Restructuring the South African Power Industry South Africa Is at a Critical Turning Point

POWER IN SOUTH AFRICA Restructuring the South African Power Industry South Africa is at a critical turning point. An uncertain environment for private investment, escalating electricity prices, and a lack of available power threaten South Africa’s position as an attractive investment destination for many of the country’s most important industries. Power has been placed at the forefront of the government’s agenda, but South Africa needs a col- laborative effort to meet the country’s energy demands and diversify its generation portfolio in order to drive economic growth. Sharon Saylor, Begum Agilonu, and Sidonie Pichard, Global Business Reports

ntil the late 1980s, South Africa en- Since 2008, Eskom has been under sig- joyed a surplus of some of the cheap- nificant pressure to boost generation capac- Thava Govender, Divisional Executive, Generation, Eskom Uest electricity in the world. However, ity and provide a stable supply of power. in 2008, after almost no investment in the “In 2008–2009, as a result of the recession, country’s power infrastructure for 20 years, we saw a dip in demand, which allowed us and facing escalating electricity demand, to push forward maintenance on existing South Africa found itself in the middle of plants,” explained Thava Govender, division- an electricity crisis. (See “Whistling in the al executive of generation for Eskom. “But in Dark: Inside South Africa’s Power Crisis” in 2010–2011, the demand is reaching the lev- the November 2008 issue of POWER.) els that we saw before the recession, and now The result was persistent power cuts the system is running very tightly. Our total through programmed load-shedding in pe- capacity is 42,000 MW, and we have a 15% riods where short supply threatened the in- reserve margin and an operating reserve mar- tegrity of the national grid system, thereby gin between 5% and 10%, which is not suf- impacting the country’s mainstay industries. ficient. If you take out gas generation, there The “National Response to South Africa’s are days when we have no operating margin, Electricity Shortage” policy document, re- depending what is on maintenance, what is leased in January 2008, issued a plan to open on forced [outage], and the demand—that is the national power infrastructure to private how tight the system runs. investment, aimed at achieving supply-de- “Since 2008 we have added 1,000 MW of 2018 and will constitute the last stage of mand stability by 2012. Thus far, progress on diesel-fired gas turbines to the overall capac- Eskom’s committed capacity expansion pro- the national plan has lagged behind initial ex- ity, and they are exceptionally expensive to gram. There has been no approval of or com- pectations, and access to electricity remains a run. For instance, the burning costs for the mitment to any new generation after that. major inhibiting factor for economic growth. most expensive coal fleet are 180 rand (R) Eskom must raise capital to pursue its The electricity market is dominated by Es- to R220 [$22.50 to $27.50] per MWh, com- committed capacity expansion program and kom, South Africa’s vertically integrated public pared to R2,000 per MWh for gas turbines. improve and refurbish its current operations. utility. Established in 1923, Eskom is responsi- “Our biggest challenge at the moment is Capital expenditure is expected to grow to ble for 95% of the country’s generation. Today, to meet our demand and continue our main- more than a trillion rand by 2026 and to be Eskom is the largest power producer in Africa, tenance schedule. Our fleet is middle-aged, funded from operating cash flows, sharehold- providing more than 40% of the electricity used which means they need extensive mainte- er loans, and debt financing (raised locally across the continent, and the 10th-largest utility nance (shutting down for 60 to 120 days), and internationally), as well as the proposed in the world by generation capacity. Eskom’s and ideally, we would like 10% planned R20 billion government equity recapitaliza- fleet includes 27 operational power stations (in- maintenance of our fleet per year, but we are tion over the next three years. Eskom also cluding one nuclear plant) with a net maximum not in a position to do this, and last year we successfully secured a $3.75 billion loan capacity of 41,194 MW (as of Mar. 31, 2011). succeeded in only 8%. We have a plan to shut from the World Bank, the biggest loan that The utility owns and operates the country’s na- down some of our units over the next five the bank has ever given to a South African tional transmission system and provides elec- years to make them compliant with environ- company. Clauses attached to the loan for tricity to about 45% of all end users in South mental requirements. We also need to reduce Eskom’s new-build program insist on new Africa. The other 55% is resold by redistributors forced outages, but with a middle-aged fleet, generation from cleaner energy sources. (including municipalities). South Africa’s elec- this is a challenge. On average we have 3,600 tricity network consists of 395,419 kilometers MW of unplanned maintenance.” A 20-Year Plan (km, 245,702 miles) of power lines and cables The completion of the Kusile coal-fired Long-term underinvestment in the South Af- (all voltages). power station is expected late 2017/early rican electricity industry for new generation

December 2011 | POWER www.powermag.com 65 POWER IN SOUTH AFRICA capacity, further compounded by an aging kind, as pointed out by Thiru Pillay, direc- carbon tax. “The proposed Carbon Tax is still fleet and the need for upgrades in the trans- tor at Deloitte, there are some elements that be finalised. . . . but could potentially make mission and distribution sector, have resulted require clarification: “The first gap is a coun- South Africa uncompetitive and be detrimen- in significant project bottlenecks. However, try-level holistic strategy, similar to the 1998 tal to the economy,” believes Michael Mees- the government’s Integrated Resource Plan white paper, that talks to the full value chain, er, Investec Capital Markets head of project 2010 (IRP 2010) and subsequent Policy-Ad- including liquid fuel, primary energy, elec- and infrastructure finance. “The carbon tax justed IRP set out a 20-year electricity plan tricity, energy source mix, as well as the way is nice to have, but there are more pressing (2010–2030) for South Africa to increase that we deal with the market structure all the things to be done at this time.” capacity and change the nation’s energy mix way down to how we deal with distribution. South Africa’s aspiration is to achieve a and competitive landscape within the context Secondly, we need stronger leadership about peak in national greenhouse gas emissions be- of global warming and globalization. As re- how we manage the role of private capital in tween 2020 and 2025, followed by a plateau flected in the IRP 2010, the power supply cri- the sector. We have made a lot of progress in emissions and, ultimately, a decline in abso- sis accelerated the need to diversify Eskom’s over the past two years, but we have been lute emissions, conditional upon international energy mix and move toward more diverse slower than we should be in the sense that financial support, technology transfer, and a energy sources such as nuclear power, natural we need the power on the ground. This is not global agreement on a climate change regime. gas, and various forms of renewable energy. a private versus state intervention, but what To upgrade and expand the country’s The IRP 2010 also outlines the efficient is the best solution for the country to ensure electricity infrastructure, in 2005, Eskom de- use of existing resources, such as coal, while the continuous investment of capital and in- cided to embark on an aggressive new-build ensuring continued investment in clean coal frastructure that the country needs.” program. An estimated R343 billion will be technology, intensifying energy efficiency spent to fund a new generation of power sta- measures, and aligning the country’s power Not So Cheap tions, including two of the largest coal-fired strategy with objectives set in the long-term South Africa led the world in low electricity power plants ever built, Medupi (Figure 1) mitigation scenarios and climate change prices for many years, providing investors and Kusile, as well as Ingula pumped stor- commitments made at Copenhagen. with a very low energy tariff that was only age. Eskom expects to build 17.1 GW of new These goals, of course, add to the complex- in 2011 surpassed by Canada as the cheap- generation capacity by March 2018, followed ity of South Africa’s power supply mix. With est electricity in the world. At $0.0855/kWh, by a new nuclear plant to come online in 85% of its generation capacity from coal, South African electricity is now 7% more ex- 2023. But major funding decisions, technol- South Africa is one of the top global pollut- pensive than Canadian electricity on average, ogy issues, and localization concerns need ers and the14th highest emitter of greenhouse having risen by 26% in 2011, largely driven to be resolved very soon to ensure achieving gases. At the moment, coal is supplemented by the need for financing extra capacity. this goal. Ultimately, Eskom plans to double by a few small hydro plants (1.5%), pumped Thembani Bukula, full-time regulator for its total generating capacity to 80,000 MW storage (3.5%), gas turbines (5.8%), one nu- the National Energy Regulator of South Af- over the next two decades. In addition to all clear plant (4.4%) in the Western Cape, and rica (NERSA), says that the impact on the existing and planned power plants (including a few very small wind turbines. In light of country’s industries was taken into account 10 GW committed coal), the plan includes South Africa’s commitment to reduce emis- and that this increase won’t make South Af- new generation from the following sources: sions, Eskom has said it will reduce coal’s rica uncompetitive: “From the perspective of 9.6 GW of nuclear, 6.3 GW of coal, 17.8 GW current share of the country’s primary energy the Energy Intensive User Group, the good of renewables, and 8.9 GW of other genera- mix to 70% by 2025 by obtaining 42% of new years have passed and the years that we are tion sources. generating capacity from renewable energy, going to have are years where the price of the To fund the capital costs and rising oper- including concentrating solar power (CSP) electricity is going to be very much related to ating costs, Eskom applied to NERSA for a and photovoltaic (PV) power and wind, plus the cost of producing that electricity. . . . It is 35% increase in electricity tariffs. The regu- an additional 23% from nuclear. a known view that in the past it was not really lator awarded Eskom a second multi-year Although this document is the first of its related. When you look at the whole infra- price determination plan (MYPD2) of elec- structure, we had a generation fleet that was tricity price increases of approximately 25% 1. Much-needed baseload power. depleted and depreciated over a very short year on year from 2010 to 2013, which were Medupi Power Station is shown here under space of time. It was producing at levels that designed to cover expansion and operation construction. The six-unit supercritical plant are not related to the cost, and when you look costs and provide a reasonable rate of return. (Eskom’s first) will have a total installed ca- at the increases that are projected, these are pacity of 4,788 MW. The units are expected increases that will bring the price of electric- A Slow Road from Monopoly to to be commissioned between 2012 and 2015. ity to the mid-point of the price of electricity Competitive Market Medupi means “rain that soaks parched lands, in the different countries worldwide. We will Partly due to the lack of a cost-reflective giving economic relief.” Courtesy: Eskom still be competitive, but the gap is not going electricity tariff, as well as a well-established to be the 40% that it was. It will probably be regulatory and legislative framework, South 20%, but we have other advantages, such as Africa’s attempts at creating an enabling envi- the reliability and security of our resources.” ronment for private participation were largely To align with the country’s goals to reduce unsuccessful. Instead, South Africa has seen carbon emissions, the South African govern- the failure of various privatization attempts. ment has introduced a 2¢/kWh environmental However, despite these setbacks, the IRP levy, which rose to 2.5¢/kWh, to be applied 2010 clearly formulates the need for private to electricity generated from nonrenewable investment and calls for 30% of new genera- energy sources. In addition, the South Afri- tion to be procured from independent power can National Treasury issued a discussion pa- producers (IPPs). The Department of Energy per in December 2010 to look at the issue of a (DOE), NERSA, and the treasury have issued

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68032 Mag 279x206.indd 1 2011/09/30 10:11 AM POWER IN SOUTH AFRICA a clearer framework for the upcoming first Africa is at a critical point for power develop- However, the environment has been less round of renewable energy procurement in an ment and economic growth. than attractive for private players. “The his- attempt to change the record for successful Despite efforts to increase participation torical price point for electricity has not been private participation. Together with a higher by private players, Eskom has and will most viable for private investment, and that is the electricity tariff, private investors may finally likely continue to hold its monopoly for de- number one constraint,” explains Deloitte’s see the change they have been waiting for. cades to come. Govender explains Eskom’s Pillay. “The return on assets for Eskom needs As Omar Vajeth, head of power and energy position on the role of private players in the to be at least 8%, but is currently 4%. With a at Absa Capital, notes: “In South Africa, we market this way: “There is the perception that further three rounds of 25% increases, it will are trying to move from a very large monop- Eskom is trying to block IPPs, but this is cer- reach 8%. This means that the state is will- oly utility with an abundance of cheap power tainly not the case. We battle every day for ing to invest in the electricity sector with a to a mindset of a competitive market. For 15 extra megawatts. Every megawatt available return on assets of an expectation of 8%. The years we have been battling to get the concept in South Africa has been signed up. For every public and business have difficulty in accept- of competition in the country, and largely we megawatt you add on or bring back into the ing a truly cost-reflective tariff for electric- have not been successful at implementing the system, you negate the use of a gas turbine ity. If you continue hiking the tariff, there is processes to bring us to those stages. Now, that runs at R2,000 per MWh, so we will sign a macroeconomic inflation issue. We have an there is a need for private power to assist in on whatever we can.” inflation-targeting strategy, and if you sig- meeting South Africa’s capacity demand. . . . Sheila Galloway, is group CEO of Utho nificantly increase the price of electricity, we and this need will drive investment.” Capital (PTY) Ltd., which was previously will have challenges to maintain the 3% to Despite an extremely tightly balanced en- focused on the telecommunication sector 6% inflation range, and that is the tradeoff. ergy system, demand-side management fo- across Africa and has now seen high activ- Are we able to manage the more than dou- cused on encouraging consumers to conserve ity in the power industry. The company has bling of pricing of services?” power during peak periods, a voluntary en- evolved into a leading public private partner- Currently, the buying and selling of power ergy conservation scheme targeting industry ship firm within Africa. Galloway notes that, lies within one single entity: Eskom. Estab- to reduce electricity consumption by 10%, “Across the continent and in South Africa, lishing an Independent Systems and Market improved plant performance, and the return utilities and government departments are Operator (ISMO) is a step toward promoting to service of mothballed power stations have cash-strapped, so inevitably there is the need private investment in the industry through helped the country avoid emergency load- to introduce private players to facilitate de- a more open and transparent process. The shedding since 2008, even in the wake of the velopment in the power industry in the fastest Cabinet has agreed to bring up an ISMO bill 2010 FIFA World Cup. Nevertheless, South timeframe possible.” for discussion in parliament. As Ernst Venter

68 www.powermag.com POWER | December 2011 Improved schooling and recreational facilities

3 531 km Transmission Powerlines Built

Camden Power Station Recomissioned

17 920 MVA New Substation Capacity

New 100MW Wind Farm

5 381 Megawatts Added

10 664 local Jobs Created

7 632 People Trained

25 437 Jobs Created

78% Local Content

142227ESKC 178x254.indd 1 2011/10/31 5:03 PM POWER IN SOUTH AFRICA

around renewable energy, and because of the 2. Kelvin Power Station. This 600-MW coal-fired plant near Johannesburg was commis- current energy shortage and the 180 billion sioned in 1957 and is owned by a consortium of private owners, one of the few independent rand funding gap, Eskom is not in a position to power producers in South Africa. Courtesy: African Infrastructure Investment Managers continue building power plants to supply the country’s power. Even with the completion of Medupi, Kusile, and the Ingula pumped storage scheme, we will still have an energy crisis, which creates the economic prerogative and justification for IPPs.” An initial glance would show little to no movement toward private participation, but in light of recent decisions around the renewable energy procurement progress, it appears that although progress was slow, South Af- from Exxaro’s clean energy division says, “If tem operator, you have increased the level rica is finally moving forward. we want to draw investors into the energy of risk in the system; then you need another “South Africa has had an abortive start into landscape in South Africa, then we need to board, and a different management team, and the IPP market,” says Brigette Baillie, head of put an enabling environment in place. For in- more handshakes between the different parts project development and finance at Webber stance, we need to establish an ISMO; you of the value chain. . . . Over a period of time, Wentzel, one of the leading law firms involved cannot have the same person as the jury and you are dealing with 30% of IPP generation in amendment of the legislative frameworks the judicator. There are many working mod- with 70% still from one player. Invariably, in early 2011 for private participation in new els internationally, for example, in Korea and 80% of that 30%, by virtue of the funding generation. “We were involved in advising the UK there are IPPs operating successfully agreements, will be long-term bilateral con- AES in the cancelled IPP peaker bid, and we with a state-owned generation company.” tracts, and the other 20% may be traded in have also been involved in advising Kelvin There is currently a debate about separation the market. It would therefore appear that we Power Station [Figure 2], which is one of the of the system operator from Eskom. Though are reengineering an industry to secure the few IPPs in the country. . . . But we will have there is merit in separating the single buyer dispatch of 20% of 30%.” a whole host of generators in South Africa on and the market operator, an ISMO means that Alastair Campbell, director of CIB mining, a long-term basis apart from Eskom. Whilst you no longer operate a vertically integrated energy, and infrastructure finance for Standard some [power purchase agreements] were utility in Eskom and, thus, the system opera- Bank, points out that market conditions are signed pursuant to the [Medium Term Power tor carries the risk of the power system. perhaps more favorable now than they have Purchase Programme], there were very few, As Pillay notes, “If you take out the sys- ever been: “There is considerable anticipation and they are short-term, and the cogeneration projects were very small. We are now talking about a substantial amount of megawatts coming from the private sector. We are also seeing captive bilateral power deals being developed. NET# Anglo, for instance, has a tender at the mo- WORK BBDO 8012299 BBDO WORK ment looking for discard coal to be used to generate power to be supplied back to Anglo, and we expect Exxaro and Xstrata to begin something similar soon.” She adds, “DOE is a very new creation, it is only 18 months old . . . it really is the embry- onic stage of the South African power sector.” Andrew Johnstone is managing director for African Infrastructure Investment Manag- ers, a joint venture between Macquarie Bank and Old Mutual to provide institutional capital and equity. He commented on the influence of risk appetite in attracting foreign and private players into South Africa as compared with the booming demand for them elsewhere on the African continent: “It depends on the location of the investor, and their perspective of return opportunity and the associated risk. The South African jurisdiction provides a far lower risk profile than other African jurisdictions, so there is likely to be a greater inclination to favor South Africa for those who are new to Africa. South Africa offers www.webberwentzel.com There’s their thinking. Then there’s our thinking. greater certainty than other jurisdictions, a lower risk profile, but also lower returns than other African options. The period over which

70 www.powermag.com POWER | December 2011 POWER IN SOUTH AFRICA the investor is comfortable to invest will also Coal This project boasts a number of firsts. Medu- influence his choice of jurisdiction. In 2006, Eskom received a license to build pi will be Eskom’s first supercritical plant, en- “Over the last three years or so, the interest the first new coal-fired power station in more abling operation at higher temperatures and in Africa has grown enormously on the back than 20 years. It is called Medupi, meaning pressures than previous generation boilers, with of the ‘emerging markets’ theme, greater “rain that soaks parched lands, giving eco- greater efficiency. It will also be the biggest dry- availability of high-quality information such nomic relief.” The station comprises six units, cooled power station in the world. Additionally, as publications highlighting the attractions of to be commissioned at nine-month intervals, the boiler and turbine contracts were the largest Africa as an investment destination, which is totaling 4,788 MW of installed capacity. The Eskom had ever signed. Hitachi Power Africa improving both data and also credibility. The first unit is scheduled to be commissioned will supply the boiler plant and auxiliary equip- large investor markets such as the U.S. and late 2012 and the last by 2015. The plant has ment to both 6 x 800-MW coal-fired plants, and Europe are starting to look at Africa, and that a planned operational life of 50 years. Alstom S&E has the turbine contract. is creating momentum.” Most other African countries are operating in a dollar market, which Absa Capital’s Va- jeth says is more attractive for some foreign investors than South Africa’s rand market: “If investors can be comfortable with taking more risks in those countries, then there are opportunities. . . . South Africa can continue to play a large role in providing the stability and gov- ernance framework for African countries to grow. In the future, we may need to go to foreign markets, but in South Africa for now we are operating in a rand offtake market, and we have the capacity to fund our own projects.” This is a time of much activity for South African financial institutions, and Nedbank Capital cautions developers to be selective in their choice of financial institutions. “If the institution is overexposed, the development of the entire project can be at risk. This is why we are selective in the mandates that we sign, and we carefully gauge our capacity to structure, close, and participate in those projects,” says Sakkie Leimecke, lead prin- ciple for energy at Nedbank Capital. “There is room in the market for a combination of international and local banks. In time, as the renewable energy sector becomes more developed, new financial instruments will become available, and financial institutions such as pension funds will start to create appetite for involvement.”

Andrew Johnstone, Managing Director for African Infrastructure Investment Managers

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Kusile is the second most advanced coal- Contracts for the new-build program stip- after the completion of Medupi and Kusile, fired power plant project after Medupi, con- ulate levels of localization and job creation. the factories can be used to export to global sisting of six units, each rated at approximately With a 25% unemployment rate, South Af- markets. Together with our partners and sub- 800 MW for a total of roughly 4,800 MW. The rica’s industries remain focused on skill de- contractors, we employ 4,500 people.” first unit is planned for commercial operation velopment and employment opportunities. Localization varies by technology. “For in 2014. Other units will be commissioned at “Hitachi has spent more than R1 billion on coal-fired plants, the advantage is that over approximately eight-month intervals, with the the resuscitation of the boiler industry on lo- 60% is local content, as Hitachi has reestab- last unit expected to be in commercial opera- calization investment; this includes upgrading lished an entire boiler manufacturing indus- tion by 2018. It will be the first power station of facilities that were in existence and build- try which had completely disappeared. This in South Africa to be installed with flue gas ing new ones for boiler pressure part manu- has created a lot of jobs in the process. For desulfurization, state-of-the art technology in facturing,” explains Johannes Musel, CEO for nuclear there will be a much larger portion of line with current international practice. Hitachi Power Africa (Pty) Ltd. “Eventually, import content,” Musel notes. The Murray & Roberts Group is currently engaged as one of the most significant players in the construction of Medupi and Kusile stations, and through a joint venture they are responsible for Medupi’s civil work and have a contract with Hitachi to do the mechanical work for the boilers. “Availability of skills and maturity (or lack thereof) in our industrial market space are key challenges in South Africa,” comments Mile Sofijanic, senior executive director, Murray & Roberts Group. “South Africa needs some form of ‘South African industrial revolution’ to be ready to face the high level of technical skills, knowl- edge, processes, and structure required for the implementation of the nuclear program,” Sofi- janic continues. “In our opinion, new power plants need to be completed in a cost-effective manner in line with world norms for produc- tivity, quality, and safety. . . . and unlike many other countries, we have objectives that run in parallel to executing projects, including alle- viation of poverty, localization, and empowerment of previously disadvantaged peoples.” In addition to the lack of development within the industry, there has been a mass exodus of qualified engineers over the years, which makes attracting and retaining person- nel a huge obstacle. “Unique to South Africa is the lack of skilled artisans,” explains Ute Menikheim, head of energy Southern Afri- can operations for Siemens. “Now with the

Johannes Musel, CEO for Hitachi Power Africa

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Eskom’s Financial Position Paul O’Flaherty, Eskom’s finance director bonds. Where we sit today we are very responsible for the new-build program, comfortable that we can fund the entire discusses Eskom’s financial status and the R300 billion, so we are very confident we effects of new pricing and possible tax leg- can complete Kusile. islation on the economy. With a clear funding path to see you You have taken Eskom from a place of through to the completion of Kusile, tremendous funding uncertainty to se- what do you envision post-Kusile to ful- curing one of the largest loans from the fill the remaining 70% of new genera- World Bank. Can you outline some of the tion to be commissioned by Eskom? key objectives achieved since your ap- Post-Kusile is another ballgame. We are pointment in January 2010? busy working with the DPE to figure out, We looked at a number of funding so- where in the 40,000 MW required by 2030 lutions for Eskom, because at that stage does Eskom fit in? Government’s intent is the board of Eskom decided not to place that Eskom does 60% to 70% of that, and our plans are coming together. In order to any further contracts for Kusile because we the question remains how we fund it. get to that investment grade, we cannot get did not have a funding plan. We looked at For instance, if Eskom had to build the away with anything less than 15% to 18% 45 funding options for Eskom, including entire 9,600 MW of nuclear, funding would increases over the three years post-MYPD 2 selling off assets and selling off interests be an issue, but not the major issue. There [the second multi-year price determination in Kusile. Ultimately, we agreed with the are plenty of funds out there and plenty of plan], but that is excluding nuclear, and National Treasury and the DPE [Depart- opportunities for funding, so while it was more expensive solar and wind; therefore, ment of Public Enterprises] in September our number one constraint in the past, we it is going to be a very tough conversation 2010 that—as our cash flows were pushed do not see it as our number one constraint determining the right number. The regula- out because of Kusile and the crunch of anymore. We see execution and project tor says 25% for the next two years, and our funding, which around the next three management skills as the number one con- we are saying we can tone that down but years was not as severe as we thought— straint, and we are encouraged to hear the extend the price increase for a longer time. to extend the government guarantees from minister talk about private partnerships; What is that number? is what we are trying R174 billion to R350 billion and to allow we cannot do this on our own. to figure out. Eskom to tap various forms of funding with the aim not to do this solely on the guar- NERSA [the energy industry regulator] What will be the impact of a carbon tax antees, but to only use them when abso- agreed to a tariff increase of 25% for on Eskom and the economy, and how do lutely required. the next three consecutive years, al- you see this coming to fruition? We figured out that, to the end of though this was below the amount re- We are busy having these debates with Kusile (2017/18), taking into account op- quested by Eskom. What would be the the National Treasury. There are effectively erational cash flows, we needed R300 bil- optimal increase to enable a profitable/ two options. The first is a pass-through for lion, and today we have secured, signed, cost-reflective return for Eskom without Eskom, which means we will not bear any and sealed around 72% of that. At of the compromising the competitiveness of cost, the same as the environmental levy. end of June 2011 we have drawn down some of South Africa’s mainstay indus- The second is that Eskom bears the tax, R80 billion of it. tries such as mining? which means we make less profit, and if we Our sources are diverse, and we see ex- That is very difficult. From an Eskom do not get an increase in tariff we would port credits as a big opportunity, having company point of view, currently, on a be even more dependent on government already secured R32 billion from export stand-alone basis, we are not investment because we would struggle to get to the credits, R28 billion from the World Bank, grade; we are B at best. We get an invest- right credit ratings, and we would struggle R21 billion from the African Development ment grade rating because of the gov- to raise debt off our own balance sheet. Bank, R15 billion from the Development ernment uplift, being a sovereign-owned It is a two-edged sword. I think we need Bank of South Africa, and we also intend company; therefore, we depend highly on to look at a grandfathering approach, that tapping the local and international bond government support. all new emitters with carbon content pay markets for approximately R90 billion Ultimately, our view is that over time more. It is an historical inheritance for Es- from which last year we got R28 billion. Eskom needs to be a stand-alone invest- kom, and you should not penalize Eskom There are still unidentified sources of ment grade and wean itself off government because of its legacy. We are in discussions around R25 billion that we are looking at support. We think we can be there in four with the National Treasury on the issue. It across a variety of funds locally and in- years’ time, and the fact that we were able seems certain it will be introduced, and we ternationally. There is potential for more to raise international bonds off our own need to give our input as to how it should export credits and for future international balance sheets means that people can see be introduced.

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new-build program, the challenges were massive; you could not find welders, fitters, and drillers—the market was completely depleted. At Siemens, we decided to train our own artisans to be able to serve our needs and develop the industry.” Siemens has developed 600 skilled artisans, and about 80% have been placed in local industry. While President Jacob Zuma has set job creation as one of the government’s funda- mental priorities, Yokogawa South Africa’s managing director, Herman van den Berg, remarks that this has not affected the readi- ness within the South African marketplace to adopt leading-edge technologies and move further toward automation. “Obviously, there are technologies that cannot be applied immediately. Some process enhancement systems, asset automization systems, asset maintenance systems, or process optimiza- tion software are not necessarily applicable to South Africa because we are still strug- gling to get everybody employed. It’s better to give people jobs than to make a factory so efficient that there is no need for manual la- bor anymore. However, there are many areas HELLO were we can apply direct benefits to South Africa, such as transmitters.”

Pumped Storage and Peaker SOUTH Solutions On any electricity system operating as close to the margin as the South African system, fast-dispatching generation resources are a AFRICA, must, so the country is building pumped storage and peaking plants. Ingula Pumped Storage Scheme consists of REGARDLESS OF WHAT YOU DECIDE IN an upper and a lower dam, both of approximate- THE ENERGY DEBATE, SMART POWER ly 22 million cubic meters water capacity (777 million cubic feet). The plant is scheduled to GENERATION IS PART OF THE ANSWER. come into full operation in 2013 with a planned capacity of 1,352 MW. The dams are 4.6 km apart and are connected by underground water- ways that house 4 x 333-MW pump turbines. Water is released during peak energy consump- The transition to a sustainable energy infrastructure tion from the upper dam through the pump tur- requires Smart Power Generation. It is a highly efficient, bines to the lower dam to generate electricity. In addition to the Ingula project, GDF flexible and economic solution for optimizing power Suez was awarded the contract for two die- systems. Adding efficient, distributed, gas-fired peaking sel-fueled peaker projects (750 MW in Kwa- zulu-Natal and 330 MW in Eastern Cape), capacity is a smart and fast move towards a sustainable, estimated at R5 billion. affordable and reliable power system. Smart Power Clive Ferreira, director of Fieldstone Af- Generation is the missing piece of the puzzle. Read more rica (Pty) Ltd. was involved in the first failed attempt at private participation in the peaker at www.smartpowergeneration.com projects. He says, “The first peaker project was a failure. When they should have done it, they didn’t do it, and now they are doing it and they probably should not. If capital is a scarce commodity, we should rather build cheaper baseload stations that can be run. The fact that they are considering those expensive peakers is an indication that we have failed in

74 www.powermag.com POWER | December 2011 POWER IN SOUTH AFRICA POWER IN SOUTH AFRICA proper planning. If you are in trouble today, Arnaud Gouet, head of South African op- ronmental factor is that the Wärtsilä solution it is because you didn’t plan five years ago, erations for Wärtsilä, comments: “Our inten- operates with a closed-loop cooling system, and the only way to do it is to build expensive tion is to grow in South Africa. We recently thus consuming absolutely no water, which is peakers that run at 10 times higher cost.” signed the 180-MW Sasol gas project [Fig- critical to a country with water scarcity. ure 3], which is an extremely important proj- Sasol is only one of many energy-inten- Gas ect for us. Gas is becoming more and more sive users that are looking into generation for South Africa’s deposits of natural gas are important. . . . it is flexible, affordable, and their own use. Many of the mining houses small. The second round of adjustments, clean energy. There are many projects for de- are following suit, including Anglo Ameri- which led to The Policy-Adjusted IRP, in- veloping gas in South Africa as well as in the can and Xstrata’s Lesedi project, both in an cluded securing a minimum 711 MW from region. There are gas opportunities in Mo- attempt to secure energy supply and reduce combined cycle gas turbines (CCGT) be- zambique, and there might be other opportu- their carbon footprint. tween 2019 and 2021 to improve security nities for [liquefied natural gas] and other gas Exxaro has also seen the opportunity: “As of supply by providing back-up for planned fields offshore on the west coast. This project the second-largest coal producer in South renewable generation as well as additional will be a landmark project.” Africa and the largest coal supplier to Eskom CCGTs later in the IRP period. The project south of Johannesburg, at an . . . we have identified a massive opportunity But Sasol, the biggest local company listed altitude of 1,700 meters (5,577 feet), is not for value creation by entering into the energy on the Johannesburg Stock Exchange (JSE), without its challenges. Wärtsilä, a leading industry, and we are currently establishing an responsible for producing synthetic fuels from global supplier of flexible power plants and energy company,” says Ernst Venter, execu- low-grade coal and a small amount from natu- services to the global power generation mar- tive general manager, business growth, for ral gas, awarded a contract to Wärtsilä in early ket, will use 18 20V34SG generating sets run- Exxaro. He cited three reasons for the move: 2011 to provide the complete turnkey solution ning on natural gas to generate 180 MW of the need for reliable baseload power supply for its gas-fueled combustion engine plant. baseload capacity for the company’s own use; to support growth, price hedging, and a de- This is part of a new initiative developed under excess production will be wheeled through the sire to move toward being the first carbon- Sasol New Energy Holding, the company re- national grid. In addition to enabling a reduc- neutral company in South Africa. sponsible for low-carbon electricity in Sasol. tion in Sasol’s operating costs, the new power This will be a first for South Africa and the plant will notably reduce the company’s car- Nuclear largest of its kind on the continent. bon footprint in the area. Another key envi- Currently South Africa’s only nuclear plant, Koeberg in the Western Cape comprises two 900-MW units (Figure 4). It was constructed 3. Industrial gas generation. Wärtsilä is supplying Sasol with a 180-MW gas engine power and commissioned in the 1980s, and the coun- plant for baseload power under a turnkey contract for its Sasolburg operations. Courtesy: Wärtsilä try has not added any additional nuclear capacity since then, despite many ongoing plans. The Koeberg plant was built by Framatome (now Areva) using pressurized water reactors and is owned and operated by Eskom. Several years ago, the Board of Directors of Eskom approved a plan to expand the company’s nuclear fleet to more than 25% of the country’s generation by adding 20 GW of new nuclear capacity. The first unit was to be commissioned in 2016. The environmental assessment process for this “Nuclear-1” project considered several sites in the Western Cape. Technology options considered were Areva’s EPR and Westing- house’s AP1000. Eskom later confirmed that, due to lack of finance, it would not continue with the nuclear program at that time. 4. Solo station. The 1,800-MW Koeberg Nuclear Power Station near Cape Town is the only Now South Africa’s energy policy plans to nuclear plant in South Africa. Courtesy: Eskom increase nuclear from 5% to 15% of overall capacity, which means 23% of new generation will come from nuclear. “Based on the natural resources available in South Africa, wind and solar renewable energy should be exploited meaningfully, but this needs to be balanced by the need for energy security,” said managing director of Westinghouse, Bultie Nel. “Without substantial hydro being available, nuclear is the only bulk option for non-carbon-emitting power.” The IRP2 allows for the first 1,600 MW of new nuclear capacity to be introduced in 2023, followed by five more 1,600-MW units between 2024 and 2029. Energy Minister

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Elizabeth Dipuo Peters has indicated that the to the South African market with high hopes of “This is the fourth attempt at involving the government will need to make decisions on becoming profitable thanks to what appeared to private sector, and we hope it will be success- nuclear power by the end of 2011 if the 2023 be one of the most attractive tariffs for renew- ful,” said Fieldstone’s Ferreira. “There still deadline for the first nuclear unit is to be met. able energy in the world. However, much to remains a lot of optimism from South Afri- Localization and skill development are key the dismay of private investors, the renewable can companies, but from international inves- considerations for South Africa, but they will energy feed-in tariff (REFIT) has since been tors there is a difference of opinion. A lot of require time to put in place. revisited, and a tender process with a competi- them have spent significant time and money Dr. Yves Guenon, head of Areva South Af- tive bid on price has prevailed. The objective to prepare their bids, and there is an air of rica, says, “South Africa needs to develop its is to build a sustainable renewable industry skepticism as a result of the uncertainties sur- localization strategy well ahead of its nuclear that contributes 42%, or 17,800 MW, of South rounding [the renewables framework].” build program. It is important that the country is Africa’s new generation capacity by 2030. The ready to procure and develop the right skills at projects for onshore wind (1,850 MW), solar Elizabeth Dipuo Peters, Energy Minister the tight time, particularly engineering and tech- photovoltaic (1,450 MW), concentrating solar nical skills to support the nuclear industry. The power (200 MW), biomass (12.5 MW), biogas French industry is ready to support the South Af- (12.5 MW), landfill gas (25 MW), small hydro rican industry by teaming with them to obtain a (75 MW), and other small projects of less than quick and sustainable know-how and technology 5 MW (100 MW) are expected to involve for- transfer, like we did in China 20 years ago.” eign and domestic investment of between $10 Technology partners in the running include billion and $12 billion. Generation III designs by Areva (ERP), West- The renewable energy target is based on inghouse (AP1000), and Generation II designs achieving a large portion of the 10,000 GWh from Korea and China. However, in light of from solar water heating, as it is the most cost- the Fukushima disaster in Japan, approval of effective and easiest renewable option to im- a Generation III design by South Africa’s Na- plement. The current tender for the first 3,725 tional Nuclear Regulator is most likely. MW of renewable IPP projects will be released later in 2011 (after this report was com- Renewables pleted) at the 17th Conference of the Parties to It was no surprise that in 2009, national and in- the United Nations Framework Convention on ternational renewable energy companies rushed Climate Change, hosted in Durban.

Westinghouse technology is the basis for approximately one-half of the world’s nuclear power plants. From our offices in Cape Supporting South Africa’s Town and Centurion, Westinghouse supports Eskom’s Koeberg Nuclear Industry facilities, the local nuclear industry, and projects in China, UK, Now and into the Future Germany and the USA. Today, the Westinghouse AP1000 nuclear power plant is the most Westinghouse AP1000 Sanmen Unit 1, under construction and on schedule in China. advanced design available in the global marketplace. More than 200 times safer than the U.S. Nuclear Regulatory Commission requirements, it is designed to automatically shut down and cool itself for 72 hours before any human intervention is necessary.

Westinghouse is at the forefront of advanced nuclear power options to meet the world’s diverse energy needs — technology that will also help provide South Africa with safe, clean and reliable electricity.

Check us out at www.westinghousenuclear.com WESTINGHOUSE ELECTRIC COMPANY LLC

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WEST_SouthAfrican_power_mag_Ad_F2.indd 1 9/6/11 2:00 PM December 2011 | POWER www.powermag.com 77 POWER IN SOUTH AFRICA

Eskom’s Chief Nuclear Officer, Clive Le Roux, on Restarting a Nuclear Program As South Africa makes its second attempt fastest and best process for a nuclear pow- During Apartheid, because sanctions were at reinstating a new nuclear program, can er plant they have ever seen, and this was placed on South Africa, many industries es- you provide us with an overview of the cur- shared by the American chief executive of tablished local manufacturing capabilities as rent situation for the planned 9,600 MW Westinghouse and French chief executive of an import replacement program. For a local of new nuclear capacity? Areva with our Minister [of Energy]. manufacturing industry to happen, govern- In 2006, because very little nuclear con- ment needs to strategically invest signifi- struction was being done in the West, the Do you offer suggestions to the gov- cant public funds, as it is not sustainable market prices for nuclear power plants were ernment on the type of technology you with the local market. Because of sanctions, not well established. Therefore, Eskom made would like to see implemented for the South Africa could not export, and most of a decision to go into the market and nego- new nuclear program? those local industries collapsed. The same tiate a commercial deal with all terms and We have to deal with the public perception will happen on the new nuclear program. conditions before finalizing an investment of the Japanese Fukushima event on the cur- If we do not embed a local manufacturing decision. We completed these negotiations, rent design plans. We have done a detailed industry into the global supply chain, it will and we had a recommended technology and study of our Koeberg plant based on the les- not be sustainable. supplier and a full set of legal terms and sons learnt from Fukushima, and we have If it were commercially competitive, conditions and prices ready for our board in come up with a number of improvements to someone would invest without pressure 2008. At that time the global financial crisis be made. Informally, there was major surprise from the government. Therefore, the gov- hit and the board decided we could not do from other large utilities about the number of ernment’s intention for pushing a local nuclear with our balance sheet. issues we identified, and we have received a manufacturing industry for job creation Eskom has not been instructed by govern- lot of accolades on how we have completed comes at a price tag, which might make it ment to do the new nuclear program, and how the analysis. It has been said that ours was nonsustainable, and it depends how deeply this will be done will be a function of the bal- one of the leading analyses in the world. they interfere in the free market. ance sheet and technical capabilities in the This has informed us of modifications nec- We have done a lot of groundwork to under- market, which have not been clarified. essary for the requirements of a new plant. stand the implications of a transfer of tech- We have also completed our EIA, and this has nology and transfer of know-how. For large What steps are currently under way to assumed an envelope for the plant (not an ex- industries it would not happen without initial prepare for the development of a new act design). The envelope covers a particular strategic investment and a guarantee on the nuclear fleet in South Africa? approach towards a pressurized water reac- debt based on the market and a reduction of We are completing the development work tor design and would probably exclude some the [black economic empowerment] involve- for the new nuclear program. Approximately of the older generation designs, but we are ment to a minor share in order to get a big eight years are required for execution, but trying not to pin it to a specific generation international player to commit to use South eight years are required for pre-planning. We type. Our proposal is that we must use the Africa as part of their global supply chain. are working on the pre-planning, including EIA envelope as our criteria; otherwise, we We completed a study five years ago called the EIA [environmental impact assessment], must redo the public participation, and after the Tsapro project to look at nine countries the site safety report, the geotechs, the seis- Fukushima, the public will not support us to that have had national strategic supply mic hazard analysis, the land purchasing, and downgrade our EIA. We will backfit Koeberg, projects and have successfully implemented these are saleable items and could be sold if but we do not want to backfit our new build. a local program. A typical example are the the government wishes a private partner to French, Koreans, and Japanese taking over be involved. The commercial process has to Does South Africa have a well-defined leg- Westinghouse’s technology, and the common be completed by 2015, and in my view this islative framework to support new nuclear factor to their success was their government’s is a three-year process and we need to start development? strategic decision to back a specific technol- in 2012. South Africa is not ready for a large nucle- ogy. Government needs to interpret these At this point, we do not know the com- ar program. Many things in legislation and studies to enable legislation and to start the mercial process that the government would many liabilities have not been adequately process of developing and training people. like to run. One possible approach is to addressed in terms of our protocols. For ex- If we look at the nuclear step-change first choose a technology and, second, to ample, in a typical nuclear program, a gov- growth from one nuclear power station (Koe- issue a technology equity partnership en- ernment will pick up the liability beyond a berg) to three power stations, this is a 300% quiry and then to determine a shortlist for certain level from the utility, and the South growth, and the human resource skills needed negotiations to choose the final partner. African legislation says the government are immense. The government has not en- We completed this process previously in “may pick up this liability.” abled the sponsorship and the changes at only one year, but we did not have to deal the university level to allow this to happen. with the complexities of government and What are the key challenges to establish- Because of our financial difficulty, Eskom is equity partners. The market’s comments from ing a local manufacturing industry for the reluctant to take on additional burdens until the 2008 pre-planning was that it was the nuclear sector? instructed by the government.

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Regulator Bukula addressed the issue by saying, “While we can “We play a significant role in funding and developing projects where be criticized for the time delay, we wanted to make sure that what we BEE players are involved,” commented Rentia van Tonder, head of decided to implement was correct and sustainable. We are going to Green Industries SBU, IDC. “We are not there to source BEE players have a regulatory environment that is second to none or comparable for companies. We prefer them to come to us with BEE partners, and to a first-world country.” we can fund them to be a part of that project. We prefer to look at Broad Johnstone of African Infrastructure Investment Managers is in Based Black Economic Empowerment (BBBEE), like community and agreement: “Another challenge is the pursuit for short-term gains. In- workers trust, especially in the renewable energy field, as it lends well frastructure is a long-term asset; it lasts a long time and takes a long to facilitate the involvement of the communities.” time to put in place. One needs to be purposeful, but also patient.” For Siemens, BEE means ramping up resources and skills locally. With a clearer framework, investors can finally move forward. “Now “Our wind division will be the hub for the whole of Africa and all of that the documents have been issued and it has been confirmed that the the Middle East. This means we will have the center of competence bidders would have to bid a tariff subject to a cap, the market can digest located here,” says Menikheim. “In renewables we will look for part- this and plan appropriately,” says Meeser of Investec Capital Markets. nerships in the industry, for instance in local manufacturing of wind “I’m not averse to a competitive procedure, if the adjudication process towers, and we are looking into a local setup with a civil company on is clearly defined and transparent. I think it would be interesting if the all the structuring for solar CSP and PV. . . .This means job creation actual tariffs were published. The obvious benefit is that the consumer will and training of people out of the local communities.” benefit through lower electricity prices. One of the pitfalls of a competitive Though in its infancy, the renewable energy industry is set to take process when looking at international precedent in the renewable energy shape. As Davin Chown, managing director, Mainstream Renewable sector is the potential of projects not to meet financial close, as the tariffs Power South Africa cautions, “Our big challenge is to show government bid could be unrealistically low as a result of aggressive assumptions.” that renewable energy will work. We cannot afford to have cowboys in the As with the coal and nuclear industry, the renewable energy industry market; we need players to prove that this is a sector that is sustainable.” is set to create employment opportunities. Although the selection is 70% weighted toward price, a bidder’s price would only be considered once the Transmission and Distribution bidder had met the other economic development criteria, which carry a 30% A 20-year backlog in investment means that urgent and dramatic so- weighting in the final selection and include job creation, the involvement of lutions are required for South Africa’s transmission and distribution historically disadvantaged individuals in the project, community develop- system. The transmission industry is in desperate need of investment, ment, and economic spinoffs, such as the localization of components used projected to exceed R80 billion over the next five or six years and in development of the facilities. Foreign investors need to embrace South extending to over R116 billion by the end of 2020, including needed Africa’s Black Economic Empowerment (BEE) legislation to involve his- investment to strengthen connection to the Western Cape (Figure 5). torically disadvantaged individuals in all phases of their project. In 2011, the International Development Corp. (IDC) launched its green industry unit with a focus on renewable energy (non-fuel-based green energy—mainly wind, PV and CSP, and small hydro), energy efficiency and demand-side management, emission and pollution management (waste management and recycling, water management, and air pollution control), fuel-based green energy (waste to energy and cogeneration), and biofuels (mostly bioethanol). IDC will invest R22 billion over the next five years and contributes to the development of broad-based BEE in the industry.

5. Continental connection. South Africa’s transmission system has interconnections with all of its neighboring countries. These lineworkers are performing maintenance on part of Eskom’s nearly 400,000 kilometers (nearly 248,548 miles) of power lines in South Af- rica. Of that total, the transmission network consists of 28,790 km of lines with voltages ranging between 132 and 765 kV and a network of 160 substations. Courtesy: Eskom

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Mongezi Ntsokolo, divisional executive are prone to lightening strikes. The sec- South Africa’s electricity infrastructure for transmission at Eskom, explained that ond problem is birds, and their excretion. connects to all of its neighboring coun- major focus areas have been identified . . . they account for more than 50% of our tries, largely because of excess demand to strengthen the network and allow for faults. The third is fires; during winter, we in the past that allowed it to supply much flexibility if there is a failure, and plans have runaway fires because of sugar canes, of the needed demand to other countries for expansion have been outlined: “South and part of their harvesting involves burn- in the region. However, as a consequence Africa has more lightening activity than ing the sugar, which dries the atmosphere of South Africa’s energy supply crisis, and many other countries, and with our high above them and ionizes and reduces the because the energy supply contracts are towers at these high altitudes, our lines air insulation between the lines, and the coming to an end, other countries in the lines actually flash over.” region are building their own power ca- But to achieve the overall expansion pacity to become self-sufficient. But the Mongezi Ntsokolo, Divisional Executive needed to meet demand as new generation Southern African region offers significant Transmission, Eskom and diversification of generation sources clean generation capacity and growth op- come online is not a quick process, as Nt- portunities both for Eskom and for South sokolo points out: “One of our key chal- Africa in hydro and wind, as well as coal lenges is acquisition of land. We do not and gas reserves. have a quick process of resolving our As Standard Bank’s Campbell com- negotiations. We need to negotiate on a mented: “Ultimately, [the Inga Dam] in wheeling buyer, wheeling seller, and this the DRC [Democratic Republic of Congo] takes a long time. Knowing that Eskom is will eventually go ahead, but most likely strengthening our networks, the prices are on the back of large industrial customers higher than the normal commercial prices. as the anchor customer to make it bank- Even when those negotiations fail, there is able. Once the Tete corridor, the various a legal process that, if it is the best line, IPPs, and REFIT take off, we will have the you can build, and that if it is in the best beginnings of a properly deregulated free interest of the country, you can invoke a market power sector.” legal price for the owner to sell to you. Now, however, the basis of connec- But it takes two years for this process to tions are a government-to-government happen.” and national utility–to–national utility un-

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distribution and transmission, and there is The South African Power Pool has created a lot of work needed in terms of expand- ing, upgrading, and rehabilitating existing plans for integration, but countries networks. Right now nine out of 10 times power failures are a result of overloading cannot be forced to comply with them. on the distribution system, and not because of generation shortfalls.” Louis Maleka, acting divisional executive for distribution at Eskom explained, derstanding, and this determines the con- was abolished, so the 287 municipalities Louis Maleka, Acting Divisional Execu- tive, Distribution, Eskom nectivity. But despite South Africa having continue to handle their own distribu- talked about strengthening its networks to tion. “The government has abandoned the neighboring countries for many years, the idea of REDS, and now we need to cre- practically, as Ntsokolo notes, is that, “In ate different solutions and incentive-based South Africa, we do not have excess pow- frameworks to move to improvements in er, thus we can only look at imports, and distribution and energy efficiency,” re- the likely supplier would be Mozambique, marked Tore Horvei, managing director Botswana, Zambia, and DRC. The implica- for the African operations of Norconsult, tion is cost. And at what price do we need a European consulting and engineering to buy this electricity? And the price must group with experience across Africa. The not be higher than local generation. The company recently decided to invest further interconnectors have been a challenge; we in South Africa to capitalize on the na- cannot commit to building until there are tion’s dire need for investment in genera- commitments to taking, and you can not tion, transmission, and distribution. commit to taking until you know the cost Horvei continued, “At the moment there of tariffs, and you cannot commit to this has been a lot of focus on generation, but until you know the cost of infrastructure. we have a huge backlog of investment in It has to be a government-to-government driven agenda.” There is heightened awareness of the need to spearhead development across the region. “Right now the integration process Norconsult - Engineering Sustainable that is required in Africa and the various Energy Solutions for Africa regions is not occurring fast enough, and as such, the continent remains dark until such time as countries work closely and collaborate,” emphasized Galloway of Utho Capital. The Southern African Power Pool has created plans for integration, but countries cannot be forced to comply with them. Hence, the need for strong regional leadership. Norconsult is a interdisciplinary engineering and design South Africa’s distribution industry is consultancy, providing services to clients in the public and also in dire need of a shake-up. The country private sectors worldwide. currently has two systems of distribution: Eskom supplies bulk 132 kV electricity to The company is the leading Norwegian consultancy, and has leveraged the municipalities, and the municipalities its substantial international presence and experience in projects of various are the redistributors and supply to the end sizes and at various stages of development, on all continents. user; or Eskom supplies directly to end us- Norconsult’s international growth strategy has Africa as one of its focus ers. The distribution industry has a check- areas, with Norconsult Africa (Pty) Ltd in Johannesburg, South Africa ered history for successful implementation coordinating Africa business development and operations. of innovative systems to improve its in- Energy sector services is key to our Africa business focus, including hydro- frastructure. It was not long ago that the power and renewable energy development, power systems engineering establishment of EDI holdings was made but also broader energy sector management consulting services. to reconfigure the distribution network into six regional electricity distributors (REDS), each of whom would be responsible for raising its own funding and devel- www.norconsult.co.za oping its own infrastructure. For more information, please call +27 11 275 0259 However, a few months ago, this system

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“We are facing some key challenges, nance Management Act does not allow a these issues. We believe we need to work which unfortunately were not solved by municipal or government entity to transfer in partnership with the municipalities, and EDI. Firstly, municipalities depend on the assets into a PTY limited company. These at this point we need to formulate what this income from selling electricity. Thus, if are challenges we need to continue to work partnership will look like. The challenge for electricity is taken out of their control, it through.” municipalities is to raise the required fund- means the municipalities lose the revenue South Africa’s distribution industry in- ing needed to improve their infrastructure. base. We also face constitutional challeng- vestment backlog is now estimated at R30 The backlog has been estimated at R30 es. For instance, the constitution states that billion. Maleka commented on the long- million. However, the likelihood is that it the distribution networks are the compe- term objectives in the restructuring pro- is probably much greater than this predic- tency of municipalities; however, Eskom cess: “EDI was supposed to give us mileage tion. The system will collapse in the next has been given the responsibility of the in terms of being able to raise money and five years if nothing happens.” network should municipalities be deemed improve infrastructure; however, now we Eskom predicts that by 2017 it will be incapable. In addition, the Municipal Fi- need to develop a new formula to tackle one of the top five distribution networks

Brian Dames, Chief Executive, Eskom

two years, until the new stations are making sure that electricity prices are running, the power supply-demand will cost-reflective. We had an extensive pe- be tight. riod of 20 years of increases that have Currently, we are working closely been below inflation, which have led us with companies to create more effi- to make inefficient investments, or, on cient production processes. Eskom uses the other hand, create massive profits the money that we receive through our for industry. tariff to invest in our large custom- For us to raise financing, investors ers, and in the last year we have in- need to have certainty about our abil- vested R1 billion. We have seen great ity to repay; therefore, cost-reflective benefits amongst our mining customers tariffs are important. This also encour- in terms of reduction in energy usage ages energy efficiency in the country. and increases in production. We have This year our electricity prices are still very close relationships with our min- amongst the lowest in the world, and The timely completion of your new- ing customers, and we provide quarterly we will migrate to a point that is cost- build program will ensure medium- power system status updates. effective. term security; however, South Africa’s We have called upon all consumers mainstay industries, including min- to look at a 10% voluntary saving. We What differentiates Eskom from other ing, have been severely affected by believe this is more than possible. Our state-owned utilities around the world? the lack of stable power supply in GDP input over energy consumption Eskom is one of the largest utilities in the past. What is Eskom doing in the shows that we are woefully inefficient. the world. As an integrated utility, for a short term? Some mining companies have already long period of time we have provided a Prior to 2008, we had electricity pric- achieved more than 10%. We have 134 reliable and very competitive electric- es that increased at levels lower than of our large customers that have partici- ity supply. Eskom has brought universal inflation, and the mining industry has pated, and on average they have seen access from less than 25% to over 70% grown very well. A lot of this growth about 5% energy savings. of the population, and we continue to has been based on Eskom’s ability to have some of the best skills to continue provide stable power and the fact that One of the critical issues is how to to run a vertically integrated utility. Eskom was the largest buyer of coal in balance financial resources and sus- Eskom runs the only nuclear plant South Africa, which meant a robust ex- tain growth in the economy. The on the continent, some of the largest port industry was built as Eskom pro- country will be faced with incremen- power plants in the world, and we have vided stable cash flow for coal supply. tal electricity price increases over the the largest dry-cooled stations in the Since 2008, we have had no inter- next three consecutive years. Please world. ruptions, and no customer has been comment on how Eskom feels this will Given our size and ability to leverage asked not to expand. To date, we have not inhibit industrial growth. our balance sheet, we were able to run a received no applications for a mining It is very important that price re- US$1.75 billion bond, the largest of any project that we cannot supply power to. flects the cost of producing. South Af- company in South Africa. The issue that we are working on is the rica’s electricity prices have historically In 2001 we were voted the best pow- connection to the grid and determin- been very low and not reflective of the er company in the world, and we have ing the appropriate timelines for these economic cost of supply. Therefore, the full confidence to restore Eskom to that projects to come online. Over the next country needed to face the reality of level.

82 www.powermag.com POWER | December 2011 POWER IN SOUTH AFRICA globally, and by then, the bulk of Eskom’s Medium Term Risk Mitigation Project supply in the short term. Camden, with a distribution networks will be under con- sets out to implement an immediate action capacity of 1,520 MW, was brought back trol. While Eskom is investing heavily plan. It includes Eskom’s demand-side in 2008; two units of 125 MW have been in its distribution networks, at the same management program and the govern- recommissioned at Komati; and two 200- time it is adding more customers, in line ment’s target for the rollout of one mil- MW units have been brought back online with its commitment to universal access lion solar water heaters, promotion of at Grootvlei. to electricity by 2014. Maleka reported: non-Eskom cogeneration, self-generation The Policy-Adjusted IRP assumes that “Since 1994, we have electrified four mil- by industrials, and renewable generation the older Eskom coal-fired power stations are decommissioned at the end of their 50-year lifespan. It is possible that these power stations could have their economic “We are in a unique position, but in five life extended with some capital investment and continue to operate for another to 10 years, countries such as Germany 10 years in case the proposed new-build options are delayed or demand projections and the UK will find themselves in a prove insufficient. However, this would have to be traded off against the plants’ similar situation.” higher emissions and low efficiencies (in the neighborhood of 30% to 33% maximum continuous rating for the mothballed —Thava Govender, Eskom Divisional Executive, Generation plants that have returned to service). To date, Alstom has successfully completed a groundbreaking integrated boiler lion households. In 2001 the government targets for the next three to five years that and turbine retrofit of Arnot power plant, took over the funding for these programs, need be achieved. Eskom is leading a cam- which was finalized earlier this year. The and now we have a penetration of 83% in paign to encourage 49 million South Afri- project added 50 MW per unit, from 350 Eskom supply area and, on average per cans to reduce their energy consumption MW to 400 MW each. Retrofits as well as annum, we electrify 120,000 homes from and think of energy in a sustainable man- life extensions provide great opportunities Eskom.” ner. The campaign stresses the importance for major multinationals that have experi- of pulling together as a nation to harness ence oversees. The Short-Term Plan energy savings. These measures will help The base case forecasts a supply shortfall provide a safety net to deal with the im- Conclusion of 9 TWh of energy in 2012, and these mediate supply shortage. The South African electricity supply- supply constraints are further complicated There is also discussion around estab- demand balance will remain tight until and increased by the urgent need to under- lishing a mandatory Energy Conservation such time as both Medupi and Kusile are take critical maintenance on generation Scheme focusing on the largest electricity brought online. Eskom, once one of the assets. Space needs to be created on the users. To date, Eskom has asked for a vol- top utilities in the world, has, because of system to support a comprehensive main- untary 10% reduction from large industri- the energy crisis, seen itself slide in the tenance program to sustain the operational al energy customers. Eskom’s Govender rankings. However, since the crisis, Es- integrity of the generation assets. Some of says, “We are probably one of the only kom has posted significant net profits to this maintenance has already been signifi- suppliers in the world to spend billions to be reinvested in the business. It has suc- cantly postponed. encourage our customers to use less. En- cessfully managed to keep the lights on Eskom’s Govender observed, “In es- ergy efficiency and conservation schemes at a time of tight supply and successfully sence, we have survived over the last three worked very well in Brazil, but the key is- made it through the FIFA World Cup. years because we have been running an in- sue in their success was that government With the government’s guarantees, Es- tegrated generation control center. This is drove the initiative. kom has put together a funding plan for a simple concept to ensure that everything “If we want to keep the lights on and the next seven years. In January 2011, happening at a power station is channeled continue our maintenance, we need a Standard & Poor’s improved both South through the center so that we can see the 3,000- to 4,000-MW reduction by 2014. Africa’s sovereign rating and Eskom’s rat- risk, manage this at a senior level, and . . . We are the ‘guinea pigs,’ and many ing from negative to stable, and the com- plan accordingly. It does not detract from utilities are waiting to see how we survive. pany was able to raise a bond of $1.75 the National Control Centre, which is the Although it will be difficult for the next billion. There is no doubt that Eskom is central hub of the energy system and con- couple of years, we need the support of in the wake of some of its toughest times, trols generation, transmission, and distri- the country, and the international commu- but with stronger governmental support, a bution. We have been in survival mode for nity will learn from us. We got through the strengthening of legislative frameworks, the past three years, and we will continue World Cup, which was the coldest winter and the successful implementation of pri- to be for the next two years, until Medupi in 20 years, and we survived. Already we vate participation, the company can remain comes online. We are in a unique position, have been judged by the fact that we have competitive, reduce its carbon footprint, but in five to 10 years, countries such as survived for three years against all odds.” and ensure economic growth. ■ Germany and the UK will find themselves The return to service of three moth- —Written and researched by Sharon in a similar situation.” balled coal-fired power stations (Cam- Saylor, Begum Agilonu, and Sidonie Unlike the IRP 2010, which takes a den, Komati, and Grootvlei) was one of Pichard of Global Business Reports long-term look at the energy sector, the the initiatives taken by Eskom to increase ([email protected]).

December 2011 | POWER www.powermag.com 83