Further cost increases on the cards for Eskom's Medupi and Kusile power stations

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Informed sources within Eskom Generation have indicated to EE Publishers that significant further cost increases can be expected for both Medupi and Kusile power stations... (more)

In the case of Medupi, provision has been made at a cost of "several hundred million rands" in the current R125-billion price tag to ensure that the plant is ready for the incorporation of flue-gas desulphurisation (FGD) plant. The FGD plant itsself will be installed under a seperate contract at the first general overhaul cycle of Medupi power station in about 2018.

Kusile, on the other hand, will have FGD plant installed from the beginning during the construction of the power station, and its cost is therefore included in the current overall R142-billion price tag. Further pushing up Kusile's price will be a significant additional cost of interest during construction, as well as contract price escallation, resulting from construction delays and the moratorium on placing of contracts since December 2008 due to the absence of a funding plan for the Eskom new-build programme.

Indications are that World Bank and other external finance for the construction of both Medupi and Kusile will be dependent on the incorporation of FGD technology in order to make the coal-fired power plants more environmentally acceptable. FGD plant will also increase the power plant operational costs due to significant additional requirements of both water and lime.

These addition costs for Medupi and Kusile come at a time when Eskom is under severe pressure from government, political parties, industry, organised labour and electricity consumers in South Africa to reduce its multi-year price determination (MYPD) application to NERSA.

The current Eskom MYPD application asks for increases in the average price of electricity of 45% per annum for three consecutive years commencing April 2010, in order to fund the construction. This would cause the average electricity price to increase five-fold between 2008 and 2012 as follows:

Year: 2008 2009 2010 2011 2012
Increase: 1,27 x 1,31 x 1,45 x 1,45 x 1,45 = 5,08 x

The Eskom MYPD application has been met with shock within South Africa, and after initially indicating its support for the Eskom proposal, government has now requested alternative proposals and options from Eskom. Recent media reports have since indicated that Eskom is today submitting an alternative pricing application with reduced increases to NERSA for consideration.

It is understood that negotiations with the suppliers of FGD plant are underway at present for Kusile, and in the light of the commercial sensitivities before contracts are placed, Eskom is not at this stage prepared to indicate the expected cost of the FGD plant for either Kusile or Medupi.

However, it is common knowledge that the current price of Medupi excluding FGD and interest during construction is R90-billion, with a total price excluding FGD but including interst during construction of R125-billion, giving interest during construction of some R35-billion, or 28% of the total price excluding FGD. Kusile on the other hand is coming in at at total price of R142-billion including FGD, and analysts indicate that this is unlikely to be much different for Medupi.

Based on the current rate of exchange of US $1 = R7,5, the cost of R90-billion for a 4800 MW power plant translates to a cost of about US $2500 per kW of installed capacity, whille the "all in" cost of R142-billion translates to US $3944 per kW.

A recent World Bank Energy Sector Management Assistance Program (ESMAP) report dated August 2008 gives price benchmark estimates for generation plant constructed in the USA, Europe and Asia, in US $ net per kW of installed capacity, as follows:

Generation plant - total plant cost USA India Romania

Gas turbine combined cycle plant, 140 MW   $1411 $1170   $1140
Gas turbine simple cycle plant, 580 MW         $860      $720     $710
Coal-fired steam plant (sub), 300 MW            $2730   $1690    $2920
Coal-fired steam plant (sub), 500 MW            $2290 $1440   $2530
Coal-fired steam plant (super), 800 MW     $1960    $1290   $2250
Wind farm, 1 MW x 100 = 100 MW               $1630   $1760 $1660
PV solar array, ground mounted, $/kW (AC)   $8930    $7840 $8200

Source: World Bank, Energy Sector Management Assistance Program (ESMAP) report, August 2008

It should be noted that the above are "pre-global financial crisis" costs, in what analysts consider to be something of a sellers' market, and that, if anything, costs for power plant may since have reduced somewhat.

These benchmarks, however, exclude costs such as connection to the grid, pipelines and access roads outside the plant fence, raw water acquisition, project financing, customs or import duties, and land costs, and therefore some care should be excercised when making direct comparisons with Medupi and Kusile.

Nevertheless, the ESMAP Report indicates that the prices for Medupi and Kusile are coming in at a significant premium over Indian and Chinese power plant, and even at a premium over American and European power plant. Yet the conventional wisdom is that the massive Eskom Medupi and Kusile power stations would bring South African customers significant cost savings due to economies of scale.

The answer to this apparent contradiction may lie in the onerous requirements for local content in the construction of South African built power stations, as well as the long construction times associated with these massive power plant projects, which brings a corresponding high cost of interest during construction.

These massive Eskom power plant projects may indeed have moved beyond the optimum size for "least cost" into the area of "diseconomies of scale", while at the same time significantly increasing the risks associated with having a single owner/developer/project manager, both in terms of cost and delivery time overruns, as well in the provision of the necessary funding.

In contrast, several smaller power plants, with shorter lead times, and constructed in parallel, may bring significant advantages in terms of cost, risk and diversity.