cogeneration project at four rand water sites · eskom rebate: • eskom in collaboration with...

COGENERATION PROJECT AT FOUR RAND

WATER SITES

PRESENTED BY IVEEN MBHELE 29 MAY 2012

PRESENTATION

• INTRODUCTION

• RAND WATER CONCEPTUAL DESIGNS

• ESKOM AND NERSA INITIATIVES

• IMPLEMENTATION STRATEGY

• FINANCIAL MODEL

• STRATEGIC IMPLICATIONS

• PROJECT CHALLENGES

• RISKS

• SEQUENCE OF EVENTS SINCE PROJECT INCEPTION

INTRODUCTION

• South Africa is experiencing power supply shortages and Eskom has embarked

on an extensive capital investment programme to build new power stations.

• The two coal fired power stations currently being built by Eskom are Medupi

and Kusile; these would however take a number of years to complete.

• Eskom and NERSA has in the short term embarked on a number of initiatives

including power conservation and load shedding together with industry and other

stakeholders.

INTRODUCTION

Rand Water has identified four sites within its current water transfer infrastructure

where hydropower can be generated.

ZOEKFONTEIN KLIPFONTEIN BRAKFONTEIN HARTEBEESHOEK

Location 8 600 m downstream

from the Vaal Dam

Chloorokop, Kempton

Park

Midrand Rosslyn

Pressure (m) 23 - 15 65 70 - 75 150 - 155

Flow (m3/s 13.8 - 23.86 5.7 - 6.9 2.3 - 2.76 1.38 - 1.61

INTRODUCTION

Location: Zoekfontein site

INTRODUCTION

Location:n: Klipfontein, Brakfontein and Hartebeeshoek sites

INTRODUCTION

CONVENTIONAL HYDROPOWER PLANT:

INTRODUCTION

TYPICAL HYDROPOWER PLANTS WITHIN PIPELINE NETWORK:

RAND WATER CONCEPTUAL DESIGNS

ZOEKFONTEIN SITE:


ZOEKFONTEIN SITE: HYDRAULIC MODELING


KLIPFONTEIN SITE:


BRAKFONTEIN SITE:


HARTEBEESHOEK SITE:

ESKOM AND NERSA SUPPLY SIDE INITIATIVES

• Pilot National Cogeneration Program (PNCP) - launched in 2007.

• Renewable Feed-in Tariff (REFIT) scheme – launched in 2009

• Renewable Bid-in Tariff (REBIT) scheme – launched in 2011

ESKOM AND NERSA INITIATIVES

Pilot National Cogeneration Program (PNCP):

• Eskom launched the PNCP in May 2007 for organisations to build power

generation capacity for cogeneration with Eskom.

• Eskom would contract to purchase the energy from sites with more than 1MW.

• The contract period with these organisations would range from 7 to 15 years.

• Eskom also offered an early completion incentive to bidders and a premium

price for power generated between April 2008 and April 2013; this being the

most critical period of the power shortages in the country.

• Rand Water submitted its bid prices of 45c /kWh for all sites.


Renewable Feed-in Tariff (REFIT) scheme :

• The National Energy Regulator of South Africa (NERSA) introduced the

Renewable Energy Feed-in Tariff (REFIT) scheme with the aim to harvest 10,000

GWh of Renewable energy in South Africa by 2013.

• In order for a project to qualify for Renewable Energy, the electricity should be

produced by means of naturally occurring, non-depletable sources of energy such

as solar, wind, biomass, hydro, tidal, wave, ocean current and geothermal.

• Small hydro power plant of less than 10MW qualifies.

• Feed-in Tariffs were, in essence, guaranteed prices for electricity supply rather

than conventional consumer tariffs.

• A tariff of 94 c/kWh was offered by NERSA for hydro power.


Renewable Bid-in Tariff (REBIT) scheme :

• Due to concerns with legality of REFIT scheme, the Department of Energy

introduced the REBIT scheme (2011).

• REBIT follows similar process as PNCP where companies submit bids with

prices for approval.

• It is based on competitive price bidding.

IMPLEMENTATION STRATEGIES

Own Use

Rand Water generates power and wheels it through Eskom or

Municipality networks. This power is discounted against power used at

Rand Water sites (Under this option Rand Water funds the project).

BOOT

An Independent Power Producer (IPP) is appointed to generate and sell power

to the market in exchange for royalties to Rand Water

(Under this option, the IPP funds the project, REFIT prices used).

Rand Water/IPP Partnership

Rand Water forms a partnership with an IPP but

Rand Water ownership is limited to 49% and is liable to pay tax.

(Electricity is sold under the REFIT scheme)

COMPARISON OF IMPLEMENTATION STRATEGIES

Parameter Own Use IPP/Partnership BOOT

Speed of

implementation

Relatively quick and

simple

Project finance structure

required and more

complicated

Dependent on IPP

Cost of funding Advantage of strong credit

rating

Funding based on project

finance and expensive

Does not affect Rand

Water

Source of funding Could be local or

international

Could be local or

international


Water

Term of funding Term could be shorter Long term funding Does not affect Rand

Water

Impact on Rand Water

borrowing capacity

Will impact due to

utilization of credit lines

Lesser impact due to

limited shareholding


Water

Return on investment Would expect utility level

return of about 8%

Would expect IPP return

in the region of 20%


Water

Transaction cost Low transaction cost High transaction cost


Water

Legal complexity Relatively simple Complex set of legal

requirements to ring fence

Multitude of agreements

to secure concessions

Construction risk Risk lies with Rand Water

but mostly can be passed

on to the EPC contractor

Most risk can be passed

on to the IPP

If risks are to high can

lead to project failure

Operation and

maintenance

Rand Water retains

responsibility and ensures

its core function is fulfilled.

Responsibility mostly lies

with IPP and requires

contractual agreements

Responsibility fully lies

with IPP and requires

contractual agreements

FINANCIAL MODEL

• Objectives of the financial model

Compare the Own Use business model against other models.

Determine return on investment per site.

Determine return on investment per tender per site.

FINANCIAL MODEL

ASSUMPTIONS:

• FINANCIAL MODEL

RESULTS COMPARISON:

Own Use IPP Partnership BOOT

NPV (R, million) 303 476 63

IRR (%) 17 26 -

Payback (years) 8 6 -

• OWN USE MODEL PER SITE:

FINANCIAL MODEL

Zoekfontein Klipfontein Brakfontein Hartebeeshoek Total

Average Power

generated (MW)

5.6 3.4 1.8 2.2 13

Average Cost c/kWh

over 20 year period

69 38 85 60 61

Average Capital

outlay (R, millions)

180 61 64 58 364

Discount rate 10% 10% 10% 10% 10%

NPV (R, millions) 103 132 16 52 303

IRR 15% 24% 12% 17% 16

Payback years 8 6 10 8 7

Zoekfontein

Klipfontein

Brakfontein

Hartebeesthoek

Total hours

(22x365)

8 030 8 030 8 030 8 030

Total kWh per

annum

40 150 000 24 491 500 13 249 500 15 257 000

Annual O & M

cost (Rands)

3 504 675 1 192 669 1 249 389 1 131 170

Operating cost

per kWh

R0.08 R0.05 R0.1 R0.08

Total Cost per

kWh

R0.61 R0.27 R0.61 R0.43

• FINANCIAL MODEL

COST PER UNIT GENERATED:

FINANCIAL MODEL

• CAPEX, REVENUE, AND OPSA & MAINT, NET PROFIT (OWN USE):

FINANCIAL MODEL

• NPV (OWN USE):

FINANCIAL MODEL

• CUM NPV (OWN USE):

STRATEGIC IMPLICATIONS

ENERGY SAVING:

• Cogeneration is an energy saving opportunity that can offset the high energy costs.

• The average of 13 MW generated equates to an annual energy saving of 7% of

total Rand Water power consumption.

• Rand Water has the potential to save up to 20% of energy should all other viable

sites be fully explored) .

•

• In addition to the financial benefit, there would be an increased operational

reliability due to reduced reliance on power supplied by Eskom or municipalities.

STRATEGIC IMPLICATIONS

ESKOM REBATE:

• Eskom in collaboration with NERSA has a rebate system for energy saving

initiatives.

• Eskom has recommended that an application for rebate be submitted only for the

Zoekfontein site.

• The estimated rebate from Eskom will be about R26 million based on net power

generated from Zoekfontein.

• Eskom has also indicated that this scheme would be valid until March 2013.

STARTEGIS IMPLICATIONS

CARBON CREDITS:

• Carbon Credits (CC) are traded internationally as a commodity for initiatives that

result in the reduction of environmentally unfriendly emission gases.

• Based on the estimated combined capacity of 13 MW for this project, there is a

potential of generating up to R10 million per annum over a period of 10 years.

• This amount may be used to cover Operation and Maintenance costs.

•

The financial viability of this project has been assessed without the influence of

potential income derived from the sale of CC.

PROJECT CHALLENGES

PATENT CLAIM:

• Rand Water received notification that it should refrain from the project due to an

alleged infringement.

• An individual registered a South African patent in 2009 on hydro power generation

in pipelines.

• A comparison between the patent and the Rand Water designs was drawn and it

was found that the method Rand Water intends to generate power with is the same

method as used elsewhere in the world for many years.

• The expert opinion also further confirmed that the infringement has no basis.

PROJECT CHALLENGES

SERVITUDE AGREEMENTS:

Zoekfontein

• Rand Water is currently negotiating with the land owners of Zoekfontein to obtain

permission to erect a hydro power plant and transmission line in the area within the

Rand Water servitude.

Klipfontein, Brakfontein and Hartebeeshoek

• The hydropower plants on these sites will be based within the reservoir area which

is owned by Rand Water, and therefore there is no need to obtain servitudes

agreements.

•

• Servitudes agreements will, however, be needed for transmission line areas.

PROJECT CHALLENGES

POWER GENERATION LICENCE:

• The power generation licence application to is being prepared for submission to

NERSA.

WHEELING:

• The framework regarding the cost (use of system charges) for wheeling of power

through Eskom or municipal network cost has been issued by NERSA.

• Negotiations with Eskom and Municipalities are in progress.

PROJECT CHALLENGES

ENVIRONMENTAL IMPACT ASSESSMENT:

• GDARD indicated that Basic Assessment and WULA applications will be

necessary for Zoekfontein site only.

•

• Klipfontein, Brakfontein and Hartebeeshoek may not need EIA application.

• An EIA consultant was appointed and the application has been submitted.

• Authorization is expected in November 2012.

NOISE POLLUTION:

• Water inlet to reservoirs is controlled with Larner Johnson valves. When reservoirs

are full, a loud siren like noise is emitted, polluting the environment.

By installing the turbines this noise pollution will be minimized.

PROJECT CHALLENGES

OPERATION AND MAINTENANCE

• The cogeneration tender provides for a two year plant operation and maintenance

service.

• Because these plants will be highly integrated in the Rand Water network, skills

transfer during the contract period will be prioritised. This will ensure that Rand

Water’s primary operations are not compromised when the contract ends.

•

• It is also envisaged that these plants will be largely unmanned and fully automated;

only to be attended to if there is a problem.

RISKS

Risk item Impact Probability Mitigation

Pressure surges High Medium Hydraulic surge analysis during

design phase

Reservoir isolations Medium High Design to provide for flow with an

isolated reservoir

Turbine isolations Medium High Isolation valves to allow normal

water flow when turbine isolated.

Interest rate fluctuations Medium High Financial model provides CPI linked

energy rates

Exchange rate fluctuations Medium High Provision made in the financial

model

Wheeling cost changes High Medium Contract agreements with

municipalities and Eskom to be

expedited.

Authorizations / Licenses delays High Medium Construction period will take 2 years

and this time will be used to

expedite applications.

SEQUENCE OF EVENTS SINCE PROJECT INCEPTION

2006 – High level investigation on hydro power generation

carried out by Rand Water.

June 2007 – SSI appointed as Consultant for the four hydro power

stations.

May 2008 – Rand Water board approves Rand Water participation in

Eskom’s PNCP scheme.

January 2009 – REFIT scheme launched and proves to be more attractive

than the PNCP scheme.

May 2009 – Investigation started on appropriate business model for

Rand Water.

December 2010 – Trans African Energy (Pty) Ltd submits a report on

implementation strategy for Rand cogeneration project.

March 2011 – The tender for the cogeneration project issued.

July 2011 – The tender closed with four tenders received.

November 2011 – Tender evaluation process completed.

April 2012 - Tender for cogeneration cancelled due to non-

responsiveness of tenders & budget review.

Thank you

QUESTIONS / CLARIFICATIONS

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cogeneration project at four rand water sites · eskom rebate: • eskom in collaboration with...

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