Identifier
Created
Classification
Origin
05PRETORIA113
2005-01-11 11:19:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

RESTRUCTURING OF THE SOUTH AFRICAN ELECTRICITY

Tags:  EPET ENRG EINV EIND ETRD ECON SF 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 05 PRETORIA 000113 

SIPDIS

STATE PLEASE PASS USAID STATE PLEASE PASS USGS

E.O. 12958: N/A
TAGS: EPET ENRG EINV EIND ETRD ECON SF
SUBJECT: RESTRUCTURING OF THE SOUTH AFRICAN ELECTRICITY
INDUSTRY -- THE SUPPLY SECTOR

REF: PRETORIA 00094

THIS CABLE IS A CORRECTED COPY OF REF A: FORMATTING
PURPOSES

UNCLAS SECTION 01 OF 05 PRETORIA 000113

SIPDIS

STATE PLEASE PASS USAID STATE PLEASE PASS USGS

E.O. 12958: N/A
TAGS: EPET ENRG EINV EIND ETRD ECON SF
SUBJECT: RESTRUCTURING OF THE SOUTH AFRICAN ELECTRICITY
INDUSTRY -- THE SUPPLY SECTOR

REF: PRETORIA 00094

THIS CABLE IS A CORRECTED COPY OF REF A: FORMATTING
PURPOSES


1. (U) Introduction: In light of recent government
initiatives to restructure the South African energy
industry, post will submit separate reports on the
supply, distribution and transmission sectors. Each
cable will serve as a general review of that sector, and
be the launch-pad from which subsequent cables on
specific topics are prepared, as developments take place
in each sector. The first, dealing with the supply
sector, follows. The purpose of these cables is to
indicate the potential opportunities for investment,
technology and service providers created by the energy-
restructuring program. End introduction.

--------------
Electricity Supply Industry (ESI)
--------------


2. (U) Summary: At the beginning of this decade, in the
absence of new supply, the South African Government
concluded that demand for electricity would soon overtake
existing generation capacity. Government tasked the
National Energy Regulator (NER) to develop a National
Integrated Resource Plan (NIRP) for insuring security of
future supply. The first NIRP was completed and
published in March 2002. At the beginning of 2003, the
NER established an Advisory and Review Committee (ARC) to
solicit stakeholder contributions to the NIRP process.
The updated study (October 2003),generated under the
guidance and approval of the NER, was carried out by a
NIRP team comprising the Eskom Resources and Strategy
Group (headed by their Managing Director, Dr Steve
Lennon),the Energy Research Institute (ERI) of the
University of Cape Town, and the NER.


3. (U) In the early seventies Eskom forecast an
electricity growth rate of 8%, and consequently built and
commissioned a number of six-pack (six generation units
per station) coal-fired stations. In the middle of the
construction program, the demand growth rate dropped as
low as minus 0.4%, causing a serious over capacity, and

three of the stations - Camden, Komati and Grootvlei -
were "mothballed". Decommissioning ended in about 1990.
The excess capacity allowed Eskom to become the lowest
cost producer of electricity in the world. Eskom's
tracking of electricity consumption identified a
significant increase in demand (from about 2000),and
they forecast that new peaking capacity would be required
by 2007, and new base load capacity by 2011. In October
2003, the NIRP-team updated the 20-year energy supply
plan based on the new demand projections, and estimated
capital expenditure of some $17 billion to 2010. The
main purpose of the plan was to identify the most cost-
effective and environmentally friendly combination of
options and technologies available to ensure South Africa
of a timely, reliable and quality supply of electricity
in the future. Schedules and technologies will
inevitably change over time as new developments occur.
End summary.

Current Capacity and Technology Mix
--------------


4. (U) South Africa's total licensed generation capacity
is about 44,000 MW of which Eskom (state-owned
electricity utility) owns 42,000 MW. Eskom mothballed
3,600 MW of capacity in 1990 and their total net
operating capacity (NOC) at December 31, 2003 was 36,200
MW. Coal-fired stations generate 86% of the electricity,
nuclear 5%, pumped-storage 4%, hydro 2%, emergency gas
turbines 1%, and 2% is imported from the Cahora Bassa
hydro station in Mozambique.


5. (U) Eskom currently operates 10 large coal-fired power
stations, a two-reactor 1,800 MW nuclear station (Koeberg
located 30 kilometers north of Cape Town),six small
hydro stations, and two pumped-storage schemes that play
a critical role in meeting peak demand. Municipalities
own 22 small power stations and back-up gas turbines, but
these total only 5% of national generation capacity and
generally run at low load factors. Municipalities also
own the transmission lines and the transformers located
within their boundaries. Private generators comprise the
remaining 2% of capacity. In 2003, the peak demand was
32,000 MW, equal to 89% of NOC. Estimated demand growth
is at least 1,000 MW per annum, and the current growth
rate stands at around 4.6%.

6. (U) According to Mike Cary, Managing Director of Rotek
Engineering an Eskom group engineering company, a
complicating factor to the capacity problem is that the
power stations are ageing. The ages of the newest
stations vary between 10 and 24 years, and the equipment
on these stations can be as old as 30 years. Although
Eskom has a comprehensive maintenance program, the old
equipment is more prone to failure. Part of the risk-
management strategy is to carry spares, but financial
constraints limit this option. Over the past 12 months,
Eskom has experienced an abnormally high failure rate (14
major supply disruptions in the Johannesburg area alone)
and some of the plant transformers have failed to such an
extent that some critical spares are no longer available.

--------------
Eskom's Expansion Plans
--------------


7. (U) Government decided in 1998 to restructure Eskom
and to establish a multi-market model (MMM) for
electricity trade in South Africa. During the four-year
model planning process, Eskom submitted its investment
program for new electricity capacity (as its contribution
to the NIRP) on an annual basis. The estimated cost of
the expansion program was about $32 billion (over 20
years),and aimed to ensure that South Africa had enough
electricity to power its growing economy.


8. (U) However, during this time Eskom became a virtual
"on-looker" as government decided that Eskom would not be
allowed to build any new generation capacity as the
government wanted to have the MMM in place before the
excess capacity ran out. Eskom, however, remained the
supplier of last resort and obligated to ensure
sufficient supply to the country. Part of the plan to
restructure Eskom was to sell 30% of their generation
capacity, valued at more than $4 billion, to foreign
power utilities. Due to a policy shift, this process
remained in limbo. Eskom and Government now face crucial
decisions about new power plants, and the balancing of
financial, operational and environmental criteria in
selecting the type and mix of energy projects it should
develop.


9. (U) Following the April 2004 elections, new Public
Enterprise Minister Alec Erwin (Eskom's shareholder
department) rescinded the "restructuring" of Eskom. This
was part of a general policy shift aimed at strengthening
State Owned Enterprises to ensure that the social
objectives of government would be met first. Erwin fast-
tracked the go-ahead for new investment in electricity
supply, as outlined in the NIRP. On October 20, the
Cabinet approved $13.5 billion in capital expenditure for
Eskom to return to service the mothballed stations, build
70% of new capacity, and upgrade existing stations,
transmission lines, and distribution networks.
Government expects Eskom to source much of this capital
from the markets. Erwin also "offered" independent power
producers (IPP's),particularly foreign utilities, a 30%
slice of the proposed new generation capacity. In this
way, he hopes to ensure healthy competition for Eskom and
to attract foreign direct investment into the
infrastructure sector of the country without damaging
Eskom's ability to lead the expansion drive. Steve
Lennon, Eskom's Managing Director for Resources and
Strategy, has stated that the investment decision was in
time to avoid early supply disruptions in 2006 and 2010.

Short-Term Expansions to 2010
--------------


10. (U) The latest update of the NIRP's power expansion
strategy (October 2003) deals with expansions envisaged
up to 2022. The first phase deals with immediate
electricity needs over the next five years. This
requires Eskom and IPP's to add at least 1,000 MW of
capacity every year, from 2005 to 2010, to avoid
shortages during peak usage time. The investment package
portions the $13.5 billion as $9.7 billion for
generation, $2.2 billion for distribution, and $1.6
billion for transmission. The plan is for Eskom to
return to service three coal-fired stations between 2005
and 2011 -- total base-load capacity of 3,600 MW. In
addition, Eskom is to build a new 1,000 MW open cycle gas
turbine (OCGT) plant by 2007 (location not specified),
and by mid 2005 the DME plans to request the private
sector to tender for a 1,000 MW OCGT plant (location not
specified),fueled by a light diesel distillate, to be
operational by 2008.

Longer-Term Expansions - 2011-2022
--------------


11. (U) By 2010 Eskom will have to start commissioning
power plants that will add to the base load for which
planning will start in 2005. According to Lennon, the
program was based on the forecast of an increase in
demand of 1.5%-4% per year over the next 20 years.
However, there are contingency plans for an uptake of 5%
should demand exceed estimates. The long-term base load
capacity would include a combination of new power plants
and imports of electricity from a number of African
projects. Capacity increases include:
-- a $0.7 billion, 1,330 MW pumped-storage scheme at
Braamhoek in KwaZulu/Natal Province, by 2013,
-- a $0.8 billion, 1,000 MW pumped-storage scheme at
Steelpoort in Mpumalanga province, by 2014,
-- a third 1,000 MW pumped-storage facility at Monontsa
in the Free State province, and planned for 2019,
-- a $1.4 billion, 1,500 MW combined cycle gas turbine
(CCGT) facility, possibly located near Coega (new deep
water port under construction) in the Eastern Cape
Province, by 2013,
-- three generation units (total rated capacity of nearly
2,000 MW) added to the six already operating at the
Mathimba power station in Limpopo Province, at a cost of
$3.2 billion,
-- a 4,000 MW greenfields coal-fired power station, at an
estimated cost of almost $6.4 billion, near coal reserves
in either Limpopo or Mpumalanga provinces, or in
neighboring Botswana or Mozambique.

Summary of Capacity Expansions to 2022
--------------


12. (U) Some electricity expansion options considered by
the NIRP team extend beyond the 2022 time-period, but are
shown for information completeness. Obviously, these
technologies and time schedules will change over time as
energy demand, innovations and other developments occur.

Generation Stations Implementation New (MW)
and Technologies Schedule Capacity
-------------- --------------
3 De-mothballed coal-fired 2005-2011 3,600
(possibly fast-tracked to 2009)
10 Single/Open Cycle Gas (SCGT) 2006-2010 2,640
1 SCGT 2022 240
3 Dry-cooled coal-fired 2016-2022 9,630
2 Pumped-storage 2012-2014 2,330
1 Pumped-storage 2019 1,000
5 Fluid Bed Combustion 2012-2014 2,330
1 IPP Open Cycle Gas (OCGT) 2008 1,000
Total new capacity 22,770

Other possible options for the future (probably beyond 2022) include:
3 Combined Cycle natural gas 3,470
1 Nuclear Pebble Bed cluster of 8 reactor units 1,320
1 Coal-fired 3,780
1 Pumped-storage 1,000
Total possible new capacity 9,570

PBMR
--------------


13. (U) According to Lennon, environmental criteria are
critically important in deciding the combination of new
power plants to be developed. This could benefit non-
coal projects, as Eskom's coal-fired plants are the chief
emitters of carbon dioxide and other pollutants.
Environmental considerations could also provide a boost
to development of South Africa's fourth-generation
nuclear-based pebble bed modular reactor (PBMR),which
could be ready for commercial launch by 2013, and
features in Eskom's long-term expansion plans, from about
2015 onwards. The capacity of a single PBMR reactor unit
is 165 MW, and that of an 8-pack cluster, 1,320 MW.
Johan Kriek, CEO of PBMR Ltd, plans to start construction
of a PBMR demonstration unit in the second quarter of
2007, the first commercial unit by 2013, and to supply
Eskom with 24 units (three clusters) between 2013 and

2023. Lennon said that negotiations have started in the
process to develop a PBMR supply agreement between PBMR
Ltd and Eskom.

Imports
--------------


14. (U) The African electricity import projects on the
Eskom drawing board include Cahora Bassa in Mozambique,
the proposed Inga3 hydro-electric project in the DRC, and
buying surplus power from the Southern African Power
Pool, as available. Lennon said that part of Eskom's
strategy could be to put equity into Cahora Bassa,
depending on the financial details of such a deal. In
addition, in November 2004, the South African utility was
one of five Southern African utilities that bought equal
equity stakes in Westcor, the company earmarked to build
the $5 billion power station at Inga3, and the associated
transmission and interconnect supply lines. The project
has the potential to supply 3,500 MW of electricity by
2011, but many experts believe this to be an unrealistic
target, given the political (and investment)
uncertainties in the DRC.
Status of the Expansion Plan
--------------


15. (U) The first phase of the expansion, dealing with
new capacity over the next five years, is well under way.
Eskom has commissioned the return to service of three
mothballed power stations at a total cost of $1.9
billion. These three facilities, when refurbished,
should supply 3,600 MW to the grid. The largest of the
three, Camden, is set to return to service in 2005. The
DME has also authorized Eskom to build a new 1,000 MW
open cycle gas turbine (OCGT) plant by 2007 (location not
specified),and a 1330 MW pumped-storage station
(Braamhoek) by 2013, as part of a $13.5 billion
investment. In December, the DME issued an IPP
"Expression of Interest" document for a 1,000 MW OCGT
facility (location not specified),fueled by a light
diesel distillate, to be operational by 2008. The tender
document should be available by August 2005, and Eskom,
as the purchaser of the electricity, cannot bid for the
project. The final leg of Eskom's short-term revamp will
be to upgrade a number of its older base-load stations,
including a $160 million upgrade of the 2,100 MW Arnot
station. Through demand and supply side efficiency-
improvement strategies, Eskom management plans to take
4,000 MW out of the system by 2013.

Financing the Expansions
--------------


16. (U) Eskom spokesman, Fani Zulu, has indicated that
Eskom would finance the $13.5 billion expansion for the
first three years through a combination of cash flows and
loan financing. After that, Eskom is likely to revert to
the local and offshore capital markets. Eskom, has a
relatively low 30% gearing, and has some room on its
balance sheet to raise its debt level. A crucial part of
the financing would be the electricity price, which the
NER determines. The regulator has recently granted Eskom
below-inflation tariff increases, but Minister Erwin has
backed Eskom's call for more realistic prices to enable
the huge capital expenditure requirement.


17. (U) In summary, the main conclusions drawn from the
latest NIRP study by energy experts, are that:
-- Options for diversifying away from coal-fired plants
are insufficient to meet forecast electricity demand over
the next 20-years,
-- Economic justification for diversification plants
would prove difficult in the absence of persuasive
measures such as penalties and subsidies for non-use or
use,
-- Clean coal technologies and demand side efficiency
strategies are required to meet environmental standards,
-- Base load plants would be required for commercial
operation after 2010,
-- At assumed future costs, and after returning the Eskom
mothballed plants to service, fluidized bed combustion
(FBC) technology offers the most economical option,
followed by coal-fired plants, and then CCGT plants (in
the western Cape),using imported gas/LNG,
-- NIRP plans indicate that 920 MW OCGT peak load plants
must begin commissioning from 2008,
-- NIRP plans assume the attainment and sustainability of
demand side management targets, power plant availability,
imports, and interruptible supply strategies,
-- short-term peak-load requirements can be facilitated
using single cycle gas turbines fueled by locally-
produced synthetic gas.

--------------
Summary of South African Energy Statistics
--------------

18. (U) Projected Electricity Supply/Demand (MW)

2004 2008 2012 2016 2022
Generating Capacity 38,620 41,990 46,060 50,700 57,540
Peak Demand 34,620 38,530 42,020 45,660 51,890
Reserve Margin (%) 11.6 9.0 9.6 11.0 10.9
New capacity - 3,390 8,460 13,140 19,990

Current Supply (MW)

Eskom:
Coal-fired 32,070
Nuclear 1,800
Pump Storage 1,400
Hydro 570
Gas Turbines 340
Total 36,180

Non-Eskom:
Coal-fired 1,320
Pump Storage 180
Hydro 70
Gas Turbines 90
Total 1,660

Imports:
Cahora Bassa (hydro) 780
Total 38,620

South Africa's Energy Mix

Product Electricity Energy
End Use % Generation % Supply %
Coal 86 69% 30
Crude - 18% -
Biomas - 9 8
Nat gas 1 3% -
Hydro 2