DOOM AND GLOOM IN THE ELECTRICITY SECTOR - BUSINESS

UNCLAS SECTION 01 OF 03 PRETORIA 000132 SIPDIS SIPDIS SENSITVE STATE PLEASE PASS USAID STATE PLEASE PASS USGS DEPT FOR AF/S, ISN, EEB/ESC AND CBA DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER E.O. 12958: N/A TAGS: ENRG EPET SENV EINV BEXP SF SUBJECT: DOOM AND GLOOM IN THE ELECTRICITY SECTOR - BUSINESS COMPLAINS REF: A) 07 Pretoria 4082 B) 07 Pretoria 3078 C) 07 Pretoria 2814 ¶1. (SBU) SUMMARY: The local media is abuzz with complaints from businesses and consumers about increasing electricity load-shedding and unplanned outages. State power company Eskom and the government offer no quick "silver bullet" solutions, and are asking consumers to bear up and conserve energy, waiting for new projects to come on line over the next 4-7 years. Eskom admits that the timing of mega-projects like aluminum smelters is at risk. The problem is likely to get worse before it gets better - given that Eskom faces its own skills shortages as it grapples with deferred maintenance and new build. Electricity shortages will likely have a negative impact on growth and investment, especially in energy intensive sectors, which have in the past been a prime source of foreign investment. Other consequences include pressure to end all electricity exports and likelihood for the government to make a decision on new nuclear power build by mid 2007. End Summary. -------------- Load-Shedding Angst -------------- ¶2. (SBU) Consumers, businesses, residents, and motorists are in an uproar about state electricity supplier Eskom's increasing load-shedding and unannounced rolling black-outs. According to press reports, Business Unity South Africa (Busa) seeks urgent meetings with Eskom and the government and called for a "transparent plan" to deal with the country's growing power supply problems, citing the particular negative impact on business and small and medium-sized enterprises. Busa called for better planning and appropriate incentives for all energy users to increase energy efficiency. Economic officers hear increasing complaints from small businesses about the costs of unplanned outages. Larger businesses and institutions are increasingly investing in generators, which have become a booming business, but it is more difficult for small businesses to finance back-up power sources. ¶3. (U) Meanwhile, South Africa's Public Protector has launched a preliminary investigation into Eskom's rolling power cuts, noting the "devastating" effect on public and private service delivery. The agency sent a letter to Eskom on January 16, requesting detailed information on the reasons behind and measures taken to deal with load-shedding, including steps it intended to take to "compensate those that have suffered damages and/or inconvenience as a result of load-shedding." -------------- Negative Impact on Investment and Growth -------------- ¶4. (U) Econometrix Economist Dr. Azar Jammine was quoted in the press warning that power shortages would inhibit foreign investment and prevent the government from reaching its targeted six percent yearly economic growth from 2010 onwards. Minister of Minerals and Energy Buyelwa Sonjica, responding in a number of interviews, countered that "there is no need to panic about future investments." Sonjica did, however, concede that the country had an "acute Q Sonjica did, however, concede that the country had an "acute problem" with electricity supply in light of strong demand growth. Foreign investment has typically been strong in energy intensive sectors, because South Africa has been perceived in the past as possessing cheap and available electricity. ¶5. (SBU) Eskom has been quoted widely that its reserve margin is dwindling as it copes with planned and unplanned maintenance. The margin is so tight that, according to press reports, planned maintenance at the Koeberg nuclear power plant was postponed for one week due to the load-shedding Eskom predicts 4-7 more years of load-shedding until significant new coal- and gas-fired projects come on line. In a January 16 meeting with Energy Officer, Eskom Executive Assistant to the Managing Director Calvin Theko predicted significant load-shedding for the next four years until the first unit at the Medupi coal-fired plant comes on line. He lamented that Eskom's headquarters at Megawatt Park in Johannesburg is itself not immune to the disruptions and inconvenience of power outages. Theko PRETORIA 00000132 002 OF 003 insisted that South Africa would be able to provide adequate electricity to the 2010 FIFA World Cup. An Eskom maintenance training manager told Energy Officer that Eskom faces severe skills deficits in maintenance training and staff. ¶6. (U) As quoted widely on January 17 in the business press, Eskom said it would not take on any new mega-projects until 2012, pending commissioning of the first unit at Medupi. Finance Director Bongani Nquababa said this would exclude any projects "1,000 MW-plus", and could affect the timing of the massive aluminum smelter Rio Tinto Alcan planned to build at Coega in the Eastern Cape. A Rio Tinto Alcan spokesperson expressed confidence that the project would move forward. The company had negotiated a long-term electricity supply contract with Eskom in 2007 that included compensation for shortfalls in electricity supply. The 735,000 ton, 1,350 MW, $3.25 billion aluminum smelter project has been delayed since its conception by Pechiney, as it was acquired first by Alcan, then Alcan was in turn acquired by Rio Tinto. -------------- Eskom's Way Forward -------------- ¶7. (SBU) Short-term, Eskom is approaching the Treasury for balance sheet support as it seeks to fund its five-year, $ 25 billion capital investment program and in light of credit rating agencies raising concern about Eskom's deteriorating debt-to-equity ratios. Standard & Poors has threatened to lower Eskom's investment grade BBB- credit rating if it does not secure additional capital from its principal shareholder, the government, in the next three months. Eskom gained approval from the regulator for a 14.2 percent tariff increase (whittled down from the requested 18 percent). (Note: South Africa enjoys low-cost electricity of around 2 U.S. cents per Kwh - when available. End Note.) An AES-led consortium will soon begin construction on two gas-fired plants totaling 1,000 MW, ambitiously targeted for the end of 2009. Eskom is de-moth-balling some plants and is using some peak-load plants as part of its current base load. Eskom reportedly still exports small amounts of power to neighbors, including Namibia, Botswana, and Zimbabwe, but these amounts have been steadily declining. The sustainability of these power exports is now under question as local commentators have called on Eskom "to come clean" about these exports during a time of growing domestic power shortages. ¶8. (SBU) Longer term, Eskom ambitiously plans to build up to 20,000 MW of nuclear power stations, out of a planned doubling of current capacity from about 40,000 MW to 80,000 MW by 2025. Westinghouse and Areva of France are competing for the first tranche of 3,500 MW and the larger fleet of as many as 14-18 power plants. Preliminary bids are due January 31 and more detailed bids will be submitted March 31. Eskom and the government are expected to make technical and political reviews in advance of Eskom's board meeting in June. The government anticipates that some of the new nuclear build would comprise new Pebble Bed Modular Reactor technology (where Qcomprise new Pebble Bed Modular Reactor technology (where Westinghouse is also a partner). Westinghouse is pitching its strength in localization as a key component of its fleet approach. One consequence of the growing power shortage is that Eskom will be under intense pressure to award the nuclear contract without delay. Embassy therefore expects the award to be made to Westinghouse or Areva by mid-2008. In addition, the government has announced that up to thirty percent of new electricity generation capacity would be available to Independent Power Producers (IPP),like the AES project, which represents the first significant greenfield IPP. -------------- COMMENT -------------- ¶9. (SBU) The media is full of stories complaining about load-shedding and its costs and inconveniences, adding additional angst to the regular topics of crime and traffic congestion. Residential and business security features, such as electric fences and alarms, are compromised by the outages. Motorists grapple with chaotic intersections where stop-lights are not functioning. Energy PRETORIA 00000132 003 OF 003 Specialist recently did his normal 20 minute commute in quiet Pretoria in two hours due to traffic jams associated with stop-light outages. ¶10. (SBU) With Eskom's effective reserve margin now zero and given likelihood of deferred or inadequate maintenance, the problem is likely to get worse before it gets better. President Thabo Mbeki made a public apology and accepted responsibility for the country's power problems last December. Unfortunately, neither the SAG nor Eskom has provided an immediate solution, other than bearing up under growing power cuts for the next several years until the next major power plants come on line. BOST