Grand Inga Project: Department of Energy update

Energy

15 March 2016
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Committee was given insight into the tenets of the Grand Inga Treaty between South Africa and the Democratic Republic of Congo (DRC).The purpose of the Treaty was to develop an enabling framework linking the DRC and SA into the project, allowing for the two countries to jointly explore economically feasible options its development. Although the treaty was bilateral, it had multilateral aspects given that the transmission line passed through Zambia and Zimbabwe en route to SA.

Some of the commercial aspects of the treaty were that if certain conditions were met, SA was committed to buy power generated from Phase 1 and subsequent phases. There would be investment by SA in the construction of the transmission infrastructure from the delivery point at Kolwezi in the DRC to SA. There was commitment to an off-take of 2 500MW by SA and 2 300MW by the DRC, and assistance in the mobilisation of funding. The DRC had also given SA the right of first refusal (RoFR) for both equity and off-take in respect of any and all future phases of the project, or any related hydroelectric development of the Congo River in and around the Inga complex if SA proceeded with Phase 1(“lock-in”).

The DoE informed the Committee that without SA, the project would not go ahead. SA was anchoring it.. In terms of the RoFR, SA was guaranteed a minimum of 20% of generated power equal to 9 640MW and a maximum of 13 060MW, and anything beyond this could still be negotiated. SA would be guaranteed access to cheaper and cleaner power if future project phases went ahead. In return for the RoFR, the DRC required SA to pay a commitment fee of $10m into an escrow account. From the presentation given, it seemed that the best option on electricity transmission was to have two separate point-to-point high voltage direct current (HVDC) systems with no alternating current (AC) wheeling arrangement in the Southern African Power Pool (SAPP). The one system would see to the DRC’s electricity needs and be from Grand Inga to the Kasumbalesa Converter at Katanga, and the second system would supply electricity to SA from Grand Inga to the Merensky Converter in the Limpopo Province.

With regard to work done by the DRC to advance the project, the DRC had lacked a regulatory and legislative framework on electricity and had put legislation in place -- the Inga Law. Members were given details of the selection procedure by the DRC for a preferred developer for the project. There were three groups who had shown a real interest in the project, and the selection of a concessionaire was expected to be completed by the end of 2016, with the contract being concluded by the end of 2017. The commercial operation of the project was expected to be by the end of 2023.

One of the challenges identified by the DoE in keeping a hand on the process was that its officials could travel to the DRC only every three months. The DoE had therefore decided to second a French-speaking technical expert to Kinshasha in the DRC to keep SA up to date on developments.

Members expressed major concern over the political instability that was prevalent in the DRC and the surrounding region. The DoE was asked whether SA was keeping its ears to the ground on whispers of possible conflict that might erupt in the DRC and the region. The World Bank had ranked the DRC as one of the worst countries to deal with, given the prevalence of conflict in the country.  The World Bank had initially planned to fund the project, but had decided against it. Would the New Development Bank (BRICS) be funding the project? Some Members felt that it had far too many risks attached to it. They asked whether the feasibility study that had been done had looked at the political instability of the DRC. Given that transmission lines were to traverse through various countries, the DoE was asked how the issue of land rights in countries had been resolved. What were the costs of building transmission lines? It was pointed out that when electricity was transferred over long distances, there were often losses. Given that SA was paying for 2 500MW of electricity, would this be the actual amount received when it reached SA?  Members also asked how the project would affect the Integrated Resource Plan. What lessons had SA learnt from its electricity supply line from Cahora Bassa in Mozambique? Concerns were raised over possible cost overruns, as costing figures could have gone up since 2014 when costing had been done.

The DoE was asked how a downgrade of SA’s credit rating would affect the deal with the DRC. What was the total cost to SA of the project? Did the treaty contain an escape clause for SA in the event that things did not work out? Members were also concerned about the $10m commitment fee that SA had to pay to the DRC. Despite the concerns expressed, the Chairperson considered the project an important one and said that it needed to be seen through.

Meeting report

Department of Energy (DoE): Grand Inga Hydro Project

Mr Ompi Aphane, Deputy Director General: Policy, Planning and Clean Energy, DoE, gave the Committee an insight into the tenets of the Grand Inga treaty between South Africa and the Democratic Republic of Congo (DRC).The purpose of the treaty was to develop an enabling framework linking the DRC and SA into the project, allowing for the two countries to jointly explore economically feasible options for its development.

Although the Treaty was bilateral, it had multilateral aspects, as the transmission line passed through Zambia and Zimbabwe en route to SA. Some of the commercial aspects of the treaty were that if certain conditions were met, SA was committed to buy power generated from Phase 1 and subsequent phases. There would be investment by SA in the construction of the transmission infrastructure from the delivery point at Kolwezi, in the DRC, to SA. There was commitment to off-take 2 500MW by SA and 2 300MW by the DRC, and assistance in the mobilisation of funding. The DRC had also given SA the right of first refusal (RoFR) for both equity and off-take in respect of any and all future phases of the project or any related hydroelectric development of the Congo River in and around the Inga complex, if SA proceeded with Phase 1(“lock-in”).

The DoE informed the Committee that without SA, the project would not go ahead. SA was anchoring the project. In terms of the RoFR, SA was guaranteed a minimum of 20% of generated power equal to 9 640MW and a maximum of 13 060MW, and anything beyond this could still be negotiated. SA would be guaranteed access to cheaper and cleaner power if future project phases went ahead. In return for the RoFR, the DRC required SA to pay a commitment fee of $10m into an escrow account. From the presentation given, it seemed that the best option on electricity transmission was to have two separate point-to-point high voltage direct current (HVDC) systems, with no alternating current (AC) wheeling arrangement in the Southern African Power Pool (SAPP). The one system would see to the DRC’s electricity needs and be from Grand Inga to the Kasumbalesa Converter at Katanga. The second system would supply electricity to SA from Grand Inga to the Merensky Converter in Limpopo Province.

On work done by the DRC to advance the project, the DRC had lacked a regulatory and legislative framework on electricity and had put legislation in place -- the Inga Law. Members were given details of the selection procedure by the DRC for a preferred developer for the project. There were three groups who had shown real interest in the project. The selection of a concessionaire was expected to be completed by the end of 2016, with the contract being concluded by the end of 2017. The commercial operation of the project was expected to be by the end of 2023. One of the challenges identified by the DoE on keeping a hand on the process, was that its officials could travel to the DRC only every three months. The DoE had therefore decided to second a French-speaking technical expert to Kinshasha in the DRC, to keep SA up to date on developments.

Discussion

Mr P Van Dalen (DA) said that a great deal of thought had gone into the Grand Inga Hydro Project. He was pleased that it was a green project. He asked about land rights and how long it would take to procure the necessary land. Was the land to be procured government or private land?  How would the issue of land rights be handled in another country? He asked what the cost of building the two lines was. Was there enough copper for the building of the two lines? The power lines to be built were A Grade. For every 1 000km of line, 20% of electricity would be lost. Was the figure of 2 500MW what SA would get when it arrived in SA, or was it the figure when the electricity left the Grand Inga Dam? If the land rights issue was to have been resolved by January 2015, had it been resolved?

He asked how the project would affect the Integrated Resource Plan (IRP), and what lessons had been learnt by SA on its Mozambique electricity line. The supply to SA from Mozambique was not stable, however, and was intermittent. SA had surely learnt some lessons. He was concerned about cost overruns on the Grand Inga Hydro Project. The costs had been calculated in 2014 and two years later it could have gone up drastically with currency fluctuations. He asked how SA’s downgrade in its credit rating would affect the deal. Was the Brazil, Russia, India, China and SA (BRICS) bank, better known as the New Development Bank, going to assist with the funding of the project? He asked what part the Gupta Family would play in it. What was the estimated total cost to SA? What were the costs of the project and the cost of the transmission line?

Mr Aphane noted that the briefing had not mentioned load flows. He conceded that there were losses when electricity was transmitted. Copper was no longer used in the building of transmission lines -- aluminium was now used. The treaty between the DRC and SA identified the border of the DRC where the electricity exited the country, to be the delivery point for SA. The amount to be delivered was around 2 500MW, but the actual amount arriving in SA was not 2 500MW, hence there were losses. The electricity would be transmitted through Zambia and Zimbabwe en route to SA. He explained that whatever electricity gains that Zimbabwe and Zambia obtained with the transmission, SA would be compensated for it. There was offsetting. He noted that there was a point-to-point direct current (DC) transfer.

He said that in the IRP, the project sat side by side with nuclear. It was not a substitute for nuclear. SA needed a mix of energy sources -- coal, gas, hydro and nuclear. SA also could not depend on the electricity supply from the Cahora Bassa Dam in Mozambique. The DoE had a slide show which showed the amount of land that needed to be secured for the project. He emphasised that there were no cost overruns. SA was just a buyer of electricity. There were no construction cost risks. SA was not building anything. SA only paid the price for the electricity supplied. If there were delays in construction then it was the DRC’s problem. The cost of the lines was R68bn, and not $68bn. There was preferential procurement for the SADC Region. The phasing of the lines had to be end to end. The lines could not be built one by one.

The lessons learnt from the Mozambique Cahora Bassa Project were that the partner needed to have a stake in the project. The Cahora Bassa Project was very one-sided. Mozambique had had a very small stake in the line. With the Grand Inga project, countries needed to get involved. He said that the DRC did not have a credit rating. If SA’s credit rating was downgraded, then the cost of borrowing had to be looked at again. He noted that the BRICS bank had a different view of financing the project, but it remained a possibility.   

Ms T Mahambehlala (ANC) noted that work was currently busy on Grand Inga 3. If the DRC had no electricity legislation and no regulator, how had Grand Inga 1 and 2 been done? She said that the new design of the Grand Inga Hydro Project allowed for development to an independent phase by different operators. She asked whether the Independent Power Producer (IPP) office was involved. She was concerned about the political instability of the DRC. Did the feasibility study that had been done consider the risk of this on the project? What had been the impact of the shift from bilateral between SA and the DRC towards multilaterals? If the cost of the project was $68bn, what was the cost in rands? Did the cost include the cost of transmission lines? She asked if SA had an attaché in the DRC to look after SA’s interests.  She asked whether the Walmarts or the Raymond Ackermans of the world would have a stake in the project. She noted that the Guptas helped to shift the balances of the world.

Mr Aphane referred to the risks and said that the DoE needed to give the Committee a project risk matrix. He said that in the DRC there had been a huge gap, as there was no electricity regulator and no laws on electricity. There was also a huge gap on how the power utility of the DRC, Societe Nationale d’ Electricite (SNEL) was financed and set tariffs. The utility was small. It should have grown bigger. However, the DRC had put a Grand Inga Law in place which was specific to the project. The IPP office had assisted the DoE with legal issues on agreements. It had assisted the DoE on how to structure off-take agreements. With regard to someone looking after SA’s interests in the DRC, he said that the Development Bank of SA (DBSA) had a permanent person in the DRC. The DoE would also deploy a technical person to the DRC. Multilaterals had already been enabled -- in the treaty between SA and the DRC, other players had been noted.

Mr R Mavunda (ANC) asked to what extent SA’s intelligence services had put their ears to the ground to pick up whispers of political instability in the countries that were included in the project. He was pleased that the briefing had provided specific dates. It would allow the Committee to perform oversight. The project involved the SADC region and hence could encourage development. There was a mutual dependency of SA with neighbouring countries.

Mr Aphane did not wish to comment on the work of intelligence services. SA dealt with land acquisitions where it they were needed in SA, and it was done in terms of South African law. The DoE was aware of land issues. Enough land had been reserved for the second transmission line. There was an existing line from the Grand Inga Dam to Kolwezi. The processes were on track.   

Mr J Esterhuizen (IFP) pointed out that the World Bank ranked the DRC as one of the worst countries to deal with, given its conflict. The World Bank was initially going to sponsor the project, but had decided against it. He was concerned that there was no escape clause for SA in the treaty with the DRC in the event that things did not work out. Only 9% -10% of the population of the DRC had access to electricity. Furthermore, Grand Inga 1 and 2 operated at only 30% capacity. Rebels had not too long ago taken over Grand Inga 2 and the electricity supply had been disrupted. The concern was that plans were being made to build transmission lines through unstable regions in Africa.  The project had taken decades to develop and was not really going anywhere. BHP Billiton had initially intended to invest in the project, but had decided to pull out. He agreed that initiatives for sustainable clean energy were good, but he felt that in reality the project could not happen.

Mr Aphane said that an escape clause had been provided for in the Treaty between SA and the DRC. SA had not paid anything on Phase 1. SA was committed to Phase 1 by virtue of it signing the Treaty with the DRC. The escape clause in the treaty provided that Phase 1 should be feasible and commercially acceptable.

The Chairperson asked what additional treaties had been entered into by SA. He was concerned about the $10m that SA had to pay to the DRC. Had the payment beenmade already? Did the 2 500MW include the electricity to be supplied to Zambia, Zimbabwe and Botswana?

Mr Aphane commented that bilaterals were political platforms. Bilaterals could not be dealt with at a commercial level. Due to the fact that electricity passed through other countries, there was a need for elevation from commercial to political. As a consequence there were political agreements that had been elevated to treaties.

He explained that the $10m was for the subsequent phases of the project.

Mr Esterhuizen said that hydropower was direct current (DC). It seemed as if the DoE was leaning towards Option 2. With the way in which the HVDC link worked, electricity was being sent over long distances. He added that to convert DC current to AC current, step up generators were needed.

Mr Van Dalen felt that the project had far too many risks, and was not a Grade A project. It would take a decade to get off the ground.

The Chairperson considered the project very important. It was just one industrialisation project, and needed to be seen through. The question needed to be asked as to why some African countries were growing whilst SA was not. A winning bidder was needed for the project.

The meeting was adjourned.

 

 

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