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Keith Bowen

Economist

Eskom

June 2, 2021
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Ep 25: Keith Bowen - Economist, Eskom
00:00 / 01:04

Adam Zuckerman
Everybody, welcome to the next episode of the Energy Impact Podcast. We are joined today with Keith Bowen, Wholesaler Manager at Eskom with an economics background. He is a wheeling expert. Keith, it's so good to have you today.

Keith Bowen
Right. Thanks very much, Adam. Good to be here.

Adam Zuckerman
Let's hop in. Tell us a little bit about your background. Have you always been in the energy environment, in the energy vertical? When did economics and energy come together for you?

Keith Bowen
Yeah, well, I started off in Eskom as a programmer. So, when I started in '93 - so it's quite a while ago - in the IT area and then I got interested in economics. My background was a computer science and economics kind of degree and as I developed more on the economic side, I went to the post grad economics training. Now, pretty much, I still do a bit of programming, but it's more about the economics and planning for the power sector.

Adam Zuckerman
Alright. So, Eskom is located in South Africa. We've got an international listening base, so for those of you who don't have too much familiarity with the country, here are a few quick stats. It is 471,359 square miles, which means it's a big country. It's halfway between the size of Texas and Alaska, if you need a framework. There are 11 official languages in it. It borders Namibia, Botswana, Zimbabwe, Mozambique, Eswatini and Lesotho. Keith, tell us a little bit about Eskom, because not everybody's familiar.

Keith Bowen
Okay, so Eskom is pretty much the monopoly service provider for electricity. It's been going since the 1920s and sort of, over time, particularly before '94, was amalgamated into this large entity that was responsible for the bulk generation, bulk transmission and distribution of electricity. We have municipalities, large scale, local government, who do most of the reticulation into the lower level of customers, but still the bulk transmission is done by the generator, by Eskom, and we, at the moment, are just over 90%, or thereabouts, of the generation output in South Africa.

Adam Zuckerman
So, 90% of the generation. Who is accounting for the other 10%? Are there IPPs, or independent power producers. What's the framework look like?

Keith Bowen
Historically, we've also had quite a few of the industrial customers would be able to sell supply. So, we've got Sasol, Sappi, large industry that could do their own generation, so that was the bulk of it historically. But since 2013, we've been running a program for, particularly renewable, IPPs and we've seen that grow to now we're just, on the system, about 5,000 megawatts, just over 5,000 megawatts of renewable IPPs that are now connected to the South African grid.

Adam Zuckerman
Is the system still bundled? If Eskom was originally doing generation transmission and distribution, does it still play a role in all three segments or are things shifting a bit?

Keith Bowen
It still, at the moment, plays a role in all three, but there was a roadmap that the government put out about a year and a half ago, which now sort of starts the framework of creating subsidiaries, separate subsidiaries for generation division, transmission division and distribution division. That kind of ideally moves in that framework towards sort of competition and generation and having an independent or more independent transmission company which handles the buying and the transport for the generation.

Adam Zuckerman
So, if Eskom's generating 90% of the country's electricity right now, what are we talking about in terms of numbers?

Keith Bowen
In terms of peak demand, peak demand about 10 years ago was about 36,000 just short of 36,000 megawatt. At the moment, that capacity, the rated capacity for generation, Eskom Generations is 45,000 to 46,000 megawatts, but a lot of that isn't always available and we have some performance issues in our generation fleet, so we struggle to meet high peaks, but it's still, our rated capacity is 45,000. We've now, as I said, we've added 5,000 megawatts of renewable IPP and another 1,000 still to come, is in the process of being connected. Government's about to roll out a program for another 2,000 megawatts of renewable IPP, so the renewable space is growing quite significantly. But up til now, that's really sort of the size that we kind of have the capacity to produce for 50,000 megawatts, but our peak is about 36,000.

Adam Zuckerman
That brings us to the main topic of today: wheeling. So, you have an IPP that decides to start operations. They win a tender, they get approvals, they go through all the regulatory processes that they need, and they're able to start delivering electricity to the grid. What happens?

Keith Bowen
Okay, the big thing, the most tricky thing that has really sort of been, in our experience, in the last four or five years is getting the license. Up til recently, the regulator did not give a license unless there was a ministerial determination, which kind of takes us back to kind of an intricacy of our Electricity Regulation Act, which says that the minister may determine certain capacity, would either be built by Eskom or go for private generation to be purchased. And generally, the regulator then says, For anyone who wants to come in with a license to do their own, it's kind of, Well, where do you fit into this regime? Only now more recently have we seen the ministers saying, Well, we're opening up to allow for people get to get a license for smaller generation. So, it really has been a problem of just getting a license to be able to generate, but also, historically, there was the issue that trying to compete with Eskom's historic tariff for generation was exceedingly difficult. I know, about 10 years ago, when the wheeling process started, we had some of the largest coal miners wanting to actually build their own power stations and wheel to themselves. When we went and looked at the economics of it, they couldn't really compete with Eskom's generation costs, and so, of course, there was always this kind of circular thing about trying to get some sort of rebate on the wheeling charge that could make them viable. And it really was historically a problem that Eskom's historic cost of generation was quite low and that's obviously started eroding the argument quite a lot lately, and now we're seeing that new generation capacity compete with new Eskom plant.

Adam Zuckerman
Why was Eskom's ability to produce and generate electricity so low? Was it because of the type of facilities that you have?

Keith Bowen
Yeah, so it was really, historically, it's also because we had large scale coal-fired generation and the coal was historically pretty cheap. But also, the big thing is, most of those coal plants were written off in terms of the depreciation a long time ago. The historic value on those costs associated with those plants is almost negligible, because it's been depreciated. So, even though it still has economic value, the accounting says it's cheap. We don't actually have to recover huge amounts of costs for that stuff. But that's where the problem is building new, obviously have much higher cost of new capital, relative to the stuff that's actually 14 years old and still is pretty cheap. That was one of the problems with coal-fired competitors. But now we're seeing that with photovoltaic, and new photovoltaic full lifecycle cost has actually started to get quite competitive with Eskom's average cost. That's where we've seen the swing that just competing with costs was a problem. Now you can, but there's a licensing issue. That's where the wheeling is starting to take off and why. Just to kind of give a background as to why wheeling has not been a big thing up til now, mainly because of cost and then secondary licensing, but we're starting to see those pressures building that we're seeing more and more customers willing to wheel, going and investing in plants, and then wanting to wheel across our network to other suppliers, to consumers, and that's really kind of been quite a shift in focus.

Adam Zuckerman
For listeners that may be unfamiliar with what a wheeling framework is, how would you describe wheeling?

Keith Bowen
It's really the ability for a willing buyer and a willing seller to be able to trade, and then the transmission company or the distribution company, just being the transport mechanism to get it from A to B so that you've got the, you're kind of bringing the two together with the transport being paid for under whatever mechanism for wheeling, and then you can trade and you have that freedom to trade with one another. For us, a big thing of what we did about 2008, 2009 was introduce a framework - and we call it the wheeling framework - but it's effectively saying that it's use of system. So, any generator, wherever they connect to the network, they pay for the use of the network, and they can sell to anybody else on that network. This is not about where do we think the electrons will flow from a contract perspective, but where are the electrons flowing physically. We've got a whole model that goes and looks, say if a generator connects and when they plug in, where do the electrons flow physically and try and then charge them for that, as a user system. And certainly, for a consumer, they're also, wherever they connect to the network and they kind of receive the power, we do a model based on where that flow is coming from to them. But it's not about who they contract with, so it gives them the freedom there. Once we've got the use of system in place, and they're paying for those charges, they then have freedom to be able to buy and sell to or from anyone on the network. It's almost like there's the historic idea of the power pool, that once you're in the pool, you can buy and sell with anybody in the pool, because the transport mechanism is dealt with.

Adam Zuckerman
What are the conditions that are required to start wheeling and enter into the board? Does Eskom say there are six things that you need to accomplish or have in place before that's allowed?

Keith Bowen
Yeah, there are quite a few. One of them is having the license, so going to the regulator and applying for a license and getting the license. Second, we have what we call a connection and user system agreement. The connection and user system agreement establishes all the requirements we have as a transport company, as for transmission or for distribution, to deal with protecting the network and what kind of equipment and stuff. But most of it is just about you adhere to a grid code. That's one thing I didn't talk about, we have a grid code. We have the transmission code and a distribution code which deal with how generators use the transmission or distribution network and what are required from a generator's perspective from a technical basis. So, they will have to sign that. And then thirdly, we need to know who the off-taker is, so they have to nominate who the off-taker is, so the consumer on the other side, so we can do the reconciliation on our side. Because, that's the thing is, we're not only the transport company, we also are the retail company. So, we need to make sure that when a customer, wherever they are taking their energy from, we reconcile their accounts that they're not paying for the same energy twice. Let's say you've got a wind farm in the northern cape part of South Africa supplying to a customer in KwaZulu-Natal on the other side of the country, we would always get the metering information from that generator and then make sure we subtract that from our bill so they're not paying for the same energy twice. But what that would mean is also on the recon side, the customer still pays for all the use of system components, because we measuring their consumption, we're just subtracting off the energy bill. So, they're not paying for the energy twice.

Adam Zuckerman
As a result, is there an increase in the cost of electricity in total that they're paying for? Or is it that the individuals and entities that are generating electricity are generating at a lower cost, which then, when the use of system fees are added on, it's about even? How does that work?

Keith Bowen
Again, because the network, the use of system is all about the network cost and that is independent to where you're getting your energy from. The only offset is on energy. The network costs are as before, nothing's changed on the network costs. It's just now you, again, are just making sure that the right party is paying for the right component. And it's something that maybe is not that obvious to people outside South Africa is that we have enshrined in the grid code is that generators and loads pay for use of system. So, as a distribution company, you're going to say, What generators do I have connected? I'm charging them for their connection, that means I will charge less to the loads. For transmission, it's actually written that you have to do 50/50. 50% of transmission costs are covered from generators and 50% from loads. So, it means that when you've now allocated your cost for the generators, there's a geographical location signal built into it. If you're in high dense generation kind of component, and we have to transport a lot of energy to the load, you'll pay more, but if you're in a low generation kind of area, and you're closer to the loads, you pay less.

Keith Bowen
So, fees are varied and based on population density, on the composition of the grid. Is there any geographic distance component, too, or not?

Keith Bowen
Yeah, it's all about how you use the network. That's the whole idea of the modeling using the distributed shift factor method going and looking at what part of the network asset you would be using when you, as a generator, you're putting energy onto the grid. If you're close to the load, you'd pay less. If you're in a place that's far from the load, and we have to transport it over a longer distance, you would pay more. So, there's definitely a very strong geographic signal in the transmission pricing. It's less so on the distribution side, and the distribution network uses some of the transmission inputs into determining it, but there are different factors that are at play in the distribution network. But the idea is, at least from transmission, you're covering the costs of transport, from both generators and loads, which is kind of unusual. Doesn't always work like that in other parts of the world, but it does mean that generators, when they pay use of system, often they would have to incorporate into their energy costs, whoever they're selling to, some recovery for that use of system.

Adam Zuckerman
Are there any other requirements that we haven't spoken about for generators to get a wheeling system up and running?

Keith Bowen
No, it's pretty much those. I'm trying to think of others, but it's basically the connection agreement, the license, and then an off-taker. We have a fair amount of freedom. Because, historically, we haven't had a lot of participants in the wheeling. I mean, at the moment, I think we have about 15 wheeling transactions. We've never, it's kind of been pretty static from one month to the next. We know who the generators are, we know who the customers are. But we're starting to find, as people are asking questions now about a future framework, what about how quickly can I change from one customer to the next? And from our perspective, it's also that as long as on the customer side, they've also have to sign to use the system agreement, and a reconciliation agreement that long as they've signed, and we know who they are, you can always switch across customers. So, we're trying to design it to be a little bit more flexible, so that when a generator's running, come to the end of the - again, we do it all in calendar month -come to the end of the calendar month, they can tell us, Okay, of my output, 40% must go to that customer, 20% of that one, and 30 percent to that one, so we kind of can allocate it correctly.

Adam Zuckerman
So, hypothetically speaking, let's say that we start the Keith IPP 50 megawatts, and I'm a high energy off-taker and you'd like to wheel energy from your power generation facility to me. We have all the approvals, so we're able to go and connect to the grid. How long does that process take to set up with you once we've entered into that PPA?

Keith Bowen
It probably can take a couple of months, because, I know from just the legal issues of doing the contracting can take a couple of months. But once all that signed, it's actually almost immediate, because we- the big thing is what we would put in as part of the course is that we have remote interrogation for the meters. Obviously, the meters that would be in place would obviously be the IPPs meter, and the Eskom meter, because Eskom needs to make sure it's coming onto the grid, so we would interrogate those meters. Historically, most of the time, we've used for wheeling agreements, the Eskom meter as the basis. So, the Eskom meter says, This is what came onto the grid. As long as we can pick that up, we can then send the information through to the reconciliation, so the customer gets that subtracted from their bill on that side. So, it's pretty easy, once all the agreements are in place, the mechanism flows relatively smoothly.

Adam Zuckerman
Do any companies have agreements in place where they're wheeling to multiple entities, whether it be a municipality or an off-taker, at the same way of time, or they're 15, independent wheeling entities right now?

Keith Bowen
At the moment, we have- so, there's one company that is almost like a trader. They've gone out and they've purchased, they've done power purchase agreements with a number of generators, and then they've got one big customer, so that we then take all the generation from those four or five generators, sum it up, and then that total amount is what gets deducted in terms of the reconciliation from that customer. We have another generator that is actually split. Some of their consumption goes to one customer and some to the other, but it's a pretty static 75/25 and it just kind of flows that way. We recently got a customer who has kind of moved things around a little bit, and, one of the big things that we don't have is that, if say a generator produces 10 gigawatt hours, but their customer only takes eight, what happens to the extra two? That's some of those rules that we're starting to look at. We have the facility to allow for what they call banking, where the extra two goes into sort of like an account, which we just manage on our side, and as the customer then takes more later, they can do that from that banking. Alternatively, the generator can then nominate another customer, as long as a customer is on the list, that they've got an agreement, they can say, Well, okay, so they're only taking eight, so I'm shifting, so 80% is going to them and 20% to them. But the problem is, a lot of the time, we don't know that until the end of the month, when you kind of see what the customer did take. So, there's a little bit of kind of flexibility in the process to try and manage it at the moment.

Adam Zuckerman
It sounds like it's a complicated reconciliation process. Can you wheel to yourself. So, back to our example of we have the Keith IPP, if you have, not only the IPP, but you also have a in mind, can you send the power to yourself?

Keith Bowen
Yes, so we've got a couple of- some of the instances we have are where it's a company that has a huge generator connected to their one mill and that produces more than what the mill requires. So, it puts onto the network and it takes off at another mill in another part of the country. It's again, it's a reconciliation from our side, so we measure the output and we deduct it from the consumption on the other side. It's completely doable. Historically, the licensing arrangement, when we talked about what the our regulator allowed, it was really for own use, and was a kind of very limited definition of own use, it had to be within the company. A lot of those were kind of easier, but now that has been freed up so that allows for from one customer to the next.

Adam Zuckerman
Are there any size restrictions? So, if you had an 18 kilowatt solar voltaic system on the top of your your residential roof, and you think, You know what, I'm really only using three kilowatt hours - very, very miniscule - can you sell back to the grid? Do you need a wheeling agreement for that?

Keith Bowen
Yeah, not at this stage. The wheeling's only allowed for a plant that's - I'm trying to remember if it's a medium or high voltage - but at least high voltage, you have to be. So, it's not a low kilovolt or anything like that, so you can't be a household putting onto the network. It needs to be relatively large. That's just because of the reconciliation issue, very much the administration to try and manage that.

Adam Zuckerman
Is this somebody on your team literally doing calculations on spreadsheets, or are these all automated right now?

Keith Bowen
At least the metering is all automated, so the metering comes through, but there's a certain amount of dumping the data onto a spreadsheet, sending it to the generator to confirm that they're comfortable with those values. Because we want to make sure that our meters have picked this up, is that what your meter says? So that we're not misaligning the values. So, there's a little bit of admin there still at this stage, and then sending it through to the recon department to offset. We're kind of working, maybe in the next six months, of trying to get it into a little bit more of a streamlined system, because we're expecting this to grow at quite a rate, and in which case, we need to manage that.

Adam Zuckerman
Well, let's talk about that growth rate. You said that there are 15 entities that are wheeling right now, when was wheeling again, turned on, so to speak? And then where do you see that?

Keith Bowen
Yeah, it started 2008, 2009. We kind of did the policy work in 2008. and I think our first wheeling agreement was really 2009. Now, it's taken a while to kind of get going and we've had a few that have been there for a long time and it's just now sort of accelerated. Then what's happened is that we've got more and more applications, because there's also a potential change in the law, which everyone's anticipating, to allow for generators below 10 megawatt to be registered, as opposed to licensed. It's a proposed change that came from the Department of Mineral Resource and Energy - they're the policy department and government - and they've said, up til now, you had to have a license if you're above a megawatt, and the licensing regime being a little bit more onerous than just being registered. Now, they're proposing lifting their threshold to 10, so it means that you're going to find a lot of pretty large kind of PV systems and stuff who'd be willing to sell to customers across the network and we need to accommodate that. So, we are expecting it, it's just a matter of preparing ourselves for that kind of process.

Adam Zuckerman
Okay, interesting. So, we're at 15 now. How many applications are currently pending? Are you able to say?

Keith Bowen
No, unfortunately, don't know that, what's kind of pending. Because most of our thing is we are waiting for the licenses to be approved and I don't know how many licenses have being applied for.

Adam Zuckerman
Okay, that makes sense. Now, when you started coming up with the policies for the country's wheeling regulatory framework, what countries did you look to? What type of research was conducted? What would you have done differently?

Keith Bowen
Yeah, so our big thing was, when we looked at this in 2008, it was really, the awareness was developing that we couldn't afford to build the next capacity. We've committed ourselves pretty heavily to two large coal-fired power stations and it was then looking beyond that and saying, Well, we just don't have the financial capability to build more, let's allow for customers to do their own. For some of it, we kind of we did - just to give some history - we've done a lot of work, even before then, in 2003, about the possibility of actually having a competitive electricity model in South Africa. And there, we had consultants from Norway, from sort of the Nord Pool kind of environment, from the US, from New Zealand, also giving input into developing a framework that was then put in place for the multimarket model. It was never rolled out by government, but at least a lot of that foundation was there when we then started coming up with a wheeling policy. There's been quite a bit of work, because the grid code was now in place and at least from transmission point of view, and I think the distribution code had just been implemented, kind of gave us the basis to look at use of system being different from wheeling. So, we're not charging wheeling charges, you're paying a use of system, which gives you freedom to contract with anybody else. That was quite a big thing for us, was to kind of step away from this idea that you have to pay a wheeling charge, which is based on your contract path. This was now, you have access to the network, you pay use of system, and you have freedom. There was quite a big shift for us and it kind of freed up a lot of the consideration as to how we did wheeling.

Adam Zuckerman
What are some of the questions that you frequently get about wheeling that we haven't chatted about today?

Keith Bowen
Well, one, it's definitely a thing that we are starting to think about, how do we deal with this backup capability? When we, as I said, we've got 15 generators in total, I think at maximum could come to less than 50 megawatts at any particular point in time of wheeling. But if you're now starting to get larger generators, and more of them, at some point is going to get to 400, 500 megawatts, maybe more and then it becomes an issue for the system operator. One, do I know what's going to happen in terms of this wheeling? It's about declaring what you're about to put onto the grid or take off from the grid, and then also being able to monitor that that actually happened. So, we start talking about balancing, one being a thing, having a balancing mechanism of balancing market to make sure we're always balancing what's supposed to come on and what does come on, and accounting for that. And then the second is around the backup. So that, if that generation didn't happen, is there something else to back it up if it's not there? We started looking at sort of a capacity charge or a capacity market to, if it's not for at least reserved capacity ancillary services, but also then just potentially any kind of generating capacity that is available for call up by the system operator, if that doesn't happen. So, it is I think, a step forward now for the wheeling environment. As it gets bigger, we do you need to seriously look at those two aspects more than anything else.

Adam Zuckerman
How do you think that could potentially play out when it comes to some of the renewables like solar or wind? They're obviously intermittent sources that you have a bit of difficulty controlling the output, and certainly the wind turns on, the windmills may spin? How do you see that playing out? Will Eskom be able to say to some of the companies, Listen, you need to hold back, you can't produce? Or is baseload a better option for you and an operator to plan?

Keith Bowen
I think the idea is that we have to be realized realistic that, in South Africa, the future is about renewables. There's absolutely- the concept of baseload doesn't really, it's kind of like becoming very 19th century. We're kind of moving past that now. So, it really is about being able to predict the renewable output. And we've seen because, I mean, even as part of the IPP program that we have in place at the moment, the wind farms, the solar farms, have to tell us what it is that they're going to produce for every hour of the following day. The forecasting capability is there and it's actually working pretty well. So, as long as those wind farms and those PV farms are taking on the responsibility of that, they will make sure that their forecasting gets better, because they're the ones who have to deal with the consequences. The second thing is that balancing shouldn't be seen as some grotesque penalty that you're basically making it impossible for a wind farm to be able to generate. It's just really to account. So, if there's a backup, like they say batteries would be a backup, that then there is the backup, the batteries are there, you've paid a capacity charge, they're always there and then you can use the batteries and the cost is not something to bankrupt. At the moment, our backup, unfortunately, is diesel generators. The cost would bankrupt anyone in a second if we were to have to continue that as our backup. But in the future, you would expect that we now, as long as we have the right incentives in place, you would build the batteries or even if it is gas, or whatever is our backup, that it's kind of, the incentive isn't there for generators to be more accurate, but it's not like a massive penalty that would bankrupt them in seconds. You just want to try and keep it within balance.

Adam Zuckerman
All right, well, Keith. What else should we talk about? I know that we have a variety of things, but we want to focus on wheeling. What's the one question that you wish that you wish we discussed?

Keith Bowen
I think the one that we get quite a lot is, because people are seeing it now, and also, one thing we didn't talk about, is the potential for municipalities to be able to buy for themselves. Also, there was something that was announced last year, and it's kind of still going through the process, is that some, particularly the large - we've got these metros, the city of Johannesburg, the city of Cape Town, Ekurhuleni, eThekwini - that they would be able to go out and procure for themselves. Now, the question that they're asking, and it's something that we get quite often is, how quickly can I get the data? How do they know what the generator is doing, because obviously, from their side, they need to check the bill. So, this is becoming the real thing about flows of data, the real time flow of data. Most of the stuff we deal with is metering kind of after the fact, which, as long as they're within 24 hours, I think everyone's comfortable, because they can at least see what the status is. But it is going to be a thing in the future that we've got to have proper metering and real time flow of data so that customers can also manage themselves. If I'm the city of Cape Town, and as we said, we were talking about balancing a generator, there should also be a balancing responsibility for the customer as well, that they start becoming what determined Europe as balanced, responsible parties, that they now look at it and they say, Well, I'm going to consume 10,000 megawatts, so they need to be able to see it. Oh, I'm not consuming 10,000, how many they're more or less? How do I get myself back into balance? And all of that is around having good data to be able to manage from their side. I think that is the thing that people are asking the question and that's what we're trying to then focus as well, is provision of data.

Adam Zuckerman
It sounds like that's a great opportunity, for IoT, Internet of Things, of smart metering. Is there an initiative to simplify that so, you can almost require, if you are in the process of signing up for a new billing mechanism between two parties, you have to have a smart meter to automate that. Is that in the process or is that just something that's a bit theoretical at the time?

Keith Bowen
It's starting to happen. And again, you can define what a smart meter is, sort of, we kind of have a, let's call it a relatively smart meter. It's not going to make intelligent decisions, but at least it's something that's remotely interrogator boards, bidirectional, it can give you information that you can dial it up in real time, but it's not necessarily going to be making decisions on behalf of the customer or the generator, but at least it's smarter that it gives us access to data. So, there are minimum requirements in terms of the code, but it hasn't yet got to the point where we can really say we're talking about a proper smart grid as such/

Adam Zuckerman
Does South Africa have a merit order of least cost of generation? So, if you're an off-taker and solar is, for whatever reason, a few cents cheaper than gas-fired plants or coal-fired plants, that you would default to that if it's available, or is it this is what it is, and there's no variability?

Keith Bowen
I think in terms of our merit order, if you think rationally, it would not take into account power purchase agreements and rates that you pay, that from a marginal cost perspective, your renewables are your cheapest, because there is no movement in terms of- so they don't fit in a price. It's kind of like really, they've contracted for a price in terms of the PPA, but in terms of our actual scheduling, on a daily basis, you will always take wind, PV, any kind of renewable first. Then we have our nuclear power station, which is also like marginal costs, pretty much zero. And then we start with the coal plant, and we've got some cheap, very cheap coal power stations to quite expensive coal power stations. Then we started looking at - we don't have gas, natural gas, not a huge amount of natural gas in South Africa - so, beyond that, then we've got pumped storage facilities, which already are large battery kind of recharge at night and discharge during the evening. We've got some hydro, which is also relatively limited. But again, the hydro would also be in that renewable category with very low marginal costs for the hydro. But obviously if you want to climb, optimize, it's only in your peak periods or that way because there's so little of it available. And then we move into, we start with interruptible load. We have some interruptible load contracts with some of our customers. Then demand response, kind of in the mix between those two. And then it's the diesel generators, which really jumps to the highest merit order that we have. So, at this stage, from an operating the network point of view, the renewables are the cheapest. They kind of must run, they're always in the mix. We do sometimes curtail renewables, because what happens, typically in winter, we have such a high peak. South Africa is very much a winter peaking system, it's all about hot space heating and stuff. So, if we find that, in winter, the demand will hit our peak, but the peak will be seven, eight o'clock at night and then not five, six hours later, you're hitting the trough in the middle of the night and our coal-fired generators can't cope with it. So, they go in at sort of minimum generation points through the night. We will often find through winter, we put too much on the bars. We've got all these coal-fired generators who can't get off, and then the wind starts blowing. So, what we will do, is it kind of goes through this merit order, again, a lot depends on the extent of the problem, but we've got some hydro that we can back off, then we would back off the wind, if we can't take a coal-fired power station off the system.

Adam Zuckerman
How does that technically work? So, you reach out to a wind farm and say, Listen, we don't have room, there's too much coming on. What do they do?

Keith Bowen
We send them a signal to say that we are now issuing a sort of a curtailment signal and they would then respond to that. 90 plus percent of them do respond, because again, the alternative is for us to just completely kick them off the grid, so they will respond by tapping their output and reducing the amount. Very rarely is it reduce everything, it's kind of, we will reduce by 50% or 40%, whatever, and so that we can then manage the flow. There is, in the power pitch, because most of those, or all of those at this stage, are committed to a power purchase agreement with us as the buyer, so part of Eskom is the buyers office, they get paid as if they generated, so they're fully- Yeah, pretty much. So, they get fully compensated for their curtailment when it happens. There are often some interesting intricacies because then, after the fact, they will go and do their meter and they say, Well, this is what we actually did. This is what we could have done based on what we call the facility power curve and that difference is what we have to pay. We might have interesting backwards and forwards about the power curve and how much of the wind was blowing at the time, but usually that gets resolved pretty quickly and then we just pay them.

Adam Zuckerman
What are some of the other challenges that you run into related to the wheeling system?

Keith Bowen
I think a big thing is knowing the communication with the generators. It's kind of one of the things why we want to try and improve that communication, so that, when we pick up the metering and we send it to them, if there's a query, they say, No, no, that's not what my meter says there's something wrong with your metering, we need to resolve that pretty quickly. And it becomes a bit of an administrative burden on us. I mean, we're not really geared up for that, in a big way. It's still something that we kind of have to work on. So, that is an issue, just making sure that the metering ties up. Then it's verifying who the off-taker is. As I said, over 90% it's kind of static, we don't have a problem, but we anticipate there could be an issue if you have said, We've got the meter and we've got an off-taker, but then the generators rather, No, no, no actually quickly, I need to send 30% to that customer and those are things that we kind of need to work on.

Adam Zuckerman
Alright, so, overall positive, negative outlook for wheeling in South Africa?

Adam Zuckerman
If we took that one step further, are you able to generate within the Eskom network and wheel to an entity, an off-taker in another country, one of the neighboring nations?

Keith Bowen
I think a very positive outlook. It's kind of the nature. One of the things we didn't talk about, even though we said we were talking about balancing and doing extra capacity, is that we were sort of also looking at the idea of opening up the market a little bit more, where you can have a day-ahead market intraday exchange. Then you're balancing, to try and then move away from the thing of having to do physical nominations all the time, that theoretically a generator can sell them to the pool into the market and then they have a contract for difference out of it, which has got nothing to do with actual flow of energy and try and kind of following sort of the Norwegian model where you kind of have a market and the market clears. But then you have contracts for differences happening outside the market. That would be a big step forward, to stop having this really kind of hectic, administrative burden, but you actually make it easier for willing buyers and willing sellers to be able to interact with one another.

Keith Bowen
No, at this stage it is an issue for getting across the border. We require that there's also a licensing regime for export, so that the export component has to still kind of be separately licensed. Then there are issues we don't have proper rules in place to deal with the cross border interconnectors. That's still something that has been discussed, and there is a Southern African Power Pool, and the Southern African Power Pool has rules for its members, but at the moment, the members are pretty much all the big utilities, and they have rules and ways of managing the flows of energy between the utilities. The moment you have a third party trying to come across through that interconnector, the rules are not in place to manage that properly. That's something that we do definitely have to design, how to manage the capacity of the interconnector to the allocation rules, and then the balancing at the interconnector is a thing. So, those are still some of the issues that need to be resolved. The one point when you kind of talked about it, it kind of also triggers it at the moment, we also have an issue with wheeling from a generator inside of municipality. All of our wheeling is, in law, municipalities have to allow for wheeling and there's a third party exit framework that they have to apply to or adhere to. But, at the moment, all wheeling is between Eskom connected customers and Eskom connected generators. There are some customers who are inside a municipality and the municipality has approved that the flow can come off their bill, and we can reconcile with them. At the moment, we don't have any case where there's a generator inside of municipality. One of our problems and again, I kind of airing dirty laundry, is that some of the municipalities are not- we have issues with municipalities who don't pay when they take energy off the grid from Eskom. If you've now got a generator inside the municipality, and it's trying to sell out, we would have to recon the energy that that has produced inside the municipality, sell it back to the municipality, and then deduct it off our bill on the other side, because effectively that energy has been consumed by the municipality before it even comes onto our network. There's a whole recon kind of chapter that we've never really gone into, because it's too messy.

Adam Zuckerman
Interesting. So, if that were to happen, do you think that the IPP that was interested in that scenario would even know that that would be a challenge before they started operations? Or is that something they would walk into?

Keith Bowen
Yeah, they know, because it's actually happened to a couple of the existing wheeling generators. We would not sign, we would not let them wheel, because they were inside a municipality, that was also kind of a problem municipality, so then it was that they actually had to build a network. They invested in the money to build the network to connect to our network and then they could wheel, but if they were inside the municipality, it became a real problem for reconciliation.

Adam Zuckerman
Oh, that's fascinating. So, in a strange twist of events, it's almost as if there are certain locations in the country that are better candidates for wheeling than others.

Keith Bowen
There are. Very definitely. But it is a framework that we have to deal with, because, if we're going to expect more and more of this, you have to have a way of dealing with municipalities so that you can recon with those metros and make sure that you still get your money at the end of it.

Adam Zuckerman
Ideally, you would want to find a close proximity to a high population dense area or high offtake area that is not within a municipality. Then enter into the agreement with Eskom and the PPA with the off-taker to set everything up in motion after you have the license from NERSA.

Keith Bowen
Yeah, well there are still a lot of things for the generators. Yeah, totally.

Adam Zuckerman
Well, it sounds like the outlook for wheeling in South Africa is very positive. It sounds like you have a long list of things that you can be working on, which is fantastic. Keith, economics, economists, power managing at Eskom, we cannot appreciate you more for taking the time today. Thank you for this masterclass. I don't think we can end it on a better note. We appreciate your time.

Keith Bowen
Thank you, Adam.

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