Eskom on its New Build Programme, with Minister of Public Enterprises

Energy

16 September 2014
Chairperson: Mr F Majola (ANC); Co-Chair: Ms D Letsatsi-Duba (ANC)
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Meeting Summary

The Portfolio Committee on Energy held a joint meeting with the Portfolio Committee on Public Enterprises to hear a briefing by Eskom on its New Build Programme. Ms Lynne Brown, the Minister of the Department of Public Enterprises headed up the team from Eskom.

Eskom announced that in 99 days, it would see the first synchronization of its Medupi Unit 6. The Executive from Eskom was very conscious of the fact that the project was three years late but the lessons learnt at Medupi Unit 6 were lessons which Eskom would embrace. Medupi was set to increase economic opportunity at the Lephalele area, as this was growing at a rate of 95% per year. Localization was also happening as 12 out of the 22 contractors were from the community of Lephalele, also 100 out of 167 purchase orders were from the local community. The Medupi Legacy Programme was also there to address the surrounding community’s socio-economic standing.

Some of the key challenges at Medupi and Kusile were around:
• Welding defects
• Control and Instrumentation
• Safety performance.

Lessons learned during the Build Programme were on development, deployment and adoption of internationally benchmarked project management methodologies, processes and systems; the establishment of a suitably capacitated contract management capability due to the complexity and extent of contractor claims; the establishment of suitable levels of monitoring, oversight and assurance across the Build Programme; and ensuring an adequate project pipeline to prevent the loss of skills and capabilities and to build on the existing capabilities through continuous improvement.

On Independent Power Producers (IPPs), key issues raised by Eskom were:
• Ability to secure a sustainable competitive price for the technology
• Funding model
• Knowledge of South Africa
• Proximity and availability of appropriate infrastructure
• Compliance with Grid Code requirements
• The hidden cost of storage and back-up being borne by Eskom and not the IPPs.

Some of the questions raised by Members were: how much were the delays in Medupi and Kusile costing South Africa and who would be for paying this? To what extent would the contractors be held accountable for the costs as a result of the delays at these plants? How much would the contractors be paying back to Eskom? Has there been some talk around the future of electricity pricing to accommodate the extra costs for nuclear? Was the money for the grid strengthening diverted away from the grid to the Medupi project? Why has not sufficient grid strengthening taken place? How much mega watts of power would Medupi and Kusile generate into the grid? What long term plans did Eskom have for skills transfers and to guard against retrenchments of those currently employed at these plants? How was Eskom planning to maximize opportunities within the Southern African Development Community (SADC) for energy? When would the complete tender documents on the Koeberg steam generators be made available to the parliamentary committees for scrutiny? An opposition member alleged high levels of corruption within Eskom and objected to the way government departments were approaching energy policy in South Africa. It was worrisome that the Minister of Energy had yet to submit the IRP 2030 to Cabinet for approval. It seemed as though the process was being delayed purposely. Parliament had a right to understand how energy policies were changed and why they were changing.  
 

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed the Minister of Public Enterprises and the Eskom team. The Portfolio Committee on Public Enterprises chairperson was also welcomed, together with members of the public and media. The Minister and Deputy Minister of Energy relayed apologies as they were unable to attend the meeting.

The Co-Chairperson thanked the Committee for the invitation. She said it was a great pleasure to sit in on the joint Committee so that Members could interact with one another on very important energy-related matters. Issues pertaining to energy were of much importance, especially in driving the economy and creating much needed job opportunities.

The Chairperson said the Committee has agreed to have more joint meetings with the Portfolio Committee on Public Enterprises on matters that are similar.

Ms Lynne Brown, Minister of Public Enterprises appreciated the comments from the two Chairpersons that there needed to be better coordination between the two Committees. This would also assist the DPE in its time management. She explained that Cabinet had approved a package to support a strong and sustainable Eskom to ensure the energy security of the country was maintained as well as to support the country’s GDP growth. This package was based on the recommendation from an inter-Ministerial Committee which was comprised of the Minister of Finance, the Minister of Energy, the Minister of Public Enterprises and the Minister of Cooperative Governance and Traditional Affairs. The committee reviewed a set of options which were available to ensure energy security. The package was a combination of adjustments which the regulator would consider through its regulatory processes. The Minister of Finance would give more detail in his medium term budget policy statement in October.

It was also clear that a discussion on the long term structure of the energy industry and the role of Eskom in this regard was long overdue; she was therefore pleased to announce that there would be a second inter-Ministerial meeting the following day. This package would assist Eskom to continue the construction of the new power plants. She said 99 days from today; Eskom would see the first synchronization of its Medupi Unit 6. She said she has been able to witness the progress within the plant first hand and she commended those who worked at Eskom and Medupi for an incredible construction. She was very conscious of the fact that the project was three years late but the lessons learnt at Medupi Unit 6 were lessons which Eskom would embrace and understand. Medupi was set to increase economic opportunity in the Lephalele area, as this was growing at a rate of 95% per year. Localization was also happening as 12 out of the 22 contractors were won by the community of Lephalele, also 100 out of 167 purchase orders were from the local community. The Medupi Legacy Programme was also there to address the surrounding community’s socio-economic standing. She was aware that there was still a lot of work which needed to be done before the project was fully completed; the DPE would monitor this work closely. Medupi Unit 6 would be up and running in December 2014 and Kusile in 2015. South Africans as a whole however had a role to play in efficient and responsible energy consumption.

The Chairperson thanked the Minister for the introductory remarks. He said both Committees should undertake a joint oversight visit to Medupi within the 99 days.

Eskom Briefing
Mr Collin Matjila, Acting Chief Executive Officer, Eskom agreed with the suggestion that the two Committees pay an oversight visit to Medupi as a joint initiative. Eskom would wait from the Chairperson with regard to the dates. He explained that 99 days were left until Unit 6 of Medupi was synchronized. Kusile would be synchronized in the first half of 2015 and Ingula in the second half of 2015. Medupi was the first coal-generating plant in Africa to use supercritical power generation technology.

On the industrial action impact at Medupi, he said construction progress in critical areas was hindered due to the industrial action of July 2014, with labour attendance of 40% - 70% during the period. However the workforce was back on site. Additional resources have been mobilised to Unit 6 by both the boiler contractor and control and instrumentation (C&I) contractor to mitigate any resource-driven delays. Similarly, additional shifts have been introduced 24 hours a day, 7 days a week to accelerate progress on site. Eskom is working with contractors to resolve any issues which could affect the schedule. With regard to Kusile, he said in addition to the protected strikes from metal and engineering contractors, Eskom experienced unprotected industrial action from civil contractors during July 2014. Disciplinary action, against civil contractors whose workers caused disruptions, has been taken. Some of the key challenges at Medupi and Kusile were around:

•Welding defects
Inadequate and/or failed Weld Procedure Qualification Records (WPQRs) and Post Weld Heat Treatment (PWHT) on the boilers. Defective and sub-standard welds needed to be re-treated or redone. All boiler repair work has since been completed.

•Control and Instrumentation (C&I)
The contractor was not able to meet some of its contractual requirements relating to C&I and this posed a risk to both Projects Medupi and Kusile and could have delayed the projects further. Eskom has worked and continues to work with the contractor to resolve identified issues within the required timelines.

•Safety performance
Poor safety performance on sites. Eskom and its contractors have implemented safety interventions, appointed additional resources, removed non-performing resources and changed work methods. As a result, safety performance and behavior has improved significantly.

He explained that some of the lessons learned during the Build Programme were around the development, deployment and adoption of internationally benchmarked project management methodologies, processes and systems, the establishment of a suitably capacitated contract management capability due to the complexity and extent of contractor claims, the establishment of suitable levels of monitoring, oversight and assurance across the Build Programme and ensuring an adequate project pipeline to prevent the loss of skills and capabilities and to build on the existing capabilities through continuous improvement.

With regard to the Summer Plan for 2014/15, he explained that maintenance was set to increase from 9.46% to 10% based on the sustainable generation strategy and on the need to clear partial load losses, with few flexible outages. However, Eskom may have to cater for higher maintenance in December including half station shutdowns for three stations. During winter 2014, Eskom also managed to achieve the following:
• Reduced Partial Load Losses from an excess of 3500MW to 1500MW
• Connected 538MW renewables IPP, bringing the total to 1000MW
• Extended STIPP and Aggreko contracts and they have delivered.

However, summer posed a different challenge as the profile looked flat and planned maintenance increased significantly compared to winter. With regard to Base Case assumptions, Eskom’s sales forecast was based on a 1.3% average growth over this period. Some of the summer risks included: increased full and partial load losses, below minimum coal stock days, outage management capacity and quality, insufficient diesel levels to run OCGTs and fuel oil levels, continuous heavy rains and the unreliability of continual load shedding.

On Independent Power Producers (IPPs), key issues raised in the presentation:
• Ability to secure a sustainable competitive price for the technology
• Funding model
• Knowledge of South Africa
• Proximity and availability of appropriate infrastructure
• Compliance with Grid Code requirements
• The hidden cost of storage and back-up being borne by Eskom and not the IPPs.

Some of the major challenges on IPPs are that the Department of Energy (DoE) is fast paced and requires additional resources, with over 1000 applications processed over the entire DoE Renewable Energy IPP Programme (REIPPP) to date. The MYPD3 revenue shortfall and resultant capital reprioritization process delays Bid 1 & 2 strengthen projects thus impacting connection timelines; in addition, some IPPs were struggling with grid code compliance and therefore not achieving Commercial Operation status within the planned timeframe.

Discussion
Mr L Greyling (DA) raised an objection; he said the presentation was the third one which the Committee had received from Eskom on the New Build Programme; one was a joint meeting between Energy and the Portfolio Committee on Public Enterprises two weeks ago. The National Energy Regulator of South Africa (Nersa) should be at these meetings. He was tired of Eskom simply suggesting their plans around the nuclear build programme while there was no interrogation by Nersa on whether they agreed with Eskom’s statements and efficiencies. Nersa needed to explain their decision on the Regulatory Clearing Account (RCA) and their decisions on tariff increases. This was a vital part of the picture which needed to be presented.

He said the delays at Medupi and Kusile were very costly. According to estimations, Medupi was over 45 months delayed; there should have been full power from the plant by October 2013. The question was, how much was this costing South Africa and who would be for paying this? The costs at Medupi were around R26 billion in forgone revenue, incurred per year by Eskom, as a result of these delays. There were also the mounting costs which needed to be paid for the coal which was not being used. The delays in Kusile were not being talked about much because there was more concern around Medupi; what were the delays at Kusile and how long would these take? What were the cost estimations? To what extent would the contractors be held accountable for the costs as a result of the delays at these plants? How much would the contractors be paying back to Eskom? As the Committee did not have the privilege to sit in on the inter-Ministerial Committee, Members could not engage the DPE on policy.

When would the Integrated Resource Plan (IRP) update be submitted to Cabinet and when would the IRP be revised based on this update? The IRP update stated that the country should not go ahead with the nuclear deal if the capital costs would be above 6500 dollars per kilowatt hour. He said what seemed to have happened was that companies were invited to bid and then a takeoff price would be given. Was there a ceiling for this takeoff price? Has there been some talk around the future of electricity pricing to accommodate these extra costs for nuclear? With regard to the renewable IPP programme, he raised a concern around the grid strengthening and the fact that this has not been done substantially. The original cost estimates which Eskom gave were now double for what IPPs were expected to pay to connect to the grid; how true was this? Was the money for the grid strengthening diverted away from the grid to the Medupi project? Why has not sufficient grid strengthening taken place?

Ms L Mashele-Makhubele (ANC) appreciated the work done by Eskom and the fact that the country was moving in the direction of securing energy sources and growing the economy as a result. She referred to the presentation and asked Eskom about the APP which the public could download to track progress on various projects, could Eskom share more information on the APP? How much mega watts of power would Medupi and Kusile generate into the grid? She said the spin offs of these mega projects to local communities were a huge achievement. The area in Medupi in particular was now a transformed place, with tourism booming and ordinary people benefitting from these projects. However, seeing that the projects would eventually come to completion; what long term plans did Eskom have for skills transfers and to guard against retrenchments among the people who were currently employed at these plants?

Mr M Mackay (DA) referred to the meeting which the Portfolio Committee on Public Enterprises had with Eskom the previous week; he reminded Members that he had asked about the Koeberg steam generator contracts. When would the complete tender documents be made available to the Portfolio Committee on Energy and the Portfolio Committee on Public Enterprises for scrutiny? He said Members were deeply disturbed by what seemed to be high levels of corruption within Eskom. He registered an objection about the way government and departments were approaching energy policy within South Africa. He argued that the fact that the Minister of Energy was yet to submit the IRP 2030 to Cabinet for approval was worrisome. It seemed as though the process was being delayed purposely and Members were deeply concerned. Members had a right to understand how energy policies were changed and why they were changing.

Ms Makhubele-Mashele said she did not recall the Portfolio Committee on Energy requesting any tender documents from Eskom.

Mr Mackay responded and indicated that Ms Makhubele-Mashele was not present at the meeting held by the Portfolio Committee on Public Enterprises, where Members of the Portfolio Committee on Energy were invited. However he said if the Committee was not interested in the tender documents, he was very happy to accept these documents as a Member of Parliament.

Mr J Esterhuizen (IFP) as a central service provider was Eskom not protected from illegal strikes? He said if a contractor has been employed and they strike, Eskom could reprimand them or use other contractors. Not all 794 turbines would be on by the end of the year. He reminded Members that Eskom had a generation capacity of 35 200 mega watts in total; however all the coal powered stations were very close to the end of their lives, and these could easily collapse before the new power stations start running due to there being no planned maintenance in progress. In addition, the diesel generators were running at a huge cost to the consumers. Eskom could only produce 75% of its total capacity. He argued that it was Eskom’s fault that the country’s energy supply was in crisis because of a lack of proper planning and good management within Eskom. Eskom had only achieved 57% of its targets as indicated by the Minister, and this was not good enough, especially considering the amount of tax payers' money being consumed by Eskom.

Minister Brown thanked Members for their engagements with the presentations. She responded and disagreed with the statement that it was Eskom’s fault that the country was faced with an energy crisis. She said Eskom was building up its own efficiency processes and efficiency within its balance sheet. She reminded Members that Eskom had to tackle challenges from pre 1994 where only 5.2 million households had access to electricity; post 1994 over 85% of the country’s population had access to electricity. Part of the problem was that Eskom had not kept up with maintenance over the period, and the end state of energy had not been agreed upon. Around 4800 mega watts of power would be generated by the new power plants. She argued that the future of electricity had to be determined. The IRP was in the process of being updated currently because government set policy. Members of the Committee should therefore call government to account.

She responded to Mr Mackay’s accusation on corruption and said as the Minister, she was not in charge of the tender documents because she did not sit in on the tender process. The documents were in Eskom’s hold, the Minister only played an oversight role over Eskom and she did not politically interfere with what decisions Eskom made. Eskom would be the one to make a decision on the tender documents and how they want to respond. On the build programme, the only way that the programme could actually create an economy around the communities was through generating enough power to boost the country’s economy. Local government, provincial government together with the DPE therefore all needed to work together. By the time Medupi was completed, 95% of economic growth would have taken place in the Lephalale area. The country had a large shortage of artisans and Eskom was currently training many welders within the Medupi project. However one of the concerns was around retaining these skills within the country because a lot of the people leave.

Mr Matjila responded to the question on the tender documents and explained that the last time the Members asked for the documents, Eskom indicated that they were not at liberty to go into the details as the matter was still sub judice; it was still before the court. However Eskom could now report that the legal process has been exhausted and the applicant, who had claimed that the tender process was flawed, withdrew the application in court, and this was publicized. For Eskom, this was an admission that there was no case in the first place. Eskom would still maintain that the process was not flawed, and if required, Eskom was prepared to stand before court again. Eskom was in the process of providing the losing bidder with information within the requirements of the law. Any request for information from Members would be attended to within the confines of the law, respecting the confidentiality of some of the information.

On the question on the renewable energy IPPs, and the role played by Eskom in strengthening the grid, Mr Matjila said Eskom has gone a long way to ensure that access to the grid was open, in preparation, not only for the renewable energy IPPs but also for any other future IPPs. Eskom has put together a specialist unit called the Grid Access Unit, which had a primary function to facilitate the connection of IPPs to the grid. This unit was resourced by specialists within the field and it engaged through a Energy Evaluation Technical Committee, which was comprised of Eskom, Nersa, specialist engineers in local government, to regularly assess the requirements of IPPs. In addition, Eskom had regular interactions with the Department of Energy (DoE) through the Grid Access Unit to collaborate and align programmes between the two departments. However, there have been challenges in meeting connections for Bid 1 and Bid 2 where Eskom was not moving parallel to the DoE. As a result of the funding shortfall from the MYPD 3, Eskom has had to fund their own transmission, outside the necessary resources. This has had an impact on the time in which to do the connections. Eskom has had to re-prioritize its capital expenditure to cater for the additional strengthening of the grid which was required. The funds for the costs which Eskom ensured were not readily available; Eskom recovered it a year later, from the tariff. However this was a temporary challenge.

On Eskom being an essential service and employees not being able to strike, Mr Matjila said this applied to Eskom employees and the unions respected that. However at the construction sites most of the workers were not Eskom employees but were employed by contractors. These workers therefore did not fall into the “essential service” scope and they were allowed to strike. Eskom has gotten into very elaborate partnerships with unions which regulated the resolutions of industrial disputes. This has been a very painstaking process which has resulted in better relationships between Eskom, the contractors and the workers. Eskom has now secured a commitment by both the contractors, the workers and the unions to support the programme on ensuring the delivery of all projects, and that there were no longer any schedule mishaps at Medupi. The previous faults which Eskom had around the boilers were dealt with appropriately; Eskom has learned some painful lessons in this regard and measures have been put in place to ensure that any repetitions were avoided. Eskom was committed to monitor the work which took place at the workshops, from where the faults initially emanated. Eskom had strengthened its project management capabilities with the contractors. Eskom has also taken unprecedented steps such as penalizing contractors for non-performance, where necessary, the statutory board of the contractor would also be called in, and in some cases, contracts were even terminated and new service providers were brought in. Eskom has lodged claims against contractors who were responsible for delays and non performance; these claims were currently being processed. On a normal basis, claims took long because they were also being challenged, and there were also counter-claims from the contractors as well. These counter-claims were also contributing to the escalations in costs. Eskom was committed to sticking to the approved budget allocations for Medupi, however Members needed to understand that there would be cost overruns in projects of this nature.

Mr Matjila said as Eskom was rolling out the programme for nuclear capacity, a plan to improve the performance of the existing generation fleet was being rolled out, in an attempt to not only maintain but also to improve generation capacity. Eskom has put in place a comprehensive plan to accelerate the performance of the generation plan by specifically attacking unplanned outages which were as a result of deferred maintenance and poor performance by contractors responsible for maintenance. However it would take about 3 to 5 years to improve Eskom’s generation fleet. Eskom was mindful of the current challenges faced by the generation fleet such as it being old and therefore requiring complete refurbishment. This was intended to arrest the current decline and to stabilize the performance of the fleet and implement improvements which would increase energy’s generation capacity. Another component was that Eskom was foreseeing an increased participation around IPPs from the private sector. This would also be augmenting the capacity shortfall which Eskom was currently experiencing. All these plans were in place to ensure that Eskom’s performance was improved and was easily monitored on a regular basis.

Mr Dan Marokane, Group Executive, Eskom, responded to the question on the spin offs of the projects for local communities and said over and above Eskom’s Corporate Social Investment (CSI) programme, the entity has taken a conscious attempt to support local businesses. As indicated by the Minister during her introductory remarks, 12 of the 20 contractors were local in the Lephalale area and a number of other sustainable initiatives have been implemented in these areas. Over R2.5 million has been injected into these CSI projects. However this projects did not last forever, and the skills developed and the employment created was for a defined period. For this reason, an area like Lephalale, with the Medupi Leadership Initiative (joint initiative between Eskom and contractors) there was a strong focus on competency and skills development among the employees who have worked on the projects, to get them to the point where on their own, the employees would be ready to undertake any new projects. This allowed for continuity between current and next projects. Eskom was therefore investing in skills for the next cycle of projects. Eskom was also working with other structures and spheres of government such as the Department of Environmental Affairs for caring for biodiversity in these areas, which created jobs within rural communities. During the Committee site visit, Eskom would be able to better communicate what other initiatives are currently running in those areas so Members could have firsthand experience.

Mr Greyling emphasized that the responses indicated the importance of having Nersa at the Eskom briefings so that the decision on the MYDP 3 could be better explained, together with its implications on Eskom. Eskom could not continue being a player and a referee. He asked about the envisaged delays at Kusile, how much would these cost the country? Would the contractors be held liable, if so, how much was Eskom expecting to get back from the claims?

The Chairperson responded to Mr Greyling and said no one disagreed that Nersa should be at the meeting. It was up to the Committee to decide on the proper dates to invite Nersa to a briefing, with Eskom present.

Ms T Mahambehlala (ANC) thanked Eskom for the presentation. She asked about the industrial beneficiation programme which was outlined in the National Development Plan (NDP) and whether the current pricing model had been reviewed. Eskom was a strategic energy force within South Africa’s economy; how was Eskom planning to maximize opportunities within the Southern African Development Community (SADC) on energy? She argued that Eskom was strategically placed to contribute significantly to creating jobs and to growing South Africa’s economy.

Ms N Louw (EFF) raised a concern around the lack of skilled contractors within the Eskom build programme; what plan was there to deal with the current contractors who were struggling to deliver on projects?

Mr Esterhuizen raised a concern about Eskom’s revenue shortfall and outstanding debt. The current bailout would not be sufficient for covering the shortfall as a result of Nersa’s MYPDA 3 determination. He asked why the newly appointed Chief Executive Officer would only be starting in October.

Mr Matjila responded to the questions on the role of Eskom in advancing the country’s transformation agenda by asking if Eskom could come back at a later stage to answer the question because it was a very broad question. However, briefly, Eskom was a catalyst for economic development and this had an impact on both residential and industrial customers. On the residential side, Eskom has indicated that the electrification programme undertaken on an annual basis was to ensure that every single home was connected to the grid. This programme had ripple effects on health, education, and the local economy within communities. Eskom has yet to quantify the economic impact of electrification for a household. Similarly, Eskom provided electricity for the whole economy for industrial use, without which, very few employment opportunities could be provided by industries. There would also be very little foreign direct investment within the country. He agreed that Eskom’s role was that of a catalyst within the country’s economy. Eskom was therefore recommitting itself to being more open and transparent in how it used public funds.

Mr Marokane responded to the question on the strengthening of the grid to support IPPs, saying it was a fact that the grid did not cover every centimetre of the country. He explained that the process which was being followed for the IPPs was to get the applicant to indicate their preferred location so that Eskom could assess where there was existing infrastructure and what it would take to connect an IPP to the grid. This commitment was contractual and had penalties on late deliveries. In some instances additional resources were required, not only for the component which linked IPPs to the grid, but also for the strengthening of the existing infrastructure. Infrastructure from a transmission and distribution aspect was not where it needed to be as a result of a lack of investment in the past. However dialogue was continually happening between Eskom, the DoE and the IPPs. With regard to the delays at Kusile, the Committee may be aware that from a construction point of view, Kusile was delayed by a full year in 2010. Eskom had to stop the project because there was no funding for the project. The delays in both projects generally fell under three categories: the industrial action, delays as a result of technical glitches and delays as a result of the actual execution of the work itself. The cost implication were assessed and taken to the parties responsible for them, and this became the subject of a very detailed claims process. On the question on the skill level of contractors, globally, construction companies were also experiencing skills challenges, and this was as a result of the "continuity" of work, which saw people leaving industry among other things.

The Chairperson thanked Eskom for the presentation. He said arrangements would be made to have a discussion with Nersa on all matters discussed. It was important to appreciate that in the midst of all the challenges, Medupi Unit 6 would be coming alight in less than 100 days, and this was a certainty. He said the joint Committees would be undertaking a site visit to Medupi with the 99 days.

The meeting was adjourned.

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