ESKOM BENEFITS FROM A REPRIEVE OF REDUCED DEMAND WHILE

UNCLAS SECTION 01 OF 03 PRETORIA 000179 SIPDIS SENSITIVE 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 EMIN EPET SENV EINV EIND KNNP SF SUBJECT: ESKOM BENEFITS FROM A REPRIEVE OF REDUCED DEMAND WHILE STRUGGLING TO FUND EXPANSION REF: A) 08 PRETORIA 2654 B) 08 PRETORIA 2403 and previous C) PRETORIA 173 ¶1. (SBU) SUMMARY: The economic downturn has given state power utility Eskom a reprieve of reduced demand, but the supply and margin remain vulnerable. Eskom has managed to avoid controversial load-shedding since April 2008. Chief Nuclear Officer Clive Le Roux briefed NRC Commissioner Peter Lyons on the status of South Africa's plans for new nuclear build, in light of the recent cancellation of the 3,000 MW nuclear tender. The SAG remains committed to expanding from its sole Koeberg nuclear power plant, near Cape Town. Eskom is seeking additional government support and higher tariffs to fund its ambitious capital expansion program. End Summary. -------------- -------------- Eskom's Lights May Stay on This Year - but Margin Low -------------- -------------- ¶2. (SBU) One year ago, a crisis at state power utility Eskom threw South Africa into darkness, based on insufficient power supply and margin and exacerbated by insufficient coal stocks at power plants. Eskom CEO Jacob Maroga used the one-year anniversary of the crisis to tell the press that the maligned parastatal remains vulnerable, but it is in a far better position to keep the lights on this year than it was in 2008. Eskom's position has been cushioned by a slowdown in the mining and manufacturing sectors, which has led to lower-than-expected demand for power. But Eskom has also made progress in some of the areas that led to outages last year, like coal supply and technical problems (Ref B). Since last April, there have been no power cuts as a result of electricity shortages, but the reserve margin remains uncomfortably tight at 8 percent, up from a low last year of 4 percent, but still thin compared to the global standard target of 15 percent. Eskom completed a significant maintenance program over the quiet holiday season and improved its ability to cope with heavy rains on its coals stocks. Average coal stocks now stand at 38.7 days, compared to just 10 days last January. Over the last six months, Eskom has added some capacity to the grid, de-mothballing units at Camden, Grootvlei, and Komati and commissioning two small open-cycle gas units at Gourikwa. Two coal-fired stations under construction, Medupi and Kusile, together totaling 9,600 MW, have seen their projected costs surge to about $21 billion, more than 1.5 times initial estimates. Maroga asserted that these were not cost over-runs, but reflected closing the gap between initial price estimates and the real contracted prices, including expected price escalations. -------------- Ambitious Nuclear Plans Deferred -------------- ¶3. (SBU) NRC Commissioner Peter Lyons received an update on Eskom's expansion plans from Chief Nuclear Officer Clive Le Roux at Koeberg Nuclear Power Plant, while on a familiarization trip to South Africa January 18-24, 2009 (Ref C and septel). Le Roux reviewed the SAG QJanuary 18-24, 2009 (Ref C and septel). Le Roux reviewed the SAG decision to expand nuclear power and support the development of a nuclear-based industry in South Africa. He noted that the SAG white paper on energy targeted 50 percent of 40,000 MW new build for nuclear to increase nuclear's share of power production from 5 to 28 percent by 2025. He noted that Eskom had been designated as the enabler to create a local industry that would potentially include the full fuel cycle: mining, conversion, fabrication, and enrichment. Le Roux noted that Americans in particular were sensitive to enrichment. He said the SAG was still considering back-end recycling of nuclear fuel, but a decision had not been reached on this. This localization vision would include manufacturing and spin-off production of ASME standard components, including reactor pressure vessels, but the volume of the projected fleet was intended to justify localized manufacturing. ¶4. (SBU) Le Roux said the recent economic downturn and related financing difficulties for Eskom had caused the SAG to cancel the nuclear tender for the first tranche of 3,000 MW of nuclear power, short-listed to Westinghouse and Areva (Ref A). He said Eskom was approaching the SAG for more support on funding or debt guarantees PRETORIA 00000179 002 OF 003 for its overall expansion program, beyond the phased, $6 billion capital injection already identified. Le Roux asserted that even the two large-scale coal power plants under construction were at risk without additional SAG support. He characterized the recent SAG announcement (by Department of Minerals and Energy Deputy Director General Nuclear Nelisiwe Magubane) of a reduced targeted fleet of 6,000 MW nuclear as part of the "Cassandra" school in the current debate. Le Roux said the Cassandras believe the current economic growth downturn would lead to a permanent shortfall in demand. Le Roux identified more with the "Pollyannas," who believe that the downturn was not permanent and there would be some catch up in economic growth, given, for example, that population growth would not take a pause. He admitted the truth would lie somewhere in between. (Comment: Le Roux was indulging in hyperbole. Few analysts expect the current economic slowdown to be "permanent." End Comment.) ¶5. (SBU) Le Roux asserted that the SAG remained committed to increasing nuclear power, but that the critical path had been successively put off from 2014 to 2016 and now to 2018-19. He said the now-bust commodity boom had caused a doubling in all prices. He said that the Westinghouse/Areva bids submitted around January 2008 had basically increased 3.7-fold since pricing analysis from one year before. Le Roux said the Eskom board was shocked by the tender offer amounts. He noted that the rand had weakened and the tender pricing had included a premium for the transfer of all risk to the suppliers for a turn-key plant. ¶5. (SBU) Le Roux said South African power tariffs were unrealistic and failed to reflect the economic costs of production and new investment. Eskom has not yet made its formal application to the national energy regulator NERSA, but it has been calling for higher tariffs once again this year, following a 27.5 percent tariff increase last year. Le Roux said Eskom was in discussions with the SAG on some sort of financial solution which would allow Eskom to move forward on its capital expansion. He said Eskom could even take a minority equity partner for a nuclear power plant. -------------- Koeberg - French Built, American Design, African Conditions -------------- ¶6. (SBU) Le Roux described the two 920 MW Koeberg nuclear reactors as French-built, but American-designed. He said the 40-year life plant had been commissioned in 1984. The reference plant for Koeberg is the EDF CP-1 plant Tricastin (changed from the original reference plant of U.S. plant North Anna, when EDF created the CP-1 safety referential). Le Roux told Lyons that Koeberg had fallen behind on upgrades to the French reference plant. Koeberg was planning an outage of 63 days the following week (versus the average outage target of up to 50 days) in order to make progress on catching up on deferred upgrades. For example, this outage would Qcatching up on deferred upgrades. For example, this outage would allow replacement of control systems, generator and turbine controls, and pressure valves. He said Koeberg's safety would be in line with IAEA targets for newer plants. Le Roux said it was a challenge to find adequate skilled work force around Cape Town to do work associated with the planned outages. He noted that Westinghouse had opened an office in Cape Town to help with plant servicing. Le Roux added that Koeberg faced special challenges from low off-site grid reliability (Cape Town's remoteness from the rest of the grid) and atmospheric induced stress corrosion cracking of stainless steel pipe work and tanks. Le Roux also pointed out Eskom is operating the reactors at a reduced temperature of 10 degrees Celsius due to concerns about steam generator tube cracking, which can cause problems with reactor cooling, thereby accepting reduced output of 10-15 MW. (Comment: NRC notes that it is good that Eskom is aware of the issue and has taken action, but the adequacy of the action cannot be judged from this visit. End Comment.) ¶7. (SBU) Comment: Eskom is publicly grappling with the funding of its ambitious and necessary capital expansion program, striving to nail down additional SAG support and higher tariffs. The SAG has taken over and deferred the development of the nuclear program, but Westinghouse remains optimistic about its shot at new nuclear build, PRETORIA 00000179 003 OF 003 particularly because of the SAG's emphasis on its strength of localization. The SAG is negotiating with the World Bank and the African Development Bank has offered a loan to help finance Eskom's new build. These are international sources the SAG previously sought to avoid. Coal has allowed South Africa to keep power prices low, but this places South Africa as a high greenhouse gas emitter, particularly with respect to its GDP. There is no escaping that energy comes at first-world, global prices with a global environmental impact. ¶8. (U) NRC Commissioner Lyons has cleared this cable. BALL