Eskom update on Capital Expansion Programme, availability of power supply, and current reserve margin

Energy

14 March 2011
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

Eskom gave a presentation to a joint sitting of the Portfolio Committees on Energy and Public Enterprises on its Capital Expansion Programme. They spoke in depth about the critical need for an extension of the power generation capacity in South Africa, as well as the ever present developmental needs of the energy grid. They understood that the recent years of energy shortages put pressure on them to come up with solutions for the countries energy needs. Eskom’s pride projects were the massive coal fired power plants of Medupi and Kusile which would, when finished, provide a vast amount of power to South Africa.

They also spoke at length about the impact the projects would have on the country within the framework of economic development. Such massive projects would create both short and long term sustainable jobs. They would lead to the development of the areas closeby the projects. They provided detail on the costing and funding plan and the challenges arising from the project, especially the tight time line and the funding uncertainties. T
he state of the power supply now and in the future was discussed and what Eskom and South Africans should do “to keep the lights on" during the next seven years. Eskom concluded by speaking about the 49M Campaign whichis an Eskom initiative, supported by government, spurring an urgent need for the more than 49 million South Africans to embrace energy saving as a national culture, joining the global journey towards a sustainable future

The discussion concerns were about the lack of initiative shown in the renewable and green power sector, the level of sustainability of the jobs the build programme would create, the use of road rather than rail for the build programme, the special pricing agreement of BHP Billiton, the role of the independent power producers and open access to the grid, decisions about the nuclear programme, wind farms and the cooperation of municipalities. At one point Eskom’s association with Chancellor House through Hitachi Power was raised at which point the question was ruled out of order by the Chair.

Meeting report

The Chairperson welcomed the Portfolio Committee on Public Enterprise to the meeting although regrettably the Chairperson of that Committee, who was supposed to co-chair, would not be attending as well as the Minister, Deputy Minister and Director General of the Department of Energy. The Minister for Public Enterprise was also unable to attend as he was tied up in the same engagement as the Chairperson of that Committee.

Eskom Presentation to Portfolio Committee on Energy
Mr Chose Choeu, Divisional Executive of Corporate Affairs introduced his colleagues, Paul O’Flaherty, Chief Financial Officer, Kannan Lakmeeharan, Divisional Executive Systems Operations & Planning, Hillary Joffe, Chief Spokesperson and Carin de Villiers, Parliamentary Affairs Manager. Mr Choeu also apologised for the absence of their Chairman and CEOas they were both otherwise engaged. Without any further ado, Director O’Flaherty provided an update on its Capital Expansion Programme, starting with a business overview of Eskom that included details on its present and future generation, transmission and distribution capabilities. He moved on to South Africa’s requirements for its Capital Expansion Programme; its alignment with South Africa’s macro-economic principles, then the costing and funding plan.

Of the new capacity being installed, baseload coal-fired power stations accounted for 73%, while the peaking portfolio (Open Cycle Gas Turbine, pumped storage, wind) would contribute the remaining 27%. Kusile and Medupi would be the third and fourth largest coal-fired power plant in the world, respectively. A detailed overview of the build programme was provided. Focus was now on Medupi, Kusile, and Ingula - the first units would come on line between 2012 and 2014. While there was quite some progress already, there was a lot more construction work to be done in this programme. The programme would have significant impact on local industry, skills, jobs, infrastructure and regional development. A large share of the Medupi, Kusile and Ingula spend would go to the local economy, thereby also benefitting local construction companies. Many skills were being developed as local content requirements kick-start whole new industries in SA . The programme would fuel demand for relevant graduates and artisans and would grow the required skill base. Across Medupi, Kusile, and Ingula new employment opportunities would touch the lives of about 160 000 people. Medupi, Kusile and Ingula would support local and national infrastructure. There was strong Government support. The funding plan was explained. Challenges included the market; contracting and risk sharing; the timeline; funding; safety and skills.

Mr Kannan Lakmeeharan, Divisional Director: System Operations and Planning, spoke about the state of the power system now and in the future and what Eskom and South Africa should do keep the lights on during the next seven years.

Mr
Choeu concluded by speaking about the 49M Campaign whichis an Eskom initiative, supported by government, spurring an urgent need for the more than 49 million South Africans to embrace energy saving as a national culture, joining the global journey towards a sustainable future

Discussion
Mr L Greyling (ID) commented that energy efficiency should be the priority. He asked if there had been any commitment from industry that they would buy the electricity that would be made available by the new plants. He asked had industry considered providing some of the finances seeing that they would consume most of the power. Finally, why had the Eskom green initiative stagnated, and what were they doing to push that forward.

Dr G Koornhof (ANC) thanked them for their honesty on the possibility of upcoming power shortages. He wanted to know if there were enough engineers, artisans and professionals to undertake their massive projects. Did South Africa have the capacity to supply this and would they be undertaking to train and recruit all of the people needed? Could they also explain if this would have a knock on effect on tariffs for the public and how much that would be for the period 2011-2012.

Mr P Dexter (COPE) asked Eskom to explain why South Africa was plagued by this energy gap. He also supported a call for an explanation into the lack of initiative on the renewable energy front as well as with independent energy producers. What was their relationship to government’s New Growth Path? He pointed out a possible error on page 31 of the presentation

Director O’Flaherty said that when it came to the renewable energy sources, particularly the wind farms, they were still in the design phase. This was because Eskom needed to make sure that all the technology, funding, and design was clear before it was put out to tender. However the wind projects had been fast-tracked. In terms of solar they were still at the stage of choosing the technological solution they wanted before they could fast-track the project forward. With regards to the presumed error on page 31 of the presentation, he explained it was not an error. The R300 billion shortfall was correctly observed, and Eskom had a funding plan in place for that. With regard to the gap in demand it was well documented in history. All he could say was that they were where they were today and could not keep going back into history, they needed to sort out these issues going forward.

Dr S Van Dyk (DA) wanted to know how much electricity was being lost to energy theft. Also he asked why, when South Africa possessed the knowhow and experience, they had to wait so long before expanding nuclear power production. Finally he asked if Koberg nuclear power plant had a safety switch that could be used in the event of a natural disaster like the one recently seen in Japan.

Director O’Flaherty said that around R2 billion worth of energy or 4% of production, was counted as unexplained loss or theft. When it came to the extension of Koberg it would start coming in at around 2023. It was a long haul process, and they had to start planning now to get it extended by 2023.

Director Lakmeeharan clarified that the Japanese Fukushima plant was a generation one plant while Koberg was a generation two plant. These were different technologies. Koberg was also built on a raft designed to withstand a magnitude 7.0 earthquake on the Richter scale. Also one had to look at the seismic history of South Africa to determine if that design was sufficient. All nuclear power plants were built on a safety case determined by local environmental and seismic factors and Koberg was built based on this. One of the most critical elements of a nuclear power plant was having electricity to ensure the cooling system worked, and that water kept the rods cool. Koberg’s primary system was the national grid. Backups were a dedicated source of gas turbines, as well as diesel generators and further diesel generators on higher elevations. For security reasons he could not go into specific details. The four level security systems for the cooling were regularly tested. All this was overseen by the National Nuclear Regulator (NNR). They also participated in peer review on an international level. Naturally, the events in Japan were reason for concern.

Mr P Van Dalen (DA) asked what was being done to ensure the jobs they were creating were sustainable. He wanted clarity on the price of the Medupi power plant, and an explanation as to why the figures fluctuated so much. He asked what the underpaying of electricity sold to BHP Billiton did to the Eskom balance sheet, and would BHP Billiton aid in the funding of these power station projects. Finally had the preferential contracts been renegotiated as had been promised by the Eskom chairman last year.

Director O’Flaherty responded that in terms of getting some of these industrial actors to provide funding, the option had been considered last year, but had been discarded due to the costs. The private investors would require a somewhat high amount of repayment for their risk in investing. When it came to the sustainability of the jobs they were creating, the Director said he would not lie; they did not have a solution for that yet. However they did recognise that this was something they had to address. He hoped they would be able to work with the various industries involved to make sure that the jobs created remained sustainable. But he reminded the Committee that workers and contractors would not be direct employees of Eskom. On the costs they acknowledged the fluctuations. However as of today they had placed the majority of their contracts and had a much firmer grasp of the final cost of the projects. The numbers in the presentation were definitely the target by which they took aim. As for BHP Billiton and the 15% energy they take up, he could not comment. All he could say was they had two remaining special agreements, one with Skorpion Zinc and another was with Aluminium South Africa. Due to these deals they were losing out about R6.5 billion over the periods of the contracts. However he assured that Eskom was committed to renegotiating these by the end of the financial year. Healthy negotiation was already going on between all parties.  

Director Lakmeeharan said that there were no special pricing agreements except for those already in existence. All other customers had standard contracts. There was no guaranteed off-take.

Ms G Borman (ANC) asked what part of the huge amount of building material for the projects would be moved on rail. She also wanted clarification on the low percentage of Heaters Drains recovery pumps locally acquired. Finally she asked what measures did they have in place at power stations to deal with heavy rains that could reduce the efficiency of coal as an energy source.

Director O’Flaherty explained that because of the short-term nature of the projects, a lot of the transportation would unfortunately be done on road. There would be a significant deterioration of roads when materials would be transported from ports to construction sites. Their relationship with Transnet was more on the long term of getting the coal supply off roads and onto rail. He regretted that he did not have any specifications on the Heaters Drain pump question.

Director Lakmeeharan on the question of coal exposed to heavy rains, said that Eskom learned a valuable lesson in 2008 on always having a robust and healthy stockpile. They also knew they had to improve their handling of the wet coal and the first step would be to not get it wet. But because this was not easily done, they had to try two other methods. First they had mixed the coal, big rocks with smaller materials. Secondly they treated the coal with various chemicals to make it water resistant. They improved the transportation of the coal and the quality used at power stations and they had started to see results from this. 

Mr A Mokoena (ANC) commended Eskom on their work. With regards to the energy challenges faced by South Africa, how did they compare globally? Were others facing similar challenges? Could the ‘mothballed ‘power stations from the Eskom fleet be bought back online? He asked how much the Independent Power Producers could contribute. Finally he asked would previously trained workers be used in these new projects so as not to leave them behind.

Director Lakmeeharan replied that previous tariff levels were not attractive for independent power producers (IPP) to come in. Also the regulatory and governance framework was not all that conducive to attracting IPPs in the past. These were challenges that needed to be addressed. But Eskom was clear that they needed IPPs because they brought new skills and technology into the market and they allowed for performance bench marking. They also had an obligation to provide open access to the grid. They were trying their utmost to make it as easy as possible within the regulatory framework to give IPPs access. However, they could not sign on IPPs - that was the role of the Energy Department. Government and Eskom hoped that by 2030, 30% of the grid would be supplied by IPPs. With regards to global comparison, Director Lakmeeharan said that there were actually many countries facing the same challenges for different reasons. He mentioned amongst others China and India, who could not keep up with their growth, Chile who liberalized their energy sector after investing heavily in gas and Europe that was trying to make the transition to a greener economy. South Africa was certainly not alone in facing difficult energy choices.

Director O’Flaherty said that Eskom had gotten all the ‘mothballed’ plants they could back into service, the ones they had avoided were too costly and inefficient to bring back into operation.

Mr D Ross (DA) wanted clear decisions to be taken with regards to the nuclear programme.

Mr S Motau (DA) wanted to know if Eskom actually was seeking to increase the tariffs. He also asked if Eskom thought its relationship with Chancellor House, through Hitachi, was inappropriate. Considering the many billions of Rand involved, it could be seen as bordering on the criminal that a party in government should profit from a parastatal enterprise. Finally how accessible was Eskom making it for IPPs to contribute to the grid.

Director O’Flaherty answered that on the numerous questions on tariffs Eskom had assumed there would be, from 2010, three years of 25% increases on their tariffs as indicated by the regulators. It had become clear, and the regulators agreed, that there would be a required 25% increase for a further two years. After that they would be at a cost reflective tariff from an Eskom perspective and any increases thereafter should be inflationary.

Mr K Moloto (ANC) asked if the debt incurred by these projects would be manageable. He also wanted to know why IPPs had not been involved earlier. Could Eskom also comment on how they intended to address the challenges of lack of water in dryer areas such as Lephalale. He also appealed to Eskom that they should not answer any questions relating to their involvement with Chancellor House, as this was not the forum for such a discussion.

At this point several members of the Committees raised vocal disagreement.

The Chairperson called for order.

Director Lakmeeharan said that on the water challenges in Lephalale there was adequate water for the project itself. It was the running, especially dealing with the sulphur-dioxide emissions that required a lot of water. They would also need more water if they built a coal to oil plant, and for these purposes they would have to bring in water. This was a challenge Eskom could not carry alone and they were in dialogue with the Department of Water Affairs to secure help as there would be other users of this water than just the plants.

Mr J Selau (ANC) asked if Eskom envisioned South Africa at some point starting to produce and export products related to the projects instead of just importing from abroad. Did they see themselves as creating a long term sustainable employment source, beyond the power plant projects. Finally he asked how they saw themselves handling the distribution challenges of the future.

Director O’Flaherty said that with regard to all the questions concerning skill development, job creation and links to the New Growth Path this had been addressed previously in a presentation by their Chairperson to this Committee, he would refer them to that. However with regards to skill development, the power plants projects would require a large increase in skilled workers for construction, but also more importantly for maintenance. There would be new opportunities within the major projects for maintenance and technology training, but also within wind power, solar and nuclear when these projects became realized. He would prefer it if this issue was addressed in a separate session. They had been able to secure very favourable conditions for their loans and debts. The combined ‘basket’ of debt was around 9.7%. With regards to the funds not yet secured they had to be cautious when approaching the international market so to not end up with something extremely costly. On the question of creating sustainable production and export of equipment (boilers & turbines), he said that there has to be an understanding that these plants would be the last coal power plants created in a very long time. So the focus had to be on developing an industry of maintenance, which would also free them from reliance of the maintenance from the original manufacturers. Eskom was working on programmes to grow a home grown maintenance base for the plants. With regards to Hitachi, the Director agreed with the Chairperson and refrained from commenting on that issue.

Director Lakmeeharan stated with regards to immediate distribution issues, it would be tight this year and the next. It would be a very close call for their supply capacity unless it would be a warm winter or an economic slowdown, neither of which they could see signs of at the moment. He reiterated that with regards to the IPPs being signed on, that was the task of the Department of Energy. Eskom was ready to connect them to the grid. Unfortunately, there were very few plants that would be ready by 2012 to alleviate the energy squeeze that might be felt.

Director O’Flaherty elaborated on the challenge of distribution, saying that it was massive. One challenge was that almost 50% of their distribution went to municipalities who then themselves redistributed it. That meant the municipalities had to improve as well as Eskom. They did however not have any solutions on the table as to what the municipalities needed to do.

Ms N Mathibela wanted to know how many solar water heaters had been rolled out and where this had been done.

Director Lakmeeharan said that he did not have specific numbers on solar heated geysers. There were two targeted groups for these: the high end consumer who ccould afford them and the low end consumer who got them through the roll out programme. They did have close to 400 suppliers. however they acknowledged they needed to make it more accessible to those who did not have access.

Mr S Radebe (ANC) wondered why wind farm could not be established on Table Mountain to generate electricity.

Director Lakmeeharan said that Eskom could build wind turbines anywhere. Environmental considerations would have to be taken by local governments, if the City of Cape Town wanted to build wind turbines on Table Mountain, Eskom would be happy to comply.

Several members commented loudly they did not support that.

Director Lakmeeharan continued by saying that the wind resources of South Africa were being compiled into a Wind Atlas study that would hopefully be completed later this year. That would explain the best locations for connection and expansion of wind resources.

The Chairperson asked them to explain the defragmentation of supply concerning municipalities. He also wanted them to elaborate a little on the quarterly updates. Finally he ruled it out of order that Eskom answer any question about Chancellor House. 

Director O’Flaherty said that Eskom intended to give updates to the country on where it saw tightness in the supply. He also wanted to alert the Committees to the fact that they came out with their financial results twice a year as well.

Director Lakmeeharan said that on the defragmentation of supply to the municipalities, Eskom could not take accountability for something they did not supply. That question was perhaps better put to the Department of Energy.

Mr Selau wondered if there was an alternative to the distribution challenges other than coal powered generation.

Director Lakmeeharan said that it was important to remember that Eskom was not in charge of some distribution; municipalities had large responsibilities as well. As it was, he believed that Eskom dealt with around 2.5 million households that need electrification. They had been trying to find out how to accelerate the process of electrification. In the past they had tried alternatives, both grid and off grid electrification. However experience had shown that customers were not happy with off grid solutions and often wanted to connect to the proper grid network. Due to the fact that many households without power where located in very rural areas, both solutions where becoming more costly. 

Mr Moloto asked if they felt that South Africa had an adequate supply of coal given the massive demand from China and India.

Director O’Flaherty answered that they did not have all the coal contracts secured till the end of the mine life. They had the majority secured, and 75% of their coal contracts were longer than ten years. They had cost plus mines, which basically meant the mines were working on South Africa’s behalf to supply coal. Coal was always high risk and had to be kept under watch as it was one of the largest cost variables they had, and as a supply it was a challenge.

Mr Radebe wanted to know why the nuclear programme could not be expanded sooner. And what was being done to increase cooperation with municipalities.

Director O’Flaherty said it was a major challenge to cooperate successfully with the municipalities. He admitted that Eskom did not have a clear plan on how to work with the municipalities. The CEO was driving them to find solutions to work with skills transfer, cash management, billing management, and boosting of distribution networks. But Eskom also had to make sure they delivered on what they had promised. The Director was certain though that there was a solution there somewhere and that they had to continue to engage on it.

Mr Motau asked how far they were along in criminalizing the theft of electricity.

Director Lakmeeharan said Eskom had worked on proposals, but he had little details in front of him. At the moment one had to be brought up on other charges to deal with theft of electricity as it was not actually covered. They would welcome any legislation that criminalized theft of electricity.

Mr Ross commented on the massive loss due to the decay of infrastructure.

An ANC member asked to what extent they sat down with the municipal CFOs and assisted them in the billing strategies so they do not over-charge the users who would then refuse to pay for electricity.

Mr Mokoena wanted them to share the magnitude of the risks they were referring to.

Director O’Flaherty said that what kept them awake at night were many things, making sure Medupi came online in time, tariff increases, coal prices, making sure projects were delivered on time, the risk of collapse in the municipality value chain. These concerned him from a managing point of view.

 Director Lakmeeharan said that for him the challenges were a fleet of middle-aged generation plants that needed a lot of maintenance to keep up their sustained production. Both over and under supply was a challenge for them. Coal security and getting it to power stations and to stockpiles was also a point of concern from an engineering standpoint.

Mr Van Dalen wanted to know if BHP Billiton would still get rates below generation for electricity after the renegotiation of the contracts.

Director O’Flaherty said he certainly could not comment on what BHP had to say about Eskom. However the way Eskom approached this was that they were engaged on a commercial basis with a customer who had a valid legal agreement. The only negotiation they could do was commercial. So what they had to insure was that Eskom got paid, in Rand, a price that was higher than its operating costs. That was what they were trying to achieve by the end of this month or thereabouts.

Mr Greyling asked whether Eskom would support any legislation on energy efficiency.

Director Lakmeeharan said that there were two elements of legislation that Eskom would welcome. The first was one that would enforce energy efficiency standards and a mandatory one or failing that, a voluntary scheme for efficiency. They would be happy to supply Parliament with suggestions if that was needed.

Dr Koornhof commended Eskom on their new leadership and attitude approach. He would like to see a regular interaction to monitor their job creation and skills development process.

Ms N Mabedla (ANC) would like to see education on saving electricity.

Director O’Flaherty ended the discussion by thanking the members and the Chairperson.

The Chairperson closed with thanking Eskom and said he appreciated their honest replies. He did agree with Eskom that the skills and development debate was best taken in another forum. He hoped members of the press would treat the issues raised here properly and not resort to playing ‘political football’ or scaremongering.

The Chairperson reminded members of the joint meeting with the Committee for Mineral Resources the next morning. He said members ought to go there as it was on gas exploration in South Africa.

The meeting was concluded.

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