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Group Capital division |
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| Highlights | Challenges |
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| Future priorities | |
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Material issues |
Group Capital continues to meet the requirements of the capacity expansion programme. Formal project assurance is used to track project schedules, costs and safety risks to meet the expected quality standards and deadlines. The three major projects – the Medupi and Kusile coal-fired power stations and the Ingula pumped-storage scheme – are on track in terms of the current schedule and capital expenditure. Despite the global recession, Eskom has successfully managed to negotiate and secure most fundamental contracts for Medupi and Kusile. Building a coal-fired power station is a mammoth task which takes approximately eight years (not including project development which typically takes between five and seven years to finalise). As such, keeping the construction costs fixed to a specific budget requires constant focus. Camden, one of the return-to-service (RTS) stations, has been completed and all units fully commissioned. Grootvlei power station, which was expected to be complete, is slightly behind schedule (93% completed) due to technical difficulties. Komati, the third RTS station, is on track, being 83% complete. Significant inroads are being made in building and refurbishing of transmission lines and substations to strengthen the transmission network. |
Eskom has a portfolio of wind projects and other renewable energy projects (including wind, and concentrating solar power) at various stages of development in line with national renewable objectives and Eskom’s own renewable energy strategy. The CSP project will produce around 516GWh yearly. Further details on the CSP project are set out in Corporate Services. Project Sere – a 100MW wind power project on the West Coast – is under way, with certain of the funding approved by the World Bank and other multilateral development banks and the remaining currently in negotiation. Project Sere’s first units are expected to be turning in the second half of 2012, and is scheduled to be fully operational by October 2013. The work undertaken by the South African government to determine the potential and options for the country to reduce its greenhouse gas emissions resulted in the production of long-term mitigation scenarios and ultimately the publishing of the integrated resource plan 2010. These were clear about the need for renewables, together with nuclear and clean coal, as options to reduce emissions from electricity generation. For renewables, the challenge is to scale up in the next few years, so that implementation at a larger scale is feasible and more affordable in future. The central problem is cost, and much depends on technology developments in South Africa and in other countries, and how these technologies can be practically implemented. BenchmarkingBenchmarking power station costsThe most widely used method to compare capital costs of different power stations is the “overnight cost” method and is evaluated in terms of the USD cost per kilowatt (USD/kW) for installed capacity. The overnight cost excludes escalation in equipment, labour and commodity prices. The overnight cost methodology commonly excludes capitalised borrowing costs and includes the engineering, procurement and construction portion, or plant basic cost, as well as a combination of the following cost components:
Further, overnight cost calculations depend on a number of factors such as site location, the year of comparison, the technology used and the station size. Another method of comparing total capital and operating costs is the “levelised cost of electricity” method. This methodology calculates the present value cost in United States dollars per megawatt-hour of energy production. Financial factors such as interest rates, inflation, discount rate and taxation are taken into account and include the capital cost, as well as fuel and all fixed and variable operating and maintenance costs. Compared to the overnight cost method, levelised cost of electricity comparisons are significantly more difficult to compare on a like-to-like basis, as a greater number of cost components need to be evaluated to normalise costs being reported from different sources. It is challenging to obtain consistent and accurate benchmarks for new power plant capital costs. This is mainly due to the following factors:
The benchmarking information must be used with care as only high-level broad conclusions can be made, particularly if the underlying assumptions differ from the various information sources. The Eskom overnight and levelised cost of electricity (LCOE) numbers have been compared with the following available benchmarks:
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| * | The Lazard study has not indicated the ZAR/USD exchange and whether transmission costs were included. Assumed ZAR/USD exchange of 8.3 (Eskom value corresponding with 2009 base year) and inclusion of Transmission costs. |
In order to compare cost more accurately, an attempt has been made to adjust the Eskom costs to the same base year and exchange rate and to match the cost components listed above in the EPRI, Lazard and IEA benchmarks. The outcome is presented below. The comparison of overnight and levelised cost of electricity (LCOE) costs show that Eskom’s plants are well within or below the international benchmark.
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While Medupi and Kusile are similar super-critical coal-fired power stations, the difference in their costs is due to Medupi costs not including flue-gas desulphurisation. The capital expenditure phasing is also different, resulting in Kusile attracting higher escalation and financing charges. Based on the current economic and financial parameters applied by Eskom, the overnight cost (excluding borrowing costs but including owners, development costs, transmission and contingency) and LCOE calculations for new build projects are:
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