Johannesburg - Eskom needs to wake up and settle outstanding issues with independent power producers (IPPs) so that South Africa won't experience electricity shortages again when the economy recovers, said Geoffrey Qhena, CEO of the Industrial Development Corporation (IDC).

Although Eskom is unable to meet the country's electricity requirements over the long term, IPPs planning large power-generation projects for the South African economy are struggling to finalise purchase agreements with the power utility. In terms of current legislation all power generated by IPPs has to be sold to Eskom.

The delays in concluding purchase agreements between Eskom and IPPs is a matter of concern, Qhena noted, but "we will continue negotiating with Eskom. If we want South Africa to benefit from growth when the economy recovers, we have to be ready [as far as electricity provision is concerned]."

The IDC, which regards IPPs and green energy as key to attracting investment to the country and creating jobs, approved an investment of more than R1.2bn in an IPP project in the past financial year, and is investigating possible investments in a wind energy farm that will generate 500MW, as well as an integrated coal mine and electrification project in Botswana.

"Over the long term Eskom cannot meet the demand for electricity. It is therefore necessary to look at how IPPs can be encouraged and supported. They need to be accommodated," Qhena continues. Back in 2003 cabinet approved a decision that 30% of South Africa's electricity would be provided by IPPs in the long term.

Although the 2008 power crisis underlined the need for additional players in the market, very little progress has so far been made in negotiating purchase agreements.

Ipsa, an IPP that in 2007 began generating electricity for delivery to industry clients in Newcastle, for instance, had to cease operations temporarily as it was unable to finalise a long-term purchase agreement with Eskom.

This has caused enormous pressure on the group's cash flow and continued survival, and has obliged it to postpone various other electrification projects, inter alia a coal and power station project in the Eastern Cape which would have generated about 500MW.

"This has been a very frustrating period. South Africa's need for new generation capacity is emphasised by continuing power cuts in many parts of the country, The authorities have been obliged to conclude agreements with other countries in the region to ensure an uninterrupted power supply during the 2010 World Cup soccer tournament. Our Newcastle plant has however been waiting for about a year, while the awarding of a long-term purchase agreement is dragged out because of delays beyond our control," Stephen Hargrave, chairman, remarked at the end of June when the group's results were announced.

CIC Energy, too, which developed the Mmabula project in Botswana with the aim of initially delivering 1 200MW of electricity to Botswana and South Africa, is struggling to conclude a final agreement with Eskom. This agreement is necessary to finalise the funding of its projects so as to start construction at the end of this year.

CIC Energy's proposition has already been through Eskom's formal processes and was submitted to the Eskom board for approval on June 18. The delay in getting a final answer is apparently attributable to negotiations between Eskom and Government, reports CIC Energy.

A government announcement on Eskom's role and responsibilities with regard to the IPPs will be made "within the coming weeks" declared energy minister Dipuo Peters in her budget speech to parliament at the end of June.

Qhena pointed out it is important for outstanding issues around price determination and the management of relations between IPPs and Eskom to be finalised, before consideration can be given to the possible opening of the electricity market to other players for direct delivery of power to clients.

"This will have massive implications for the market in future. Eskom's tariff structure, for instance, allows for the subsidisation of those who cannot afford electricity. We need to first resolve issues of price and proportion before throwing the market open," he said.

- Sake24.com