BusinessSectorsCan SA's Eskom keep the lights on?


Posted on Monday, 06 May 2013 17:46

Can SA's Eskom keep the lights on?

By Jana Marais in Johannesburg

The 4,800MW Medupi coal-fired plant is two years behind in its construction schedule/Photo©SIPHIWE SIBEKO/REUTERSFive years after blackouts shut down mines, South Africa continues to rely on Eskom for 95 percent of its power.

With project delays, red tape hampering independent producers and tariff increases halved, the crisis is far from over.

Jana Marais in Johannesburg

After decades of underinvestment, Eskom, Africa's largest power utility, is desperately playing catch up to meet the needs of South Africa's growing economy.

It is spending R340bn ($37.6bn) on a new programme. At the end of last year, it signed the first long-term power contracts with independent producers since the 1970s.

Through power buybacks from high-intensity users, 10 percent savings deals with larger customers and the use of expensive open-cycle gas turbines, it has managed to prevent further load shedding.

However, budget overruns and delays in getting new capacity online mean power supply remains extremely tight and is likely to remain so for the foreseeable future.

When floods in Limpopo Province limited power imports from Mozambique and a technical fault halted a unit at Koeberg nuclear plant in February, the reserve margin – the difference between supply and demand – dropped to as low as 1 percent.

The international benchmark is 10 percent.

Coupled with crippling tariff hikes – average Eskom tariffs jumped 200 percent over the past five years – weak electricity provision is threatening jobs and investment as the government aims to create 5m new jobs by 2020.

The Energy Intensive Users Group (EIUG) of Southern Africa, whose members include miners AngloGold Ashanti, Xstrata and BHP Billiton, estimates that demand of around 2,000MW is already taken out of the system due to power buybacks and companies operating below capacity.

By paying customers not to use electricity, state-owned Eskom, with total capacity of around 42,000MW, not only incurs additional costs but also loses revenue needed to service its ballooning debts.

"The issue is not only the output that is lost because companies operate at less than capacity, but also the investment decisions on new projects and expansions that weren't made because of a lack of supply," says Mike Rossouw, chairman of the EIUG.

In 2009, Rio Tinto cancelled a planned $2.7bn aluminium smelter near Port Elizabeth after Eskom reneged on a power supply deal.


"There was massive underinvestment, and we are now paying for our sins of the past. In the 1990s and 2000s Eskom was supposed to be capitalised and it wasn't, because people said the private sector should be allowed [to enter the market].

"This didn't happen. We need a competitive tariff – the increases have already killed many jobs," says Irvin Jim, general secretary of the National Union of Metalworkers of South Africa (NUMSA).

South Africa has historically provided cheap electricity to industrial consumers, negotiated in apartheid-era purchase agreements, although international comparisons now put the price for industrial users above that of other emerging economies such as Turkey and Thailand.

NUMSA, which represents most of Eskom's workers, has been one of the unions involved in long- running labour issues at Medupi, the 4,800MW coal-fired power plant under construction near Lephalale in Limpopo Province.

A dispute in January saw workers locked out for more than a month. before public enterprises minister Malusi Gigaba intervened to get stakeholders back to the negotiating table.

The budget for Medupi, which was the first new coal-fired power station to be built in the country in more than 20 years, has ballooned from an estimated R70bn to R130bn, while the start date was delayed from 2011 to 2013.

It was supported by a controversial $3.75bn loan from the World Bank. Further delays are likely given the unrest, according to the EIUG.

The trouble at Medupi might well mean the end of the career of Eskom chief executive Brian Dames.

Speculation is rife that he might leave in July after the annual general meeting when Paul O'Flaherty steps down as chief financial officer.

Gigaba's intervention was unexpected and widely interpreted as a loss of confidence in Eskom's ability to resolve the dispute.

In January, the ruling African National Congress's national executive committee also fiercely criticised Eskom's proposed 16 percent tariff hike over the next five years.

The National Energy Regulator of South Africa (NERSA) awarded Eskom only half the requested increase in late February, criticising its buyback programmes, maintenance backlog, unplanned outages, cost overruns and delays.

"We think the increase is sufficient for Eskom to operate the system efficiently," explains Thembani Bukula, a commissioner at NERSA.

"They'll have to cut the cloth to fit the dress they have to wear." Eskom's focus will now be on cutting costs, improving efficiencies and coal-burn rates, and limiting unplanned outages.

Kusile, another 4,800MW coalfired power station under construction about 130km east of Johannesburg, and Ingula, a pumped-water storage scheme in KwaZulu-Natal, have seen their switch-on dates pushed back.

Regulatory hurdles have hampered the introduction of independent power producers (IPPs), with only 1,082.6MW contracted at an average price of R0.80/ kWh from IPPs as of September 2012.

Government has also been delaying a decision on new nuclear plants, in which Eskom is likely to play a key role.

The state's strategy is to add 9,600MW of nuclear power by 2030, but no tenders have been issued yet.


Its renewable energy programme, which aims to produce 3,725MW by 2016, has also experienced delays.

"It's not the right time for renewables. The technologies are getting cheaper all the time internationally, and the current deals are adding huge costs to Eskom," explains Mike Schussler of

In November, Eskom signed the first 20-year contracts, agreeing with 28 pro- viders to buy 1,441.7MW at prices ranging between R1.14 and R2.75 per kilowatt hour (kWh), significantly higher than Eskom's current selling price of R0.50.

Wheeling tariffs – the fees that Eskom charges generators to transmit power from the generator to its customers – are higher than in many developed markets and are a hurdle to private power producers, according to Xstrata.

The company has shelved plans for a 300MW plant utilising low-grade coal in Mpumalanga Province●

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