000 MW of new open cycle gas turbine (OCGT) peaking pow er capacity through a competitive IPP tendering process, to be commissioned by the end of 2008. At around the same time cabinet approved Eskom s investment in a further 1,000 MW of OCGT peaking plant. As it happened the DME procurement process dragged out and eventually failed in early 2008. Perhaps in anticipation of this outcome Eskom doubled up its original OCGT order to 2,000 MW. The first 1,000 MW of Eskom s OCGT peaker plant w as commissioned in 2007, and the second 1,000 MW in early 2009, thereby meeting the original peaking capacity target. 13 July, 2011 NERSA License Hearing 4
Historical Context Peaker procurement process Follow ing the termination of the Peaker procurement process in DME entered into direct negotiations w ith a bidder w hose bid had been judged non-compliant No further competitive bidding process appears to have been follow ed for the Peaker Project, despite the passage of time, and DOE does not appear to have considered alternatives, such as Demand Response programmes The rationale for the Peaker Project appears to be limited to DOE s desire to complete a process that commenced in 2004, despite material changes in the pow er system. 13 July, 2011 NERSA License Hearing 5
Peaker Project Rationale Integrated Resource Plan DOE included the Peaker Project in the 29 January 2009 Integrated Resource Plan (IRP) as a Current Programme w ithout any public consultation or rationale The 2009 Current Programme w as treated as a policy input to the Integrated Resource Plan for 2010-2030 The cost effectiveness of the Peaker Project w as therefore not tested against other options during the latest IRP process. South Africa faces pow er shortages due to inadequate investment in base load capacity. We appear to have sufficient peaking capacity and are now in danger of over-investing in peaking capacity. 13 July, 2011 NERSA License Hearing 6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 MW Peaker Project Rationale IRP 2010-2030 peaking capacity additions 1,600 1,400 Eskom OCGT Ingula (pumped storage) Peaker Project OCGT (diesel) 1,200 1,000 800 600 400 Over capacity for 8 years? 200 0 (DOE 2011. Integrated Resource Plan for Electricity 2010-2030) The IRP provides for no peaking capacity additions from 2015-2022, suggesting significant over-capacity from 2014 onw ards. Ingula is largely a sunk cost, w hereas the Peaker Project can still be cancelled or deferred to avoid this over-capacity problem. 13 July, 2011 NERSA License Hearing 7
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Installed capacity (Nominal MW) Peaknig capacity as % of total capacity Peaker Project Rationale Peaking capacity as a percentage of total nominal generation capacity 10,000 9,000 8,000 7,000 Liquid fuel Pumped storage Hydro Peaking as % of total 10.0%10.0%10.0% 9.5% 9.0% 12.3% 12.0% 11.4% 11.0% 11.1% 10.7% 10.8% 10.4% 10.2%10.0% Over capacity? 14% 12% 10% 6,000 7.9% 8% 5,000 + DOE Peakers 4,000 3,000 2,000 1,000 5.6% 5.6% 5.6% 5.6% 5.6% + Eskom OCGT + Eskom OCGT + Ingula 2-4 + Ingula 1 6% 4% 2% 0 0% Financial year ending in (DOE 2011. Integrated Resource Plan for Electricity 2010-2030; Eskom annual reports.) The IRP forecasts a proportionate drop in peaking capacity for 8 years, despite the rising proportion of renew able generators in the system. This is a clear indication of peaking over capacity. 13 July, 2011 NERSA License Hearing 8
Demand Response Alternative Demand-side solutions Demand Response programmes incentivise consumers to curtail their demand, or to rely on alternative sources such as standby diesel gensets during peak periods Many countries have implemented Demand Response programmes as a cost effective substitute for new peaking capacity particularly liquid fuel-based OCGTs Eskom already runs successful Demand Response programmes for large consumers (the Demand Market Participation Programme or DMP) and is considering expanding this to medium sized industrial and commercial consumers, and even residential consumers. 13 July, 2011 NERSA License Hearing 9
Demand Response Alternative Peaker Project vs. standby diesel gensets Factor OCGT Standby Gensets Capital cost Est. R8 billion for 1,020 MW Nil. 3,500 MW installed by 2008. Forex impact Impact on retail tariffs Approx. 75% of capital value is imported Step increase in tariffs Nil. Existing fleet Income opportunity for genset ow ners Jobs Approx. 40 staff across tw o plants 100 s if not 1000 s of jobs. New industry w ith multiple benefits Time to market Three years to finance and construct 12-18 months to scale up Flexibility Minimum 15 year PPA Minimum 1 year PPA. Can scale up and dow n. Dispatch units 170 MW unit size Very flexible. Dispatch dow n to 1 MW units Minimum dispatch of 70% rated capacity Response time 10 minutes to full load. Minimum run 1-2 minutes to full load. Can tolerate short run times. times. Fuel efficiency Above 150 kva gensets have better heat rate than OCGTs, and also avoid transmission and distribution losses (+ /- 12%) Environmental Concentrated source of SOx and NOx. Limited, since gensets are w idely distributed and impacts w ould only run for a small percentage of the year (~ 2% of normal diesel consumption). Catalytic exhausts and particulate traps can easily be retrofitted if air quality standards require. International Mature technology Widely used in Australian, Europe, USA and other experience 13 July, 2011 NERSA License countries. Hearing UK National Grid routinely dispatches 10
Demand Response Alternative Peaker Project vs. standby diesel gensets Eskom, SANERI and the University of Cape Tow n have all studied the business case for utilising standby diesel gensets and reached positive conclusions Standby generation is a more cost effective option than OCGTs Eskom s study recommended that: (Eskom presentation, 24 April 2009) 3,000 MW of standby generation potential should be exploited before new OCGT plant is considered A small scale standby generation program should be established The programme should initially consider units above 350-500 kva. Units should initially be islanded, and shift to pow er export at a later stage Eskom should engage w ith potential aggregators via an RFI / RFP (Eskom presentation, 24 April 2009) Eskom managers have been reluctant to take this programme forw ard, due to the pending capacity of the DOE Peaker Project. 13 July, 2011 NERSA License Hearing 11
Legal Context Criteria for IPPs The May 2011 Regulations on New Generation Capacity require pow er purchase agreements (PPAs) to meet various criteria: 9. Concluding the power purchase agreement (1) A pow er purchase agreement betw een the buyer and an IPP must meet the follow ing requirements- (a) value for money; (b) appropriate technical, operational and financial risk transfer to the generator; ( c) effective mechanisms for implementation, management, enforcement and monitoring of the pow er purchase agreement; and (d) satisfactory due diligence in respect of the buyer' s representative and the proposed generator in relation to matters of their respective competence and capacity to enter into the pow er purchase agreement. (DOE. 2011. Electricity regulations on new generation capacity) How ever, regulation 12 explicitly exempts the Peaker Project from these tests 12. Transitional provisions (1) The provisions of these Regulations do not apply in the case of any project relating to the electricity generation capacity listed under " Current Programmes" in the table titled IRP 1 in Schedule A to GN 25 of 29 January 2010: Determination regarding the integrated resource plan and new generation capacity, save for the electricity generation capacity listed as REFIT. (2) Notw ithstanding sub-regulation (1), regulation 10 shall apply to the Peaker Project. (DOE. 2011. Electricity regulations on new generation capacity) Why should the Peaker Project not face a value for money test? 13 July, 2011 NERSA License Hearing 12
Legal Context NERSA license hearing If NERSA grants generation licences to the Peaker Projects the cost of their Pow er Purchase Agreements (PPAs) w ill be passed on to all electricity consumers DOE s IPP procurement process has provided no opportunity for public review and comment. No feasibility study appears to have been undertaken, and the original 2004 study w as never published. Consequently it is not possible for the public, or NERSA, to reach an informed decision. We believe that the electricity sector s governance system must provide checks and balances to protect consumers from inappropriate executive decisions. NERSA s generation licensing process is a crucial check in this regard. 13 July, 2011 NERSA License Hearing 13
Conclusion Is the Peaker Project in the public interest? If the Peaker Project goes ahead it w ill be the first significant greenfield Independent Pow er Producer (IPP) procured in South Africa. As such it w ill set important precedents DOE as project sponsor must prove that the tendering procedure w as fair, equitable, transparent, competitive and cost -effective NERSA is required by law to consider the Public Interest w hen making its decision and cannot be bound by executive w ill There is no good reason to exempt the Peaker Project from the simple test of w hether it offers consumers Value for Money Ample evidence exists to show that Demand Response programmes offer better Value for Money than the Peakers We therefore recommend that NERSA should not aw ard generation licences to the Peaker Project. 13 July, 2011 NERSA License Hearing 14
Recommendations Taking Demand Response forw ard We further recommend that NERSA commences a process of rule-making to promote the development of the Demand Response industry, covering at least the follow ing matters: Definition of the various Demand Response services Frequency response Emergency reserve Standby generator Definition of pricing mechanisms for each service category Market based? Regulated prices? Funding mechanisms? Definition of market structure and market rules Buyer or buyers Market periods Standards 13 July, 2011 NERSA License Hearing 15
Thank You mark.pickering@premiumpow er.co.za grove.steyn@premiumpow er.co.za 13 July, 2011 NERSA License Hearing 16
Legal Context Executive authority to procure new capacity Section 34 of the Electricity Regulation Act grants the Minister of Energy executive authority to enter into pow er purchase agreements w ith IPPs 34. New generation capacity (1) The Minister may, in consultation w ith the Regulator (a) determine that new generation capacity is needed to ensure the continued uninterrupted supply of electricity; (b) Determine the types of energy sources from w hich electricity must be generated, and the percentages of electricity that must be generated from such sources; (e) Require that new generation capacity must (i) Be established through a tendering procedure w hich is fair, equitable, transparent, competitive and cost-effective (ii) Provide for private sector participation (Electricity Regulation Act 4/2006, amended by 28/2007. Section 34 in force from 1 May, 2008) Did NERSA concur that the Peaker Project w as required? If so, w hen? And w ould this concurrence stand given the change in circumstances? If NERSA concurred, is it bound to grant a generation license? Or does it still have discretion to review the application? Does NERSA regard the Peaker procurement process as fair, equitable, transparent, competitive and cost effective? 13 July, 2011 NERSA License Hearing 17
Legal Context Feasibility studies for IPPs On 4 May 2011 the Minister replaced the August 2009 Electricity Regulations on New Generation Capacity w ith a new set of regulations (The New gen regulations ) Both the old and the new versions of the regulations provided for Feasibility studies to determine the necessity of procuring new generation capacity, and w hether this should be undertaken by public or private entities As far as w e are aw are no such study has been undertaken or published to justify the Peaker Project, and no such Ministerial Determination has been issued. If the Peaker Project is premised on a study undertaken in 2004 then it w ould seem necessary that this study be review ed, given the lapse of time and the material changes to the pow er system over this period. 13 July, 2011 NERSA License Hearing 18
Legal Context NERSA rules for cost recovery NERSA s Regulatory Rules for Pow er Purchase Cost Recovery define cost - effectiveness as the primary hurdle for recovery of pow er purchase costs by the buyer as part of its regulated revenue allow ance 3.1.2 In assessing the cost effectiveness of pow er purchases, factors that w ill be considered include: a) The cost of alternative supply options; b) Direct cost of pow er purchase, inclusive of fuel; c) Timing (time-of-use differentials and date of commissioning); d) Netw ork (locational) benefits and costs; e) Security of supply; f) Firmness of supply; g) Law s and regulations as w ell as environmental considerations; h) Fuel diversification objectives; and i) Quantifiable risks. (Made in terms of the now defunct regulation 10 of GN R. 721 GG No. 32378 of 5 August, 2009) Do these rules apply? If not, w hat criteria should NERSA consider? 13 July, 2011 NERSA License Hearing 19
Legal Context Objects of the Act Irrespective of the various regulations, determination and rules, the Minister and NERSA are both bound by the original objects of the Act. Objects of Act 2. The objects of this Act are to (a) achieve the efficient, effective, sustainable and orderly development and operation of electricity supply infrastructure in South Africa; (b) ensure that the interests and needs of present and future electricity customers and end users are safeguarded and met, having regard to the governance, efficiency, effectiveness and long-term sustainability of the electricity supply industry w ithin the broader context of economic energy regulation in the Republic; (c) facilitate investment in the electricity supply industry; (d) facilitate universal access to electricity; (e) promote the use of diverse energy sources and energy efficiency; (f) (g) promote competitiveness and customer and end user choice; and facilitate a fair balance betw een the interests of customers and end users, licensees, investors in the electricity supply industry and the public. (Electricity Regulation Act, 4/2006) Are the Minister and NERSA convinced that the Peaker Project accords w ith these objectives? If so, w here is the evidence? 13 July, 2011 NERSA License Hearing 20