ESKOM/SAG IMPROVISE RATHER THAN STRATEGIZE ON

C O N F I D E N T I A L PRETORIA 000758 SIPDIS SIPDIS DEPT FOR AF/S, EEB/ESC AND CBA STATE PLEASE PASS USAID STATE PLEASE PASS USGS DOE FOR SPERL AND PERSON DOC FOR ITA/DIEMOND E.O. 12958: DECL: 04/08/2018 TAGS: ENRG EPET EMIN EINV SF SUBJECT: ESKOM/SAG IMPROVISE RATHER THAN STRATEGIZE ON POWER WOES REF: A. PRETORIA 726 ¶B. PRETORIA 565 ¶C. PRETORIA 315 ¶D. PRETORIA 214 ¶E. PRETORIA 168 AND PREVIOUS Classified By: ECONOMIC COUNSELOR PERRY BALL FOR REASONS 1.4 B AND D ¶1. (C) SUMMARY: South Africa continues to grapple with its short- and long-term power crunch as it approaches three months from its January 24 nadir when state power supplier Eskom cut off electricity to mines and large industrial consumers. Eskom is implementing rationing plans and imposing scheduled load-shedding to threaten customers to make reductions and to remind them that the problem is far from resolved. Industry contacts criticize a lack of senior government leadership and strategic vision to overcome power problems. The Chamber of Mines Economist calls for greater fiscal incentives to modify consumer behavior. Mines will suffer short-time production losses, but will likely adopt efficiencies to adapt longer-term. END SUMMARY. -------------- -------------- Eskom's Electricity Gap - Give Us a Rate Increase -------------- -------------- ¶2. (C) South Africa continues to grapple with its electricity shortfall, dramatically highlighted by the January 24 cut-off of the mining sector for almost a week (reftels). Impala Platinum Managing Director Les Paton told Energy Officer and Specialist on March 18 that the capacity shortfall was so dire on January 24 that the system was on the brink of failure, which would have necessitated three weeks to get back up and running. He did not fault Eskom's shut-down of major industrial customers at that point, noting the 50 Hertz system had breached 48.5 Hertz and 48.2 Hertz would have precipitated a cascading black-out. Many observers confirm the persistent capacity and reserve margin short-falls, primarily due to planned and unplanned plant maintenance, exacerbated by coal stock-pile shortages. ¶3. (C) Eskom General Manager Andrew Etzinger confirmed the vulnerability of the national power grid and described the implementation of the company's response plans at an AmCham Breakfast on April 4. He noted that Eskom had completed the system stabilization phase by imposing an overall reduction of 4,000 MW (about 10 percent of total installed capacity) and the nation was now in the power rationing phase. Etzinger repeated common themes of capacity expansion, demand side management, and "predictable" load-shedding. He elaborated on Eskom's controversial request for a 53 percent rate increase, back-dated to April 1, on top of the approved 14 percent increase. The proposed 53 percent increase would pay for increased costs: higher coal and fuel costs, including the overworked peaking capacity gas/diesel turbines; demand-side management; and capital expansion. The electricity regulator NERSA has two months to evaluate the request. -------------- Where's the Leadership? -------------- ¶4. (C) SA Chamber of Mines Economist Roger Baxter asserted Q4. (C) SA Chamber of Mines Economist Roger Baxter asserted to Energy Officer and Specialist on April 4 that there was insufficient high-level government leadership and strategic planning to overcome South Africa's power crisis. He lamented that on business day 55 since the dramatic January 24 power cut-off to the country's mines, Eskom was still improvising and the government had not offered clear leadership or a strategic approach. Baxter opined that the 138 large industrial firms had overwhelmingly borne the brunt of Eskom's power cuts, which ultimately was not fair or sustainable. Baxter pointed out South Africa's dependence on portfolio investment to finance its current account deficit, noting that mining companies represented 35 percent of the Johannesburg Stock Exchange's capitalization. He concluded that "sticking it" to the mining companies would have dangerous economic consequences on portfolio flows, investment, employment, and exports. ¶5. (C) Baxter described key results of a survey carried out by the Chamber of Mines on the effects of the sustained provisioning of 90 percent of historic power to mining companies (he noted that only a few deep mines, primarily gold, had in fact negotiated an increase to 95 percent): - - Mining investment would fall 12 percent per annum over the next five years. - - Mining employment would fall by as much as 30,000 per year (versus 40,000 jobs created last year, taking total mining sector employment up to 500,000). - - Gold production would fall 15-20 percent (because deep mines require significant power for cooling and ventilation). - - Platinum production would fall 10-15 percent (platinum smelters are power intensive) Baxter noted that surface and shallow mines were less effected, like coal and diamonds. He said gold production was down 16.5 percent and overall mining was down 10.5 percent in January year-on-year. Industry observers will be closely watching the February gold production numbers. -------------- Where Are the Incentives? -------------- ¶6. (C) Baxter and other interlocutors criticize Eskom's and the SAG's emphasis on sticks rather than carrots, in jaw-boning consumers to reduce consumption without offering incentives. Baxter advocated using some of the South African Government's fiscal surplus to fund tax incentives to encourage consumers to put in place solar power water heaters (with a potential savings of 2,000 MW) and efficient lighting (with a potential savings of 1,000 MW). He pointed out that there is a lot of potential for "smart", energy-efficient appliances and buildings, like USDOE's energy star program. Baxter said he participates on a Business Unity South Africa (BUSA) committee making these kind of recommendations to government, but he decried the lack of high-level leadership in the SAG on this problem. He noted that the National Electricity Response Team had a competent leader in Department of Minerals and Energy (DME) Deputy Director General Nelisiwe Magubane, but the SAG should designate a more senior leadership for an emergency task force. ¶7. (C) Baxter said the power shortfall was a big opportunity for government, but at the same time it was a big risk. He observed that there was now a political hiatus given "the blood-less coup" in the ANC by the labor union COSATU. Baxter said the power crunch was comparable to a number of other "network" problems (transport, water, IT, liquid fuels, skills, health, and education),where government should attract greater private sector contribution and implement a market-based approach. Elaborating on related liquid fuels Qmarket-based approach. Elaborating on related liquid fuels challenges, Baxter said 200 trucks traveled daily by road from Durban to Gauteng to provision the growing market. Delays in building the new pipeline for that route mean that demand for use of the pipeline will have already exceeded its design capacity when commissioned. In effect, its diameter will how have to be increased with probable further delays. -------------- Mines Soldier On -------------- ¶8. (SBU) AngloGold Ashanti CEO Mark Cutifani expressed bullishness about South Africa in a lecture at the Gordon Business School on April 3. He said AngloGold would produce eight percent more gold in first quarter 2008 up to 1.19 million ounces, citing that Eskom had stabilized power supply to the mining industry. Cutifani said his company had implemented 4.5 percent of energy savings since January, and there was potential to improve this by another 5 percent over the next twelve months. "This is not an issue that will stop AngloGold from growing," he said. AngloGold's approach has been consistently positive, compared to Gold Fields which has threatened significant job cuts as a result of future power reductions. Gold Fields CEO Ian Cockerill resigned his post and will take the senior position at AngloCoal, setting the mining industry abuzz. Power will remain a critical challenge to the mining industry, but existing companies will likely adapt and maintain profitable business. ¶9. (C) COMMENT: Three months after the worst moment of the power crisis, industry observers legitimately ask where is the government's cohesive leadership to overcome the long-term problem and why has so little been accomplished? The government has employed more sticks than carrots, and has failed to tackle demand and efficiency with fiscal and other incentives. Time is passing and the southern hemisphere winter is fast approaching. BOST