By Mthunzi Luthuli
In the previous article on powerships, we investigated the technical feasibility of using Karpowerships as a short to medium-term solution to alleviate the impact of load shedding on South Africans and the economy. By short to medium-term we mean a period no longer than five years.
This follow-up article looks at the financial and economic feasibility of the proposed solution. We answer the following questions: How much will it cost Eskom and electricity users to implement this solution? Does it make economic sense to use Karpowerships to mitigate the effects of loadshedding?, etc.
Karpowerships’ aggregate tender price was just under 160c/kWh, for example, R1.60/kWh at the time of tendering. Eskom’s average price of electricity at the time was around R1.38c/kWh. So, Karpowerships’ price was slightly higher than Eskom’s average price, and this was to be expected, given the nature of this technical solution and the fact that it’s an emergency short-term solution.
Eskom’s current average price for electricity is around R1.82c/kWh, which is higher than Karpowerships’ average tendered and awarded price. Karpowerships’ prices are also much lower than the prices that Eskom is paying to the Bid Window 1 and Bid Window 2 Renewable Independent Power Producers.
Karpowerships’ price is an aggregated price in two senses, namely that:
a) Karpowerships offered three powerships for use on the coast at three different ports. Two of the ships are 450MW vessels. The third one is a 320MW vessel, with a slightly higher price than the two 450MW one.
b) The price has two components – a Capacity Charge (CC) and an Energy Charge (EC). The capacity charge is fixed, and it is recovered over the duration of the contract. It includes charges for capital expenditure, mobilization costs, etc. The EC is for the cost of Liquified Natural Gas (LNG).
The EC is linked to the international LNG price, and is usually dollar denominated. So, because of the structuring of the pricing, the cost to South Africa / Eskom will fluctuate up and down during the contract period. At the time of tendering, the LNG price was around $20 (R364) per million Btu. (Btu stands for British Thermal Unit, a measure of the calorific or energy content of a fossil fuel).
Some people have stated that the cost of Karpowerships to Eskom and electricity consumers would be, and I quote, “more than R5.50 / kWh”. It was further stated that Karpowerships are “economically disastrous and financially ruinous to Eskom”. Given the above facts, these statements are clearly wrong.
A point to consider is that if the contract period is reduced, as it should and as we have proposed, the R1.60/kWh will increase slightly because the capex and mobilisation costs will have to be recovered over a shorter period of time. That means the CC component of the price will increase. The reason the increase will be small is that the capex and mobilisation costs of powerships is a small percentage of the total cost. The LNG cost is much higher.
We also have to factor in the capex that Eskom has to spend constructing power lines to the substations, the cost of modifications at the substations, etc. However, these costs are small in comparison to the overall project costs. If we take these costs that Eskom will have to incur to make this proposed solution workable, the actual cost of Karpowerships to Eskom would be in the region of R1.70/kWh. That’s not taking into account the fluctuations in the price of LNG.
Now the economic cost to the country of every kWh that gets loadshed is estimated at R9/kWh. Eskom calls it the “Cost of Unserved Energy”. As can be seen, this figure is much higher than the Karpowerships’ tendered price of R1.60/kWh. This means that the opportunity cost of not connecting powerships to the grid is big.
So, there you have it. Karpowerships are both technically and economically feasible, plus they can add MWh onto the grid within three to six months after financial close if Eskom is ready infrastructure wise. This means the necessary work has to be done regarding modifications and upgrades at the identified substations, transmission line design and associated servitude negotiations.
As can be seen, the proposal by the Economic Interventions Forum of South Africa (EIFSA) to use Karpowerships to alleviate the devastating impact of load shedding on our economy was well-considered and researched.
It must be noted that EIFSA is technology neutral. Our principle is that solutions that are technically feasible and that make the most economic sense, including sensibility when considering the social and environmental impact of those proposed solutions, should be implemented.
Mthunzi Luthuli is the CEO of EIFSA (Economic Interventions Forum of South Africa).
BUSINESS REPORT