Meeting with Eskom on IPAP2 and outstanding issues, including impact on climate change

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Trade, Industry and Competition

10 August 2010
Chairperson: Mr J Fubbs (ANC)
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Meeting Summary

The Division Executives of the Corporate Division and the Systems and Operational Planning Division of Eskom briefed the Committee on the power utility’s response to the challenges of climate change and the contribution to the Industrial Policy Action Plan.  Eskom had developed a strategy plan that focused on reducing carbon emissions, diversifying into renewable energy resources, technological research and development to produce cleaner carbon emissions, evaluating investment projects using a shadow carbon price and actively participating in various world forums. Carbon emissions were expected to increase until 2025 before increased efficiencies would result in a decrease in emissions.

Eskom facilitated the introduction of Independent Power Producers in terms of the Renewable Energy Feed-In Tariff programme by allowing access to the Eskom grid. To date, six IPP’s had signed agreements with Eskom. The National Energy Regulator of South Africa had approved price tariffs and the final IPP criteria were expected by the end of August 2010.

Eskom’s focus during the following three years would be on increased energy efficiency as demand would continue to exceed supply. There was a high risk of blackouts and Eskom required widespread support to achieve improved energy efficiencies. The Medupi power station would come into production in three years. Decisions needed to be taken during 2010 to meet the energy demand beyond 2017, when the Kusile power station came into production.

South Africa needed to increase nuclear power generation capability.  The lead time for nuclear facilities was at least ten years and the major challenge was obtaining funding.  Eskom continued with the environmental impact assessment studies on the three sites identified.

Members asked questions about the impact on jobs, the likelihood of a decrease in the cost of electricity and of future blackouts, the status of the planned Nuclear 1 power station, the assistance provided to municipalities to develop skills, the agreements with neighbouring countries to import power, the regulation of the cost of electricity paid by municipalities, the calculation of the cost of nuclear energy and whether or not the cost included the de-commissioning of the plant, if any conditions were attached to the funding provided by the World Bank for Concentrated Solar Power programme, the action taken with regard to illegal electricity connections, the support for locally-produced solar panels and the location of training facilities.

Meeting report

Briefing by Eskom
Mr Steve Lennon, Division Executive: Corporate Division, Eskom, said that climate change was a key priority for the organisation because of the long term nature of the business of the power utility.  Eskom had developed a six point strategy plan encompassing diversification, energy efficiency, adaptation, innovation, investment and advocacy (see attached document).

With regard to diversification, while coal would still play a major role, the target was to reduce emissions by one third by 2025 by diversifying into clean coal gasification technology, increasing the use of renewable energy and nuclear energy.  The target set to increase energy efficiency was a saving of 5500 megawatt in 10 years. While carbon emissions would increase until 2025, efficiencies would result in a decrease in absolute emissions after 2025.  Concerning adaptation, the negative impact of climate change would necessitate the establishment of new power stations that utilised dry cooling, which used less water. Innovation included research and development on, for example, underground coal gasification, smart grid applications and load management.  The investment strategy involved green financing and the evaluation of projects by using a shadow price for carbon, which was based on the future value of carbon.  Advocacy involved participating with Government departments and being active in various world forums, such as the World Economic Forum.

Mr Kannan Lakmeeharan, Division Executive: Systems Operations and Planning, Eskom, said that the organisation was acting as a facilitator to the introduction of Independent Power Producers (IPP’s) to the Renewable Energy Feed-In Tariff (REFIT) programme by allowing IPP’s to use the Eskom grid. The introduction of IPP’s was based on an integrated resource planning process framework, which diversified the energy supply to include other types of sources of energy, such as solar, wind and nuclear. To date, six IPP’s had signed agreements with Eskom. The Regulator had approved price tariffs and the issuing of the final IPP criteria by the National Energy Regulator of South Africa (NERSA ) by the end of August 2010 was awaited.  Eskom had a long term contract with Cahora Bassa and short term agreements with Zambia and the Democratic Republic of Congo. REFIT was a R22.2 billion investment, of which R4.7 billion would be paid out via tariffs.

Industrial Policy Action Plan (IPAP) manufacturing opportunities would exist in REFIT programmes for solar water heaters, wind farms, biomass fuels, Concentrated Solar Power (CSP) and automotives. Eskom was encouraging the establishment of a solar park to be built where a solar water heater manufacturing facility would be situated.

Looking ahead, Eskom saw standardisation as the way to provide consistency and stability to manufacturers. Planning of the infrastructure of the electricity transmission grid in place should take place at the national and regional levels.  Eskom promoted the introduction of a carbon tax, although there was already a carbon tax of 2c per kWh in effect. Eskom hoped to make a contribution when South Africa hosts the climate change programme in 2011.

Mr S Marais (DA) wanted clarification of the carbon output for the period 2004-2006. He was concerned about the impact of the use of biomass products on deforestation and noted that the presentation had made no mention of bio fuels.

Mr Lennon said that carbon output had expanded during 2004 to 2006 as a result of the expansion of capacity, with mothballed power stations such as Camden coming on line. The biomass products were derived from renewable sources and waste products. Bio fuels were considered to be too expensive.

Mr Lakmeeharan said that ferrochrome aluminium smelters had come on line during the period as well.  The cold winters experienced resulted in an increased demand for power as well.

Ms C Kotsi (COPE) asked if the envisaged reduction in the use of coal would affect jobs.

Mr Lennon said that coal would continue to play a role. There were massive coal reserves in the Waterberg region as well as other untapped resources in the country. South Africa’s coal was considered to be the cleanest and as clean coal technology developed other unused resources would be released. An increase in coal mining activity was envisaged as coal combustion in other countries was increasing. Jobs in the renewable energy sector were being created for engineers and artisans.

Mr B Radebe (ANC) asked if the price of energy would decrease when the planned efficiencies were implemented. He asked if there would be further blackouts and if Eskom could quantify how many jobs the organisation created directly.

Mr Lennon said that the experience in Europe had shown that costs had increased as carbon emissions were tightened.  He predicted that the price of energy would continue to increase.

Mr Lakmeeharan said that, until the Medupi power station came on-stream, the demand would exceed the supply for the following three years.  Eskom’s focus would be on energy efficiency. There was high risk of power blackouts and support was needed to drive home the need for improving the efficient use of the power supply.  Decisions had to be taken during 2010 to meet the demand or power beyond 2017, when the Kusile power station came on line.

Mr D Ross (DA) said that he had hoped to see a larger percentage of imported electricity in the energy mix.

Mr Lakmeeharan said that it was important to work with neighbouring countries.  Eskom engaged neighbouring countries through SADC, the Department of International Relations and the Southern African Power Pool.

Mr N Gcwabaza (ANC) asked if Eskom planned to assist municipalities with the development of skills.  The lack of skills had a negative impact on municipal service delivery.  He asked what steps Eskom was taking to deal with the problem of illegal connections in certain communities and to make the communities aware of the safety hazard of illegal electricity connections.  He wondered if Eskom was facilitating the manufacture of solar panels by local enterprises.

Mr Lakmeeharan said that Eskom dealt with municipalities on a regular basis and provided assistance with the sourcing of coal for municipal power installations as well as with skills development.

Mr Lennon said that Eskom had a community outreach programme, which focused on creating awareness and educating communities on the importance of safety measures as there had been many fatalities through electrocution.  Illegal connections reduced efficiency of usage. The INFILS programme was devised to ensure that electrical connections were properly made and 20,000 connections were done per annum. Other programmes delivered 250,000 solar panels per annum and Eskom was attempting to stimulate the market by giving preference to local manufacturers in the procurement process.

The Chairperson asked what needed to be done to result in a radical reduction in carbon emissions.

Mr Lennon said that carbon emissions would be reduced when coal-powered power stations were de-commissioned. The challenge was to build power stations to replace them.

Mr A Van Der Westhuizen (DA) invited comment on the statement made that Eskom contributed to the de-industrialisation of South Africa by dragging their feet regarding IPP’s and long term contracts.  As a result, South Africa was lagging behind other countries and suffered losses in job opportunities.

Mr Lennon said that recognition of the role played by Eskom in industrialising the country by the provision of low cost electricity should be given. He denied that Eskom had dragged its heels on the matter of the IPP’s and the organisation was frustrated by the misperception that was created. Eskom was not in competition with IPP’s as the power utility focussed on large scale projects and IPP’s targeted the small scale projects.  Eskom had done everything possible to facilitate IPP’s and the constraints were caused by a lack of finance.  As soon as the Regulator had approved the price provisions, the IPP’s had signed the agreements with Eskom.

Mr X Mabaso (ANC) asked what role was played by Eskom in narrowing the poverty gap.

Mr Lennon said that Eskom supported the coal industry and had a budget of R31 billion.  Further details of the impact of the power utility were available in the Annual Report. Eskom had established a new fabrication training facility for boiler-making plants.  The procurement of the Medupi and Kusile power stations was 50% locally sourced and the two power stations had created 150,000 jobs.

Ms F Khumalo (ANC) asked if the energy price paid by municipalities and Eskom as regulated.

Mr Lennon explained that the price charged by Eskom to the municipality was regulated by the National Energy Regulator. NERSA recommended prices to municipalities. The issue of an independent market operator was not clear and the current policy position remained the 1998 White Paper.

Mr S Motau (DA) asked what was happening to the Nuclear 1 programme.

Mr Lennon replied that Eskom needed to make an investment decision as South Africa needed nuclear power generation capability.  Eskom was currently working on sourcing funding for the nuclear power programme. He was aware of the long lead times (i.e. 10 years) and the Environmental Impact Assessment (EIA) studies on three sites were in progress. Nuclear 1 would be built on one of the three sites identified. If the programme was rolled out, it was possible that all three sites would be used. More work on bridging the gap between the negative perceptions of nuclear waste and the technical realities had to be done.

Ms F Hajaig (ANC) remarked that nuclear power was costly and asked if comparative studies of viable renewable energy and nuclear energy had been done.

Mr Lakmeeharan said that typical nuclear costs varied between R1.00 to R1.50 per kW. The Department of Energy had published benchmark costs on the Department’s website.

Mr S Njikelana (ANC) said that developing countries would find it difficult to access technology from developed countries.  He asked if Eskom had a research and development strategy in place. He asked to what extent was IPP advancing the IPAP2 goals.

Mr Lennon said that the intellectual property of other countries was not difficult to access but South Africa should be doing more to encourage research and the development of its own technology by allowing tax deductions or by forming partnerships with research organisations. Eskom had an active coal research facility. He said that IPAP was also about diversification.

Mr Lakmeeharan said that an amount of R22 billion would be spent on capital investment during the following three years.  The investment over the longer term was however unclear.

Mr G Selau (ANC) asked to what extent South Africa was leveraging the resources of neighbouring countries, such as Lesotho and Mozambique.

Mr Lakmeeharan said that Eskom interacted with Lesotho on power generation but the supply of water was also an issue for South Africa. In Mozambique, the challenge was who would fund the work that had to be done in northern Mozambique.

The Chairperson asked if Eskom had determined how much energy was required by IPAP consumers.

Mr Lakmeeharan said that a growth rate of 4.5% to 5% over 20 years was projected.

Mr L Greyling (ID) asked how the cost of nuclear power was calculated and if the cost of de-commission had been considered.  He asked if tenders were awarded to Ariva and Westinghouse as Ariva had had massive cost overruns on their most recent project. He asked if there were conditions attached to the funding provided by the World Bank for the CSP project and if the funding was sufficient. He questioned the accuracy of Eskom’s forecasting model as the current conditions were caused by the decisions taken during the 1980’s.

Mr Lakmeeharan said the cost of nuclear energy included the cost of the de-commissioning of the plant and a portion of the cost of waste disposal.

Mr Lennon advised that no conditions were attached to the funding provided for the CSP in Upington.  The CSP comprised a total package for solar, wind and road to rail. The World Bank did not provide funding for all the projects and Eskom was in a position to fund the balance required. The plant was expected to be operational by 2016 and Eskom considered the plant to be the anchor for the solar park concept. The forecast during the 1980’s was based on an 8% p.a. increase in demand but the subsequent oil crisis and the economic sanctions imposed on the country had slowed down demand.

Mr Marais asked how Eskom dealt with IPP tenders.

Mr Lakmeeharan explained that Eskom dealt with IPP’s by means of regional projects.  Alternatively, Eskom completed the initial work on the establishment of the site and the IPP focussed on the plant.

Mr Mabaso asked what was being done to maximise local production. He asked how communities would be organised and empowered to produce and/or distribute electricity.

Mr Lennon explained how rural communities in the United States of America had formed a partnership with a supplier to electrify rural areas.

Ms Khumalo asked if there were any Eskom training facilities other than in Gauteng.

Mr Lennon replied that Eskom had an academy of learning with an enrolment of 6000 learners.  Training facilities were not limited to Gauteng.

The meeting was adjourned.


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