investment and uncertainty
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Investment and Uncertainty. Historical experience with power sector investments in South Africa and implications for current challenges Grov é Steyn [email protected] 083 379 1735 Please see paper at: www.gsb.uct.ac.za/mir 30 May 2006. The Electricity Supply Commission. - PowerPoint PPT PresentationTRANSCRIPT
Investment and Uncertainty
Historical experience with power sector investments in South Africa and implications for current challenges
Grové [email protected]
083 379 1735
Please see paper at: www.gsb.uct.ac.za/mir 30 May 2006
The Electricity Supply Commission ESCOM was established on 6 March
1923. Non-profit statutory corporation Not accountable to parliament, reporting
to line minister Could veto municipal generation
investment
ESCOM: Initial Strategy
Set out to establish itself as sole supplier of new capacity– Took over Colenso power station from Railways– Agreements that it would construct Congela and
Salt River power stations– Vetoed future VFTPC stations: Witbank, Klip, Vaal
(ESCOM Finance and own, VFTPC to build and operate)
– Expropriated VFTPC on 1 July 1948 for £14.5million - largest transaction in South Africa's history
Investment: Upscaling and interconnection in 1960/70s. Post war years
– Skills and equipment shortages– Increased demand from gold mining and industry
lead to rationing and load shedding.– Supply to mining shaped ESCOM culture
1960s and early 1970s– Interconnection – national grid– Upscaling – economies of scale– Important implications for generation technology,
plant sizing and locational decisions
Increased demand and investment in the 1970s
Increased demand and investment in the 1970s (2)
Increased demand and investment in the 1970s (3)
– Oil crises– From 1972 to 1975, demand growth outstripped
the rate at which ESCOM could add capacity.– Dramatically increased building programme
• Matla, with six 600MW units, started in October 1974• Drakensberg, with four 250MW units started in January
1975• Duva, with a further six 600MW units started in
November 1975 (decision shortly after the Portuguese lost political power in Mozambique)
• Koeberg also finally started in August 1976 barely two months after the Soweto uprising.
Second Oil crises in 1979
– Demand growth increased to twelve percent, leading to alarming reduction in reserve margin
– “No time to draw up new designs or go through long tendering processes”
– Lethabo (3 708 MW) was ordered as a copy of Matla
– Tutuka ordered (3 654MW) as a copy of Duva– The supply arrangements were negotiated with the
same turbine and boiler contractors as were used with the original stations
Problems with up-scaling and capital costs By middle 1970s it was taking fourteen
years between the decision to construct a large six-unit coal fired station and the commissioning of the last unit.
Most of the capital expenditure occurred between year seven and eleven
ESCOM fixed assets under construction
Capacity crises and further investment in the early 1980s
– Loss of the 1373 MW of contracted firm capacity from Cahora Bassa
– Commissioning problems were experienced with the new 600MW sets at Matla and Duva
– Unexpected deterioration of availability• From 85% in 1975, to 74.7% in 1980, and 71.9% in 1983• Result of poor initial performance from the new large-scale
generating sets• (Availability levels of over 90 percent during the 1990s when
surplus capacity meant that the system was run at lower load factors)
– Mostly problems at the three largest stations Arnot, Kriel and Matla
Availability of selected ESCOM power stations
Taaibos Ingagane Grootvlei Arnot Kriel Matla Duva All ESCOM8x60 MW 5x100 MW 6x200 MW 6x350 MW 6x500 MW 6x600 MW 6x600 MW Stations
1973 83.6 89.7 83.4 65.0 82.51974 86.2 93.0 81.7 73.3 83.71975 91.2 94.7 83.6 80.8 85.01976 84.1 87.2 76.4 80.2 68.0 82.31977 86.1 81.3 77.2 66.9 70.6 78.51978 85.3 74.9 76.6 66.0 71.4 77.41979 90.3 87.7 79.9 68.1 81.6 45.9 78.8
1980 87.9 75.8 62.2 66.5 72.0 59.5 78.2 74.71981 88.1 80.5 82.5 73.3 61.8 70.1 55.8 74.21982 88.6 76.4 71.4 82.1 57.7 71.2 79.0 74.31983 86.1 54.8 64.6 74.3 60.5 80.9 72.2 71.9
1979-83 88.2 75.0 72.1 72.9 66.7 65.5 71.3 74.8
Capacity crises and further investment in the early 1980s (2)
– Supply crises– Unavoidable load shedding with goldmines– Left an indelible impression on the senior engineers
- resolved to ensure that it should happen “never again” (Kok 1999, McRae 1997 and Rubberts 1997).
– Again it was decided to accelerate plans for constructing generation plant. Ian McRae, recalls:
“It would have been the biggest sin to have been responsible for holding back economic growth [by constraining electricity supply] so it was just go, go, go!” (1997).
Further orders in the early 1980s– By 1982 foreseeing capital expenditure programme of
R65 billion which would treble its capacity to 70 000MW by end of the century (Ryan, 1982).
– Placed boiler and turbine orders for three additional 4000MW class stations, Matimba, Kendal, and Majuba on the basis of the four tenders submitted for Matimba. Also signed a letter of intent for the turbines for a further station, Lekwe.
– All these stations were to utilise “dry” cooling. – By end of 1983, ESCOM had generation plant totalling
22 260 MW under construction or on order. Equivalent to 97 percent of its total plant in commission.
ESCOM: Capital expenditure
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
Cap
ital
exp
end
itu
re (
Rm
)
199719941991198819851982197919761973
Year
ESCOM/Eskom’s prices
Eskom's investments, debt and financing costs
0
3 000
6 000
9 000
12 000
15 000
18 000
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
Cap
ex &
Fin
ance
(R
mill
ion
)
0
10 000
20 000
30 000
40 000
50 000
60 000
Deb
t (R
mill
ion
)
Net interest bearing debtTotal CapexCapex excl. electrificationNet interest and finance
Cost contributions per kWh
1986
1984
1982
1980
1978
1976
1974
1972
Year-5.00
0.00
5.00
10.00
15.00
20.00
Co
st c
on
trib
uti
on
s (c
/kW
h)
Surplus (Loss)
General expenses
Distribution oper. & maint.
Generation operating
Electricity purchase
Fuel
Reserve Fund
Total CDF contributions
Loan repayments
Interest
Average price in 1998Rands (using PPI)
Cost contributions per kWh (2)
Problems with system planning and project appraisal Irreversability Uncertainty and ignorance rather than
“risk” Incorrect use of discount rates Overlooking the benefits of portfolio
effects and diversity Overlooking the value of flexibility and
options
Strategies in the face of uncertainty and ignorance Incertitude shifting Incrementalism: “The science of muddling
through” Lindblom (1959 and 1979)– effective response to complexity and uncertainty in
the context of bounded rationality – poses a challenge to the mastery-via-
understanding tradition of Western civilization
Strategies in the face of uncertainty and ignorance (2)– Flexibility (of an investment)
• allows for trial and error learning (Collingridge, 1992)• enables adaptation to changing circumstances and
therefore reduces the potential costs of errors (Collingridge and James, 1991).
– Diversity (of a system)• promotes beneficial forms of innovation and growth• hedges against exposure to uncertainty and ignorance• mitigates the adverse effects of institutional ‘momentum’
and ‘lock-in’ in technological trajectories• accommodates disparate interests associated with social
choice in modern pluralistic societies. Stirling (1998: 37)
Moral Hazard
A specific instance of the principal agent problem
From investigating health care insurance incentive problems
E.g. car insurance Four elements of moral hazard:
– Incertitude shifting– Principal agent relationship– Agent incentives diverging from principal interests– Information asymmetry (observability) problems
On Moral Hazard
Moral hazard is pervasive in the economy. It occurs whenever risk is present, individuals are risk averse, and “effort” is costly to monitor. And it arises not only in insurance markets, but also when insurance is provided by governments, through social institutions, or in principal-agent contracts. (1988: 384, emphasis added)
Arnott and Stiglitz (1988)
Some findings
Information asymmetry: financial system and pricing does not reveal cost of electric power
Persistent Moral Hazard– Moral Hazard problem exists and is not
recognised
Implications for policy– Persistent Moral Hazard means that the problem is
bigger than you think.– Policies should focus on:
• Moving exposure to real economic uncertainties back to firms and financiers
• Reducing– ex ante information asymmetries with regard to investment
exposure to real uncertainties and ignorance; and– ex post information asymmetries with respect to the subsequent
performance of these investments.
– Comprehensive public review of: Eskom’s governance and investment decision-making methodologies and procedures; and of its accounting and pricing policies required