Eskom’s Pilot National Cogeneration Project

1. 60th AMEU Convention Eskom’s Pilot National Cogeneration Project Rob Higgo, Project Development Department Stuart van Zyl, Industry Association Resource Centre 16 October 2007

2. Contents • Background • Strategic issues • The need for a “pilot project” • Objectives & Principles of the pilot project • Eskom’s “Pilot Project” • What is Eskom Offering • Consideration of Connection & Billing Issues • Network considerations

3. What is Co-generation? • Co-generation: a source of electrical power that is a co-product, by-product, waste product or residual product of an underlying industrial process. • Type I: projects utilizing process energy which would otherwise be underutilized or wasted (e.g. waste heat recovery). • Type II: Primary fuel based generation projects which produce other usable energy in addition to electricity (e.g. Combined Heat and Power projects). • Type III: Renewable fuel based projects where the renewable fuel source is a co-product of an industrial process (e.g. use of bagasse and/or forestry waste from the sugar and paper industries).

4. The Eskom challenge • During June 2006, Eskom’s Exco challenged the organisation to develop new cogeneration opportunities in South Africa • A target of 900MW1 was established, to be achieved within a 5 year window, ending March 2011 • In so doing, Eskom would: • Support NERSA’s initiative to established a cogeneration framework (guidelines) that will promote new cogeneration • Pursue and actively procure cogeneration opportunities that make good business sense • An Eskom cogeneration workgroup was established internally to support the initiative • Eskom has worked jointly with the EIUG workgroup, NERSA and others in industry to meet its objectives 1) The target is not definitive, and actual cogeneration developed will be dependent on market response

5. Strategic Considerations • Cogeneration has potential to deliver capacity “quickly” • Cogeneration may provide electricity at lower cost than conventional generation (not all Cogeneration is cheaper) • Cogeneration potentially reduces investment in networks and supports distributed generation • Transmission cost savings • Cogeneration may improve industrial efficiency and can be environmentally friendly e.g. Combined Heat and Power (CHP) • Deferred investment at (possible) lower cost • Overall efficiency gains • Environmental benefits • Improved reliability and quality of supply • Employment / BEE opportunities Eskom’s strategic considerations closely mirror those of the EIUG and Industry

6. The need for an Eskom “pilot” project • NERSA’s guidelines, regulations and implementation programme may take some time to conclude • Window of opportunity exists between now and approximately 2012 • Eskom’s first new base load power plants due to come on line during 2012 to 2013 • The initial “pilot” will allow both Eskom and NERSA an opportunity to gauge the cogeneration market in SA • Quantity and size of the market offering • Cogeneration mix, location, profile • Pricing of cogeneration options being proposed • Timing of potential cogeneration projects • Results from the “pilot” project will feed into the current NERSA guidelines and thinking • Lessons learned will be carried forward into the long term model for SA

7. Objectives & Key principles • Develop the necessary tender documentation to attract new cogeneration • Obtain NERSA support and approval for the process • Develop a standard contract for cogeneration developers which is bankable (PPA) • Have a transparent evaluation process to evaluate tender submissions • Implement the process in a timely fashion • Develop a ceiling price which will be approved by NERSA beyond which contracts will not be offered

8. Objectives & Key principles • Transparency • Well defined and clearly understood process • Known implementation parameters • Equitable treatment across projects • Determination of qualifying projects • Simplicity • Procedural simplicity for projects to achieve regulatory approval • Minimisation of transaction negotiations • Minimisation of transaction costs

9. What is Eskom offering? • An opportunity to attract and contract new cogeneration into the market • Requirements: • new build or re-commissioned plant of nett capacity >1MW. • Must be co-generation not renewable generation that requires renewable energy grants (i.e. must be cost effective as a stand alone co-generator) • “Cheapest bids” from technically and commercially qualified bids win contract provided that they do not exceed the ceiling price set by Eskom’s avoided cost model • there are modifiers for siteing and timing (first on line) advantages • Maximum 15 year contracts are offered • A standard contract (PPA) was developed for the Cogeneration projects which include inter alia • Payment profiles aligned with energy needs: support TOU / peaking periods; Winter vs. Summer etc.

10. Progress to date • Pilot project is essentially a tender process.

11. Progress to date • Summary of EOI’s received: Co-generator Types Waste Energy Renewable Energy Generation with 2ndary Process Energy

12. Progress to date • Summary of EOI’s received: Generator net output

13. Contractual vs Physical Flow* Eskom Generation Physical flow Contractual flow Eskom Wholesaler Eskom Tx Network ESAa(Meter 1’ + 2’) Retailer (Eskom Dx / Munic / RED) Dx Network (Eskom Dx / Munic / RED) PPA (Meter 2) ESAb(Meter 1 + 2) Meter 1 Meter 2 Industrial Load Cogeneration * Within embedded generation networks

14. Contractual vs Physical Flow* Physical flow Eskom Generation Contractual flow Eskom Wholesaler purchases Eskom energy generated at existing Eskom generation tariff Eskom Wholesaler Eskom Tx Network ESAa(Meter 1’ + 2’) Eskom Wholesaler “purchases” gross energy generated at Meter 2 at cogen PPA tariff Retailer (Eskom Dx / Munic / RED) Dx Network (Eskom Dx / Munic / RED) PPA (Meter 2) ESAb(Meter 1 + 2) Meter 1 Meter 2 Industrial Load Cogeneration * Within embedded generation networks

15. Contractual vs Physical Flow* Eskom Generation Physical flow Contractual flow Eskom Wholesaler Eskom Tx Network Eskom Wholesaler bills for energy summating Meters 1 and 2 at standard power sales tariff within identified and ring fenced area ESAa(Meter 1’ + 2’) Retailer (Eskom Dx / Munic / RED) Dx Network (Eskom Dx / Munic / RED) PPA (Meter 2) ESAb(Meter 1 + 2) Meter 1 Meter 2 Industrial Load Cogeneration * Within embedded generation networks

16. Contractual vs Physical Flow* Eskom Generation Physical flow Contractual flow Eskom Wholesaler Eskom Tx Network Retailer similarly bills for energy summating Meters 1 and 2 at standard power sales tariff within identified and ring fenced area ESAa(Meter 1’ + 2’) Retailer (Eskom Dx / Munic / RED) Dx Network (Eskom Dx / Munic / RED) PPA (Meter 2) ESAb(Meter 1 + 2) Meter 1 Meter 2 Industrial Load Cogeneration * Within embedded generation networks

17. Connection & Billing Arrangements • The “export” of energy may be physical or only a commercial arrangement (own use but paid for by Eskom) • The commercial arrangement (PPA) will not impact the distributor’s revenue (no netting off of usage) • PPA will be with co-generator and ring-fenced contractually from the usage by the end user (load) • Standard tariff paid by end user (load) for energy purchased by consumer is that metered by the distributor plus energy generated by co-generator and sold to Eskom via the PPA • No impact on sales and revenue • Distributor to take into account technical factors arising from generator connection: • The associated costs payable by the generator • Physical export will increase technical complexity and impact connection costs

18. Technical Considerations • Penetration levels of Embedded Generation are low: Experienced SA engineers are few. • Consultant(s) to be appointed to assist in evaluating technical impact and provide designs where required • Includes skills transfer on network studies • Embedded Generator connection policy is handled in the Grid and Distribution codes • Distribution Code approved by NERSA October 2007 • Principle of open access to Embedded Generators • Each Distributor to develop interconnection standards • Detailed technical guidelines lacking • Eskom interconnection standard • Planning guideline

19. Technical factors to be considered • Fault level contribution • Detection of Loss-of-Grid • Difficult to detect in some instances • Guidelines given on when dedicated protection is required • Network earthing and earth fault protection • MV networks are resistively earthed at the source. Generator neutral to be left unearthed • Protection and protection settings • Related to generator operating philosophy • Isolation of system for safe working • Metering • Installation near generator terminals

20. Conclusion • Eskom’s Pilot National Co-generation project seeks to connect 900MW of new-build generation by 2011. • Effectively a tender process • Expression of interest netted 124 submissions, 5000MW. • Power Purchase Agreements (PPAs) and Technical Standards presently under development. • Distribution Code is a second driver for interconnection standards • Earthing, loss-of-grid protection some of the key technical aspects

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