Restructuring the South African Power Industry South Africa Is at a Critical Turning Point
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POWER IN SOUTH AFRICA Restructuring the South African Power Industry South Africa is at a critical turning point. An uncertain environment for pri- vate 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.