Eskom’s white elephants – Medupi and Kusile – dampen electricity price outlook

The numbers surprised all given the 11 percent rise in Eskom’s full year profit, driven mainly by increased sales to neighbouring countries. But this was against a decline in local sales volumes, again a stark reminder that the local economy is under pressure. And amongst all the financial jargon of an annual report, what struck EE Publishers Chris Yelland as worrisome was the increased costs and overrun of the Medupi and Kusile power stations. Both are expected to add further strain on the company’s financials, which will most likely fuel electricity hikes, adding further pressure onto consumers already tight pockets. – Stuart Lowman

By Chris Yelland*

Besides the financial results themselves for Eskom’s financial year ending 31 March 2016, perhaps the most important new information to come out at the media briefing at Megawatt Park on 5 July 2016, was Eskom’s latest estimate of the overnight capital costs, or cost to completion (CTC), for its Medupi and Kusile power stations.

The 4764 MW Medupi coal-fired power station, situated near Lephalale in Limpopo province, has been under construction since 2007. The 4800 MW Kusile coal-fired power station close to Kendal power station in the Nkangala district of Mpumalanga province, has been under construction since 2008.

When questioned, Eskom’s head of capital projects, Mr. Abram Masango, advised that:

• The latest estimated CTC for Medupi, excluding flue gas desulphurization plant (FGD), and excluding interest during construction (IDC), had increased from R105-billion to R135-billion.
• The latest estimated CTC, including FGD, but excluding IDC, had increased from R118.5-billion to R160-billion.

The latest estimated interest during construction has still not been disclosed by Eskom. However, in light of the significantly increased capital costs and delayed project programs for both Medupi and Kusile (Fig. 1a and 1b), it is expected that IDC for both Medupi and Kusile could increase by about 25% above the figures previously indicated by Eskom in September 2014.

It should be noted that although FGD plant was not initially included in the costing of Medupi, the site has been designed to be ready to install FGD plant at the first major shutdown of each unit after construction. Furthermore, FGD plant is required at both Medupi and Kusile in conditions of a $3.75-billion World Bank loan to Eskom, approved in April 2010. Kusile, on the other hand, is being constructed including FGD plant from the start.

The history of the estimated CTC approved by the Eskom board from time-to-time and communicated to the public for the construction of Medupi is as follows:

• Apr 2007: R69.1-billion: Initial CTC for 6 units excluding FGD and IDC
• Sep 2008: R88.5-billion
• Sep 2009: R87,5-billion
• Jun 2011: R91.2-billion
• May 2013: R105-billion
• July 2016: R135-billion: Latest CTC excluding FGD and IDC

Similarly the CTC approved by the Eskom board for the construction of Kusile is as follows:

• Apr 2007: R80.6-billion: Initial CTC including FGD and excluding IDC
• May 2013: R118.5-billion:
• July 2016: R160-billion: Latest CTC including FGD and excluding IDC

A previous estimated total CTC in September 2014 for Medupi and Kusile power stations, including IDC, FGD and the settling of unprocessed contractor claims, is given in Table 1.

An updated total CTC as at July 2016 for Medupi and Kusile power stations, including IDC, FGD and the settling of unprocessed contractor claims, is estimated in Table 2.

Table 1: Previous estimated total cost to completion (CTC) for Medupi and Kusile power station as at September 2014.

Table 2: Latest estimated total cost to completion (CTC) for Medupi and Kusile power stations as at July 2016.

Thus the massive cost and time overruns at Eskom’s Medupi and Kusile power stations are expected further strain Eskom’s financial resources, and place upward pressure on Eskom’s electricity price trajectory in the years ahead.

• Chris Yelland, investigative editor, EE Publishers