U.S. FIRM AES CHARGES INTO SOUTH AFRICA'S ELECTRIC POWER

UNCLAS SECTION 01 OF 02 PRETORIA 003490 SIPDIS SIPDIS DEPT FOR AF/S, EEB/ESC, EEB/CBA DOE FOR SPERL, PERSON COMMERCE FOR ITA/DIEMOND E.O. 12958: N/A TAGS: ENRG EINV EPET SF SUBJECT: U.S. FIRM AES CHARGES INTO SOUTH AFRICA'S ELECTRIC POWER SECTOR PRETORIA 00003490 001.2 OF 002 This cable was a collaboration between Congen Johannesburg and Embassy Pretoria. ¶1. Summary. An AES Corporation (AES)-led consortium has been selected as the preferred bidder by the Department of Minerals and Energy (DME) for two open-cycle gas turbine peaking power stations to be constructed in South Africa. The AES-led consortium, which won the bid over a Suez-led consortium, will finance, design, build, own and operate a 750 MW power station in Durban and a 330 MW plant in Port Elizabeth, at the Coega industrial development zone. AES will be one of the first firms to enter South Africa as an Independent Power Producer (IPP) and will sell its production to South Africa's state-owned electric power company, Eskom. Over $600 million will be spent on construction of the plants. End Summary -------------- Background - Need to Build Power Plants -------------- ¶2. The South African Government has embarked on a program to greatly increase its energy production capacity and upgrade its aging power infrastructure to meet the demand created by its strong economic growth and activities related to the 2010 FIFA World Cup in South Africa. It is estimated that up to 2,000 MW will need to be built each year for the next twenty years in order to match demand. Government policy calls for 30 percent of the country's power to come from private power producers. This was the first IPP project to be bid out by the DME. The project will set the bar for similar efforts to introduce IPPs in neighboring countries, including Namibia, Botswana, and Mozambique. Comment: Half of the additional power requirements for the next 20 years, or up to 20,000 MW, is to be supplied by nuclear power. Westinghouse of the U.S. is one of two companies, along with Areva of France, that have been selected to compete for the next nuclear power contract. The winning company for that contract is expected to be chosen in early 2008. End Comment. -------------- -------------- Market Opening Efforts by U.S. Mission in South Africa -------------- -------------- ¶3. The South African state-owned electric power company, Eskom has dominated the electric power sector in South Africa and neighboring countries and has long been closed to U.S. exporters of energy-related services and products. While there are no regulatory barriers denying U.S. firms access to this largest power producer in sub-Saharan Africa, long standing preferences for European suppliers, developed during the United States' apartheid-era divestment from the country, have persisted. ¶4. The U.S. Embassy in South Africa, led by the U.S. Commercial Service South Africa (CSSA) and the U.S. Trade and Development Agency (USTDA),developed a strategy to increase U.S. participation in the power sector in South Africa. To promote U.S. firms with appropriate technologies, goods, and services, CSSA and USTDA jointly organized programs to introduce U.S. energy companies to South African decision-makers. These programs included two orientation visits (OVs) funded and organized by USTDA with delegations led by CSSA. The first OV was primarily composed of Eskom officials while the second included DME officials and representatives from throughout southern Africa. USTDA and CSSA also organized in partnership with Eskom a U.S.-South Africa Power Industry Supplier Conference, held in Johannesburg in October 2006. These efforts have helped breach the procurement barriers and initiate Eskom's acceptance of and preference for technologies from U.S. suppliers. These activities helped companies such as AES to demonstrate their capabilities as well as their interest and plans to enter the South African market. Several other companies, including Black and Veatch and Honeywell have directly attributed the award of recent contracts with Eskom to these USTDA and CSSA activities. -------------- U.S. Company Enters the Market -------------- ¶5. Representatives from AES directly and indirectly benefited from PRETORIA 00003490 002.2 OF 002 these programs. AES participated as a gold sponsor for the U.S.-South Africa Power Industry Supplier Conference, where AES representatives had access to the senior management of Eskom and key officials within the Department of Public Enterprises, which oversees Eskom, and DME. Two senior DME officials responsible for the IPP bid also participated in a site visit to an AES facility in the U.S. during the November 2007 orientation visit. Additionally, in response to a request from AES and its Broad-Based Black Economic Empowerment (BBBEE) partners, USTDA funded a $550,000 technical assistance grant in May 2006 with Tiso Energy, one of AES's BBBEE partners, to provide support and build capacity within the BBBEE partner companies throughout the drawn-out bid period during which all but two of the original short-listed companies withdrew from the competition. ¶6. AES partnered with Tiso Energy, Mbane Power and Kurisani Youth Development Trust on its bid, as part of its Broad-Based Black Economic Empowerment (BBBEE) program strategy. To ensure the bona fides of AES' potential BBBEE partners, CSSA conducted due diligence research and provided reports to AES that became the basis of these partnerships. The resulting consortium successfully competed against the French Suez-Inkanyezi consortium for this project, which will allow AES to build, own and operate a 750 megawatt power station in Durban and a 330 megawatt plant in Port Elizabeth at the Coega Industrial Development Zone. ¶7. COMMENT: This $600 million project is both a great win for AES and representative of the significant opportunities available to U.S. energy firms in South Africa and the southern Africa region. The growing success of U.S. firms in South Africa's electric power sector is directly related to the sustained and combined efforts of the multiple trade agencies of the U.S. Mission in South Africa. BOST