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KARPOWERSHIP
Powerships are barge- or ship-mounted floating power plants. They are supplied with gas from floating storage and regasification units (FSRUs), which in turn are supplied with imported liquified natural gas (LNG) from international suppliers on purpose-built LNG carriers. The powerships and FSRUs would anchor permanently in the three harbours – Coega, Saldanha Bay and Richards Bay – for the duration of the planned 20-year contract.
The LNG is subject to international prices. With the unfolding crisis in Eastern Europe, LPG and oil prices are even more volatile.
There is no fixed infrastructure offered by floating powerships, aside from shore-based terminals which then connect to the national electricity grid. Such terminals are usually owned by the host country, but this is not always the case.
The noise from the Karpowerships has an impact on marine life. There is also hot water issues as the cooling water from the power barge is discharged into the sea.
The regasification units also use water from the sea to heat up the liquid gas to gas, and so cold water will be discharged from that vessel, leading to patches of hot and cold water, which may also affect marine life.
The Karpowership independent power producers are private entities, owned 51% by the Turkish energy company Karadeniz Holdings and 49% by the South African company Powergroup SA.
The only means for Eskom to have access to the electricity generated by Karpowership (and then distribute it through the grid) is through power purchase agreements.
Karpowership is not the solution. If we proceed with that option, that will mean South Africa is tied to the agreement for 20 years. Karpowership buys gas (to generate electricity) in US dollars, and the dollar-rand exchange rate fluctuates. So South Africa will be tied financially to whatever the rate is.
If the agreement falls through, Karpowership can simply pack up and leave, leaving South Africa with no infrastructure to generate electricity (though we would have spent a lot of money by then). At the time when the preferred bidders were nominated, the reasoning was that the power ought to be procured as a matter of urgency. The emergency has since passed, yet Karpowership is STILL on the table.
NERSA's process of licencing the Karpowerships has been flawed by a lack of transparency.
OUTA finds it inexplicable that NERSA granted the Karpowership generation licences while there are so many questions over the process and the Karpowership projects.
OUTA's concerns
On 13 August 2021, OUTA made a formal submission to NERSA, objecting to the Karpowership licences. Our submission is straight forward and sets out why NERSA ought not entertain the application(s) in the first place as many factors and processes are still pending and not yet finalised. We were assisted by energy expert, Chris Yelland. Read the summary and our full submission here.
The concerns we raised include:
• Environmental authorisations were been refused by the Department of Forestry, Fisheries and the Environment (DFFE);
• An internal appeal process by Karpowership is still underway challenging the decision by DFFE;
• The absence of fuel supply agreements;
• The absence of fuel pipeline licences;
• The absence of port authorisations;
• Eskom has not agreed to enter into power purchase agreements;
• There is a possibility of appeal proceedings in the DNG court case challenging the bid awards.
The Karpowerships are to be anchored in Richards Bay, Saldanha Bay and Coega, and are supposed to between them provide 1 220 MW using gas to power plants with additional vessels with floating storage and regasification plants. At prices when the deal was agreed, the 20-year deal could cost up to R218bn.
However, as the deal will be linked to the international gas price, this price is going to rise. As with all power plants, the loans need to be repaid and the costs will be passed on to the people of south Africa through our electricity tariffs. OUTA foresees that the only means for our government to finance such venture is for this load to be carried by the consumer – meaning that we will see even greater electricity tariffs in order to fund this.
18 February 2020: the Minister of Mineral Resources and Energy issues a Determination on the need to procure 2 000 MW of generation capacity from a range of energy technologies, through the Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP).
25 May 2020: The National Energy Regulator of South Africa (NERSA) concurs with the Minister's Determination.
June 2020: Karpowership is awarded an exemption from having to undertake an environmental impact assessment, under an emergency provision, but in August this is revoked and the Green Scorpions start a criminal investigation into an attempt to bypass the law.
7 July 2020: The Determination is gazetted, with a deadline for connection to the grid of December 2021. The procurer of the new generation capacity is the Department of Mineral Resources and Energy, and the buyer is Eskom.
24 August 2020: DMRE issues a Request for Proposals for new generation capacity under the RMIPPPP, with commercial operation required by June 2022, and 28 bids are submitted. See here.
18 March 2021: DMRE nominates Karpowership SA Coega, Karpowership SA Richards Bay and Karpowership SA Saldanha Bay as preferred bidders to supply the country with 1 220 MW power of the total RMIPPPP capacity of 2 000 MW. They are three of the eight preferred bidders. Another three preferred bidders are added later.
13 April 2021: Karpowership applies to NERSA for three generation licences for Coega, Saldanha Bay and Richards Bay, with 31 August 2022 as the commissioning date. The applications were revised and resubmitted in May 2021. Karpowership’s applications can be found here: Coega, Richards Bay and Saldanha Bay. NERSA subsequently called for public comments on the applications.
13 August 2021 : OUTA makes formal submission to NERSA, objecting to the Karpowership licences. Our submission is straight forward and sets out why NERSA ought not entertain the application(s) in the first place as many factors and processes are still pending and not yet finalised. We were assisted by energy expert, Chris Yelland. Read our submission here.
21 September 2021 : NERSA approves all three Karpowership generation licences, but fails to provide the reasons for the decisions. See OUTA’s comments here.
30 September 2021: DMRE’s extended deadline for RMIPPPP regulatory processes.
30 September 2021: DMRE’s extended deadline for RMIPPPP regulatory processes.
29 October 2021 : NERSA publishes the reasons for decisions on the generation licences: see here, here and here. OUTA believes that NERSA applied its mandate too narrowly and did not consider all the factors that ought to inform its decisions, rendering the decisions reviewable in terms of the Promotion of Administrative Justice Act.
27 January 2022: DMRE’s further extended deadline for RMIPPP regulatory processes.
December 2021 : NERSA publishes adverts calling for comments on Karpowership applications for gas operation licences. The timelines are botched and not enough information is given to the public. OUTA decides not to make a formal submission to NERSA on these applications as our contentions were listed in our August 2021 submission. However, OUTA writes to NERSA to express concern about the inadequate public participation process.
30 January 2022: Court dismisses attempt by losing bidder DNG to overturn Karpowership award; DNG had alleged tender irregularities and corruption.
3 February 2022 : OUTA writes to NERSA and complains about the botched public participation process on the Karpowership gas licence applications, seeking clarity. OUTA's letter is here. No response was received from NERSA.
3 February 2022 : OUTA writes to NERSA and complains about the botched public participation process on the Karpowership gas licence applications, seeking clarity. OUTA's letter is here. No response was received from NERSA.
31 March 2022: DMRE’s further extended deadline for RMIPPP regulatory processes; an indefinite extension is now in place.
26 April 2022: OUTA files an application in the Pretoria High Court to review and overturn NERSA’s decision to award generation licences to the Karpowerships.
OUTA applies to the high court to overturn NERSA's decisions to licence the Karpowerships
On 26 April 2022, OUTA filed an application for the review and setting aside of the decisions by the National Energy Regulator of South Africa (NERSA) to grant the three Karpowership independent power producer (IPP) generation licences.
OUTA’s application was filed in the Pretoria High Court. The respondents are NERSA, four Karpowership companies, the Minister of Mineral Resources and Energy, the Minister of Forestry, Fisheries and the Environment, and Eskom. The Karpowership companies are Karpowership SA (the holding company) and its wholly owned subsidiaries Karpowership SA Coega, Karpowership SA Saldanha Bay and Karpowership SA Richards Bay. OUTA’s action is directed against NERSA, while the other parties are cited due to their interest in the matter.
This is an application in terms of the Promotion of Administrative Justice Act.
OUTA is asking the high court to review and set aside NERSA’s decisions to award generation licences to the three Karpowership IPPs, and order NERSA to reconsider these decisions.
The application is supported by an affidavit by OUTA Executive Director Advocate Stefanie Fick and a confirmatory affidavit from a specialist consultant supporting the views on the negative economic impact and lack of consideration of far more viable alternatives.
OUTA believes that the normal public procurement processes for new generation capacity and private procurements by electricity customers themselves are now overtaking the Risk Mitigation Independent Power Producer Procurement Programme (RMIPPPP), the so-called “emergency” process.
“It is submitted that NERSA has displayed a cavalier attitude towards statutory compliance and public concerns throughout its decision-making process to award generation licences to Karpowership. By doing so, it has failed to properly exercise its mandate in terms of the ERA [Electricity Regulation Act] and fulfil its oversight functions of regulator without the necessary independent checks and balances to ensure that the interests of electricity suppliers are balanced with the interests of customers, the public and the South African economy,” says OUTA’s Advocate Stefanie Fick in an affidavit supporting the application.
“The decisions to award the licences to Karpowership for generation at Coega, Saldanha Bay and Richard’s Bay respectively were irrational, unreasonable, and taken without regard to relevant considerations or with regard to irrelevant circumstances.”
OUTA’s court papers call NERSA’s decisions procedurally unfair, irrational and unlawful
Fick’s affidavit supporting OUTA’s application includes these points:
• NERSA’s decision-making was procedurally unfair. The process was premature and lacking in transparency, with significant portions of the licence applications redacted.
• The law requires that NERSA acts in the best interests of the country, but OUTA believes that NERSA has failed to do so. The Electricity Regulation Act, which empowers NERSA to issue the licences, requires a fair balance between the interests of customers and end-users, licensees, investors and the public. The National Energy Regulator Act requires that every decision by NERSA be “in the public interest” and “based on reason, facts and evidence”. This Act also provides for the judicial review of NERSA decisions in terms of the Promotion of Administrative Justice Act.
• NERSA granted the generation licences for the Karpowership IPPs prematurely, without the relevant facts before it, and conducted the public participation process without providing the public with the necessary facts on which to comment, including pricing aspects. “The lack of transparency points to a decision that was procedurally unfair as the public was not informed of and able to comment on and submit relevant facts and evidence to NERSA on the costs involved over the next 20 years,” says Fick.
• In its reasons for the decisions, NERSA failed to provide a meaningful response to the public concerns and objections, effectively undermining the public participation process. Instead, NERSA “simply brushed aside” the public objections, says Fick.
• In August 2021, OUTA made a formal submission to NERSA objecting to the granting of generation licences to the Karpowerships. Many of these objections still stand and have not been addressed.
• At the time when the applications for generation licences by the Karpowership IPPs were considered by NERSA, the regulator did not take into account that the Karpowership IPPs failed to meet certain legal and regulatory requirements, including NERSA’s own prescribed requirements for generation licence applications to be considered. These include failure to obtain environmental authorisations, port authorisations, water licences, emissions licences, waste management licences, various gas infrastructure construction, operating and trading licences, fuel supply agreements and power purchase agreements.
• NERSA’s lack of transparency on the financial information raises concern about the effect on the public. “It failed to deal with the issue of price variation in circumstances where prices over the next 20 years will be dependent on the US dollar price. This causes uncertainty and may come at tremendous costs for the South African public,” says Fick.
• NERSA appeared to prioritise the interests of the Karpowership IPPs over the public. Fick says that “it is of great concern that NERSA, a South Africa public body using public funding, expresses concern about the financial affairs of a private Turkish majority-owned company, thereby creating the distinct impression that the financial well-being of Karpowership should enjoy preference above that of the South African public.”
• Eskom has not signed power purchase agreements with the Karpowership IPPs and there is no certainty that it will do so, which is an important factor when considering the granting of generation licences.
• Despite the DMRE having repeatedly extended the deadline for RMIPPPP preferred bidders to obtain the requisite regulatory approvals and authorisations necessary for financial closure, the Karpowership IPPs have still failed to provide these.
• NERSA accepted the “plans” by the Karpowership IPPs to comply with environmental legislation as actual compliance.
• NERSA failed to take value-for-money considerations into account, including consideration of more cost-effective options.
Fick’s affidavit refers to input from OUTA’s independent consultant:
• There are faster and substantially cheaper generation project options available to eliminate loadshedding in the short-term, so the Karpowership projects are not needed.
• The Karpowership projects will impose unnecessary financial, economic and environmental costs on South Africa and the 20-year contracts carry a significantly greater risk to customers, the public and the economy than the available alternatives.
• NERSA has failed to conduct a proper analysis of the project costs and cost risk, and appears to have misconstrued the issues surrounding the electricity pricing formulas (in particular the gas pricing components). This includes the price being significantly exposed to variations in the US dollar / rand exchange rate and global gas prices.
• The Karpowership bid price in April 2020 was about R1.50/kWh and NERSA said this would be up to R2.80/kWh from April 2022, but the independent consultant estimates the current price is close to R5/kWh, roughly two to three times the cost of alternative generation methods.
• The pricing methodology is such that the Karpowership IPPs could receive “windfall” profits.
• NERSA failed to consider the climate impact of 20-year generation licences for the Karpowership IPPs (which run on fossil fuels) when cleaner, cheaper and faster electricity supply options are available. “High capacity factor gas power as proposed by Karpowership, will mostly not displace CO2 emitting coal power as claimed by NERSA in the RfD [reasons for decision], but will rather displace the amount of future renewable energy that will be built. It will thus result in a higher emitting power sector than what would otherwise have been the case, thereby undermining the country’s efforts to decarbonise its economy,” says Fick.
• Contrary to NERSA’s assertion in its reasons for decision for granting the Karpowership IPPs’ generation licences, renewable energy solutions provide more employment opportunities on a per kWh basis than will be provided by the Karpowership projects.
On 28 April 2022, OUTA announced the legal action against NERSA over the Karpowerships licence decisions. A link to the media briefing on this is here.
The court papers
The notice of motion is here.
The founding affidavit by Adv Stefanie Fick is here.
The annexures are here: Annex FA1, Annex FA2-4, Annex 5, Annex 6, Annex 7-11, Annex 12-14, Annex 15-17, Annex 18.
On 28 April 2022, OUTA announced the legal action against NERSA over the Karpowerships licence decisions. A link to the media briefing on this is here.
The court papers
The notice of motion is here.
The founding affidavit by Adv Stefanie Fick is here.
The annexures are here: Annex FA1, Annex FA2-4, Annex 5, Annex 6, Annex 7-11, Annex 12-14, Annex 15-17, Annex 18.