- Consumers should brace for increased tariffs
- Deal is one-sided, not sustainable—analyst
Malawians are shouldering the cost of Escom’s emergency diesel energy deal without enjoying the benefits because the contribution of the newly-acquired generators to the national grid is insignificant, documents Nation Online has seen show.
Before acquiring the gensets, Malawians were paying K58.74 per kilowatt (kWh) of electricity, but they now have to pay K72.54 per kWh. This means a consumer who used to buy 103 electricity units worth K5 000, now only gets 92.7 units.
With the increased costs of production, Escom’s only option to realise a surplus and survive is to raise tariffs, a former Escom chief executive who asked for anonymity suggested to Nation Online in March.
Last year, Escom leased 84 gensets from Aggreko, which can only produce 78 megawatts (MW) for six hours each day, contributing a meagre 9.10 percent of power to the national grid.
Escom’s tariff impact analysis, dated November 17 2017, shows that at the end of two years, the power utility will have spent over K105.5 billion paying Aggreko Power Solutions Limited, yet Malawians will have used 90 percent of power generated through hydro.
The documents further show that Escom entered into the deal well aware that its total turnover, in two years, will be K145.7 billion.
Out of this amount, K91.5 billion is expected to come from hydro generation and K62 billion from the diesel generators.
However, the power utility provider has to spend K69.6 billion to buy the hydro-generated power from Egenco, which constitutes over 90 percent of the electricity the country uses then pay a whopping K105.5 billion to Aggreko for the generators’ power, which only constitutes 9.10 percent of the energy consumed in the country.
Escom’s documents show that the Aggreko higher tariff impact is a result of expenditure on diesel powered generators, capacity charges, hourly running charge, transport charges, mobilisation/installation/commissioning and decommissioning charges for the three sites, namely Chichiri, Kanengo and Chinyama.
Escom is expected to spend K42 billion ($57.7 million) on fuel for the generators for two years.
During the same period, Escom will pay Aggreko Power Solutions K63.6 billion (about $87. 2 million) to buy the power.
For the two years, the 78 megawatts generators are expected to produce 341.6 million kilowatts of energy at a generation cost of K189.8 ($0.26) per kilowatt (kWh). The generators will use 143 548.36 litres of fuel per day.
Loss making venture
According to the documents we have seen, the generators are expected to run for six hours and deliver 170.8 million units of energy in the two years, at a generation tariff of K34 per kWh, totalling K32.6 billion for the period.
On the other hand, Escom is expected to sell 153.6 million units of the diesel-generated energy—with a 16 percent system loss—to the consumers at a retail price of K72.56 per kWh to get the same K32.6 billion and an added K490.4 million as the administrative charge.
In contrast, during the same period Egenco is expected to produce 1.9 billion units of electricity at a generation tariff of K19.68 per kWh to be sold to Escom at K63.8 billion.
Escom is then expected to sell to the consumers about 1.6 billion units of hydro-generated energy—with a 17 percent system loss—at K72.56.
On a daily basis, according to the documents, Escom would pay K8 760 ($12) as a running charge per hour for the generators without fuel and 143 548.36 litres of diesel per day.
To foot the Aggreko bill, Malawi Energy Regulatory Authority (Mera) authorised Escom to increase electricity tariffs from K58.74 to K72.85 per kWh.
In an interview, also in March, former minister of Energy Grain Malunga said the money Escom is expected to pay Aggreko at the end of the two-year contract is equivalent to installing a new hydropower station that can generate 14 megawatts (MW) for 40 years.
He observed that the cost of energy from diesel generation is K191/kWh, instead of the current hydropower cost of K94/kWh.
In a separate interview, a former Escom chief executive officer said the Aggreko deal was clearly one-sided against Escom.
He observed that the contractual charges were in US dollars and the Malawi kwacha equivalents are bound to increase substantially following exchange rate fluctuations, and wondered how Escom hedged itself against that.
”Fuel price increases will be borne by Escom. Why did Escom opt to be responsible for fuel purchases? It could surely have been possible to have a contract for megawatts of electricity to be delivered to Escom by Aggreko as an IPP [Independent Power Producer].
“If it was a proper power purchase agreement, Aggreko should have been bearing some of the risks inherent in commercial agreements,” said the former Escom head.
He also observed that the most glaring contractual disadvantage to Escom in particular, and Malawians in general, were charges that have to be paid to Aggreko whether additional electricity is produced or not.
He further noted: “The total charges to be paid to Aggreko, whether the machines are running or not, clearly show that the deal is not sustainable. All those costs will have to be factored in the tariff adjustment.
“Another factor to consider is that the demand for electricity in the country is approximately 400 MW with an installed capacity of about 285MW. This means that even the 78MW from the diesel sets running for only six hours will not make any significant contribution to meet national demand for power.
“The tariff increase as a result of diesel generation is an unnecessary cost to customers who are still going to be suffering from power outages,” he said.
Experts have concluded that hydro-power generation was far much cheaper and cleaner than diesel generation which is damaging to the environment, saying a well managed hydro-generation plant can produce electricity at as much as 90 percent lower price to the end consumer than electricity produced by diesel generation.
“In fact, in a situation where the power utility is hydro-based, any supplementing of power supply from more expensive sources, beyond peak demands, has proven disastrous if the temptation to run the standby facility for more prolonged periods due to other generation challenges such as low water levels, is not resisted.
“This explains why Escom disposed of its 15MW gas-turbine a few years ago as the diesel fuel required to run it always resulted in untenable financial and operational consequences.
“That was a 15MW diesel standby facility. For Escom to readily go for a 78MW diesel facility and accept all the associated risks is beyond comprehension,” another expert in the energy sector told Nation Online.
He said by supplementing power shortages with power from more expensive sources and the consequent tariff upward adjustment as Escom has done, consumers should brace for more of such increases which eventually could lead to a more than proportionate decline in the demand for electricity. This would further lead to lower revenues than expected.
“That increases in the price of electricity will always lead to increased revenues is a fallacy that has been proven over and over. The billions that have to be expended on the Aggreko contract could be sufficient to invest in a reasonably sized solar farm which is another cheap source of power,” he said.
Nocma spokesperson Telephorous Chigwenembe told Nation Online that as of March 29 they had supplied 6.5 million litres of diesel to Escom.
On its part, Escom refused to disclose how much money it has spent on diesel for the generators, saying it was part of the Fuel Power Purchase Agreement (PPA) which was confidential.
Escom spokesperson George Mituka, in an e-mail response to our questionnaire, said Escom cannot be disclosing to the public how much it paid to any power generator.
“In the unbundled power market, any power purchase agreement [PPA] that Escom, as the single buyer, signs with any power generator is a confidential contract hence, its contents cannot be disclosed to the public, especially in terms of tariffs,” he said.
Further efforts to seek clarification from Escom management on the Aggreko deal proved futile as Mituka said he could not get any response from seniors.
Mera, on its part, making an observation on the Escom and Aggreko Power Purchase Agreement (PPA) wondered why Escom, being a single buyer, should bear the responsibility for equipment transportation, saying the risk should rather be borne by the supplier.
“Escom’s obligations should be limited to the payment only and not the logistics,” read notes for the general observation.
Mera also observed that the capacity charges were payable in dollars saying: “This is contrary to the arrangement in Mera’s standard PPA where it is stated that the quotation shall be in dollars but payment is to be made in Malawi kwacha.”
Mera chief executive officer Collins Magalasi, in an interview on May 4, confirmed that Escom came up with a tariff impact analysis used to base their authorisation for the price increase.
He also said Mera made some observation on the contracts including Escom’s involvement in the purchase of fuel and payment to Aggreko in United States dollars—which was against the country’s foreign exchange policy—but said Escom justified both after getting necessary approvals from government authorities.
Magalasi said with the use of diesel run generators, Escom wanted to increase tariff by 74 percent, later negotiated to 56 percent. However, Mera put its foot down and approved 24.67 percent based on the understanding that Aggreko will be generating 78 megawatts.
“But when they were rolling out they were generating 55 percent so we asked them to implement only 16.6 percent. Once Chinyama will be on the grid, electricity tariff will go up again,” he said.
Magalasi said Escom was in a catch-24 situation to either have persistent blackouts or have a 10 percent additional power, albeit, expensive.
He said, as of March, the combined generation of Egenco and Aggreko was 270 megawatts with Aggreko providing 35 megawatts.
“Egenco has the capacity to produce 269.40 megawatts but they are only producing less because the country is trying to save water. As of Wednesday [May 16] hydro electricity was only producing 201 megawatts. During the same period Aggreko produced 15 megawatts at Chichiri and 20 megawatts at Kanengo instead of 55 megawats,” he said.