ESKOM AND MINES: AIMING FOR THE LIGHT AT THE END OF THE

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TAGS: ENRG EMIN EPET SENV BEXP MGMT SF MZ BC
SUBJECT: ESKOM AND MINES: AIMING FOR THE LIGHT AT THE END OF THE
TUNNEL

REF: A) Pretoria 168
B) Pretoria 132 and previous

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1. (SBU) SUMMARY: South Africa's electricity crisis continues
unabated. Economists debated the costs of most of the country's
mines being shut down for almost one week, as they started to move
back into partial production on January 30-31. The government has
announced a stabilization plan to achieve reduced demand to bridge
the five-year gap to new supply, but Eskom was already not reaching
agreed targets. The mixed message from the government and Eskom
raises uncertainty for large investors. The SAG and Eskom stress
the importance of maintaining exports and imports with neighbors.
End Summary.

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Mines Slowly Reopen After Unprecedented Closures
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2. (SBU) South Africa struggles with the consequences of the
unprecedented closure of its mines in response to the electricity
supply crisis that came to a head on January 24 when Eskom told
mining companies it could no longer guarantee supply (Refs). The
mines remained closed for four days, but began reopening on January

30. Eskom has been widely quoted that during the mine closures,
10,000 MW - or about one-quarter of its approximate 40,000 MW total
capacity - was off-line due to planned and unplanned maintenance and
problems with coal supply and quality. The "wet coal" excuse was
debunked at the start of the episodic load-shedding at the end of
2007 with respect to coal combustion, but it has resurfaced with
respect to wet coal negatively impacting its handling inside and
outside the plant. A 60-Minutes-style "Carte Blanche" television
expose showed that many plants' coal stock-piles were at extremely
low levels and there had been problems with tendering of coal
delivery contracts. Two General Electric officials told Energy
Officer on January 29 that Black Economic Empowerment (BEE)
affirmative action contracts for coal deliveries had been delivered
in some instances to inexperienced firms who were unable to deliver
coal to stock-piles.


3. (SBU) South Africa's top three gold producers began to ramp up
production on January 30 with Eskom's assurance that it would
provide 80 percent of normal supply, and then 90 percent by the end
of January 31. Coal suppliers promised to boost supplies to Eskom.
AngloGold Ashanti said that all of its underground mines were moving
toward full production, and it hoped for resumption of normal
operations the first week in February. An official at AngloGold
Ashanti's Mponeng mine (where Economic officers visited just prior
to the outage) confirmed to Energy Specialist that production shifts
were working on January 31. A Chamber of Mines official told Energy
Specialist on January 31 that it may still be difficult to assure
Eskom providing substantially more than 80 percent. In fact, late
on January 31, Eskom withdrew the authorization to ramp up to 90
percent "owing to system instability" and announced that mining
Qpercent "owing to system instability" and announced that mining
companies and iron/steel producers would have to maintain usage at
80 percent. The Chamber of Mines official said that mines may have
to organize some sort of sequencing of production and operations.
The Gold Fields CEO complained in a series of interviews that this
would result in a 20 percent production decline with "profound
results". Local smelter Hernic Ferrochrome said that 10 percent
less electricity means 10 percent less production.

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The Government Has a Plan - But Eskom Struggles
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4. (SBU) Public Enterprises Minister Alec Erwin announced agreement
on a stabilization action plan for mitigating the electricity crisis
on January 29, which would allow mines to begin operating again by
January 31 with 90 percent of their normal electricity (already in
question two days later). In phase one between February 1 and the
beginning of March, the SAG would cut 4,000 MW, initially through
load-shedding, then through "preemptive load curtailment" and
targeted reduction from specific customer categories. In the second
phase from March to July, the SAG would introduce power rationing
(learning from experience in Brazil),power conservation,
incentives/penalties, and supply-side responses, saving a sustained

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3,000 MW through 2012 when new coal-fired units start to come on
line (Refs). Minister Erwin also sought to counter claims that
large investments were at risk - as earlier announced by Eskom; he
claimed that the power shortage was not a long-term problem. Press
reports indicate that Rio Tinto is rethinking its investment for a
significant aluminum smelter at Coega on the coast, for which it has
a long-term contract with Eskom.


5. (SBU) Ministers repeated apologies for the electricity crisis in
a special session of Parliament in Cape Town on January 30, but
stopped short of offering any firings or resignations to satisfy the
blame game. Energy Minister Sonjica Buyelwa unveiled a ten-point
plan to encourage South Africans to change the way they use
electricity: "We are confident that we have the ability to turn
around the situation. We reassure South Africans and the world that
all our projects will be on course and that the 2010 FIFA World Cup
is not under any threat." Amid jeering from opposition MPs, she
advised: "Go to sleep earlier so that you can grow and be cleverer."
In addition, she blamed the power crisis on the "country being part
of the global village." "There have been black-outs in the U.S. and
Europe, and Brazil has gone through the same experience," she said.



6. (SBU) General Electric CEO Jeffrey Immmelt told Economic
Officers on January 29 that his company was offering to help South
Africa with 4,000 MW of gas-fired capacity in two years. He said
that he was going to make this offer personally to President Mbeki
later that day.

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Links to Neighbors Important
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7. (SBU) In frequent interviews, Minister Erwin has stressed the
importance of the Southern African Power Pool and the relationship
with international partners with whom South Africa has contracts to
supply electricity. Eskom's Managing Director emphasized that South
Africa exports and imports electricity, citing a "huge amount of
power" from Mozambique, a limited amount from Zambia, and a limited
amount from as far away as the DRC. As of January 30, Eskom
reported that about 300 MW was being exported primarily to Namibia
and Botswana (with smaller amounts to Swaziland and Zimbabwe).
Eskom has cited that it imports about 1400 MW from the Cahora Bassa
hydroelectric dam on the Zambezi in Mozambique, and in turn it
exports 950 MW of that to the Mozal smelter. South Africa is
looking to its neighbors to provide additional electricity in the
future. The proposed Mmamabula 2100+ MW coal-fired plant in
Botswana is negotiating with Eskom on an off-take agreement to gain
financing. An IFC official told Energy Officer that Eskom "plays
hard ball" with this and other potential projects given its
monopsony power.


8. (SBU) Speaking at a Chinese investment in Africa conference at
the University of Pretoria Business School, Anglo American
strategist Clem Sumter cautioned that South Africa's power crisis
Qstrategist Clem Sumter cautioned that South Africa's power crisis
demoted the country to the "relegation box" of the "first division"
(soccer league). Failing timely resolution of the crisis, he
warned, the country could slip to the "second division", negatively
affecting its status as "gateway to Africa" (although there is no
clear alternative to South Africa).


9. (SBU) COMMENT: The loss of almost a week of mining production is
unprecedented and will likely have a significant effect on South
Africa's economy and investment environment (mining represents 16
percent of direct and indirect GDP and significant amounts of
exports and jobs.) Mining companies will now not be able to rely on
an "uninterruptible contract" and this will weigh heavily on the
minds of boards of directors who are considering the approval of
major projects, especially energy intensive ones. In addition,
mines are also grappling with the vexing challenge of safety. The
AngloGold Ashanti Mponeng Gold Mine General Manager told Energy
Officer on January 24 the mine's year-on-year production declined in
2007 because of the SAG "over-reacting" and shutting down production
for one week because of a fatality. Now this mine and others are
grappling with the uncertainty of comparable or greater closures
because of electricity disruptions in 2008.

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10. (SBU) Eskom and the government need to have a plan, including
implementing more effective planning for and mitigation of
electricity shortfalls. Because they have not had a viable plan to
date, they have resorted to last-minute improvisation. Significant
"unplanned maintenance" is the real challenge and shows the risks
and uncertainty of running aging plant at peak loads for prolonged
periods. Both the initial improvised measure of emphasizing
load-shedding on residents and small businesses and the later
approach of focusing the burden of power cuts on the mining sector
are both measures that are not sustainable from a political or
economic perspective.

TEITELBAUM