Eskom on National System Status & Provincial Network Plan for Energy in the Western Cape

Finance, Economic Opportunities and Tourism (WCPP)

09 October 2019
Chairperson: Ms D Baartman (DA)
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Meeting Summary

The Standing Committee met with Eskom to discuss the company’s Network Development Plan for the Western Cape and the current status of its debt.

Eskom outlined the financial and infrastructural investments it would be making in the province over the next five years. It expected to invest R200m to R300m in the first three years of its development plan and would increase spending in following years.

Key areas for growth highlighted were the Western Cape’s potential to be a leading producer of renewable energy due to its options for wind and solar power and existing battery storage capacity. The province currently hosted 75% of World Bank approved renewable energy projects in the country. Eskom identified the Western Cape as a top performing power plant location.

The Committee wanted to know how performance was determined and why the province was considered a top performer given the large number of townships without electricity and the prevalence of illegal electrification.

The Committee questioned Eskom’s silence on the cost of electricity. It wanted a breakdown of generation and distribution costs, an explanation for the current cost of electricity and a likely price estimate Eskom thought would be appropriate. Members requested information on the savings the country was making through IPPs which had a more competitive rate compared to Eskom.

Eskom said it was committed to providing cost-effective tariffs and was in the process of renegotiating contracts and managing its relationships with primary energy providers because value chain processes impacted the price of electricity. Eskom said its priority was to ensure that prices were in the best interest of customers.

Eskom explained that it currently had R450b in debt and would need assistance from the Government in order to address its financial challenges. It acknowledged that some of its debt was as a result of rampant corruption throughout the company. Eskom assured the Committee that it was working closely with the Special Investigating Unit, Asset Forfeiture Unit and the Hawks to identify and address corruption. Another key contributor to its debt was outstanding debt from municipalities, which currently stood at R45b. Eskom had enlisted the help of other government departments to address this issue. 

Meeting report

The General Manager of Eskom, Mr Alwie Lester, gave a presentation on the current status of Eskom in the Western Cape. He was accompanied by the COO of Eskom, Mr Jan Oberholzer, who later gave an update on the company’s debt and cost containment plan.

Mr Lester explained that the provincial network plan comprised of two elements, a capital investment plan and a maintenance plan. He presented Eskom’s network development plan and projected financial commitments for the next five years from 2019-2023. He provided information about the rate of electrification in the province, its potential for renewable energy production, rate of informal electrification and an update on the Ankerlig project.

Eskom Presentation
Capital Investment Plan
Eskom had engaged with various stakeholders to identify projects that were critical to driving economic performance in the province. They expected to spend R200m to R300m in the next three years which would be increased to R450m in the fourth year.

Maintenance Plan
Mr Lester presented the maintenance plan under which Eskom expected to spend R410m over the next two years between 2019 and 2021.

He then addressed plant performance in the Western Cape. He said that performance was based on two indices which looked at the average duration that customers experienced power outages and the frequencies of these interruptions. Over the last five years, customers in the Western Cape have experienced, on average, 14 to 15 hours of outages per annum up to a maximum of 20 hours per annum, whereas customers in the rest of the country have experienced outage durations of about 30 to 35 hours. Overall, customers in the Western Cape have experienced fewer outage incidents and for shorter durations than the rest of the country. When compared to other countries with similar networks, populations and economic outlooks, the Western Cape was within the top quartile for performance.

Renewable Energy
The Western Cape currently has 398.6MW of wind energy technology installed and 133.8MW of solar energy technology installed. Although Eskom had been able to specify the renewable energy capacity installed in the Western Cape, all capacity was managed and dispatched nationally and not at a provincial level. This meant the location of a power station was not necessarily the area that it serviced. Energy was sent to the national grid and was then distributed across the country.  Eskom currently has a loan agreement with the World Bank to implement renewable energy projects and battery energy storage systems (BESS) across the country. The Western Cape hosts 75% of the World Bank approved projects, because it has both wind and solar energy options, because it has substations with the battery storage capacity to support the projects, and it has environmental approval. Practically, the Western Cape would have enough battery storage that could effectively manage a Stage 1 without load-shedding.

Informal Electrification
Mr Lester said that Eskom currently spends between R85m and R100m annually on formal and informal electrification funded by the Department of Energy. He acknowledged that the rate of electrification of informal settlements was slow and that the Western Cape currently had approximately 200 informal settlements which required electrification. In addition, there were 9 314 informal dwellings that were un-electrifiable because they were either on privately owned land, wetlands, road or rail reserves or in noise corridors. Alternative solutions would be to relocate inhabitants or for government to purchase privately held land in order for electrification to proceed.

Update on Ankerlig
Mr Lester provided an update on the status of Ankerlig Power Station and the shift from open cycle to closed cycle. Eskom had completed Phase 1A of its installation of dual fuel burners and 50% of Phase 2.

Discussion
Ms N Makamba-Botya (EFF) thanked Eskom for the presentation. She then sought clarity on what constituted Eskom’s good performance, given the high number of townships without electrification and the incidences of illegal connections used to electrify households. She also wanted to know the reasons behind the low rates of electrification in informal settlements. She mentioned the big renewable energy projects that Eskom had in the province and wanted to know what the targeted areas for implementation were.

Mr A van der Westhuizen (DA) commented on how Eskom had been quiet on the cost of electricity. He mentioned that in the past, the impression was that Eskom was one of the most efficient producers of electricity in terms of cost per unit. However, this had changed with rate increases. He asked what the current cost of electricity was and where Eskom would like it to be. He asked about the current role of Ankerlig and how often it was run to provide electricity. He stated that the reason for this question was to see if the conversion to gas would make economic sense. He asked if Eskom had performed any studies on the projected utilisation of Ankerlig and if they were in a position to guarantee Transnet that they would use the gas line to Ankerlig for a minimum amount of time or volume of gas. This would make it a viable investment for Transnet and in the future other industries.  He asked for clarity on the cost of electricity, specifically around generation versus distribution.

Ms N Nkondlo (ANC) thanked Eskom for the presentation.  She then referred to the Western Cape’s top plant performance when compared to other provinces and asked for the explanation behind this. She then asked for additional reasons behind the Western Cape holding 75% of the World Bank’s approved battery projects and confirmation that this would reduce the burden of load-shedding in the province. She then asked about the Sierra wind farm project that had been implemented by Eskom in the Western Cape and whether or not this project was active and providing electricity to the national grid and if so, at what volume. She asked to be educated around the concept of informal electrification and asked if load curtailment was an available option for households in gated communities or if this was only an option for big companies. Lastly, she asked if Eskom had a cost analysis of all types of electricity sources, specifically the cost-competitiveness of IPPs in the country.

Mr D Mitchell (DA) referred to the R6m allocated to Karoo under Eskom’s National Development Plan and asked where, specifically, the project was and what its job name was. He also requested a sector breakdown of routine and preventative maintenance. He commented on Sector 4 which covered Beaufort West and George and, particularly, the difference between the large budget allocation of R9.92m and current spending of R1.2m. He asked for the reason why spending was low in this area. He asked if a five year period would be adequate for the transfer of the skills required to fulfil Eskom’s procurement method changes. He also asked why there were zero planned electrification connections for Karoo over the next six years. Lastly, he commented on Eskom’s statement that there was no formal electrification backlog in the Western Cape. He emphasised that he was not disputing the credibility or accuracy of the information, but just wanted to know the source of the data.

Eskom’s Response
Mr Lester replied that the Western Cape’s technical performance was based on two matrices, the number of times customers experienced interruptions and the duration of these interruptions. He said that this only applied to those customers registered on Eskom’s system and not those supplied by municipalities or the City of Cape Town. He said that Eskom had electrified some households located in informal settlements and that those had Eskom registered meters. However, he acknowledged that illegal electrification was still an issue, but indicated that Eskom engaged with those customers on a monthly basis to encourage them to get legal meters, more so for safety reasons. In terms of accuracy, he shared that there was a less than one percent error deviation in data. Addressing Eskom’s good performance despite a high incidence of un-electrified areas, he said that performance in the province was based on investment made in the network; the design of the network; and the ability of the network to service customers. He said that the results of good decisions that had been made in the province over the last ten years were being seen in the building of strong networks. He acknowledged that Eskom had experienced challenges such as unprecedented storms over the last two years but that the network had withstood those. The major challenge was in the area of informal settlements.

He explained that the identification of areas to be electrified was a municipal competence and that municipalities were responsible for providing Eskom with a list of those areas they wanted to be electrified. Eskom submitted this list to the Department of Energy for funding. In the event that Eskom did not use all the funds it has been allocated, Eskom went back to municipalities to suggest additional locations that could be easily electrified rather than return the funds. Although Eskom did engage with municipalities to suggest areas that needed electrification, formally, it only acted on the instruction of municipalities. 

On the location of the renewable energy projects, he said that it was based on the criteria provided by the World Bank, which recommended that project sites were close to an area that had the option for renewable energy. The reason that the Western Cape hosted a large portion of the projects was because it had the option for both wind and solar energy whereas inland provinces did not. Secondly, World Bank criteria required that areas have existing infrastructure to support the projects. In addition to these criteria, Eskom had tried to link these identified areas to constrained networks to unlock their potential and economy. Eskom went through a national exercise to identify areas that fulfilled these criteria, which the Western Cape happened to have, thus explaining why it hosted a significant amount of renewable energy projects.

He explained that Eskom’s price point for electricity was currently in the double digits which regulators had expressed as being undesirable. Eskom’s submission to regulators was based on cost-effectiveness, however, in the past it was based on subsidised costs in order to incentivise foreign investment in the country. The price for electricity was therefore very affordable under the subsidised mechanism model which has now been withdrawn. Eskom now had to disclose how much it costs to produce electricity and had tried to be transparent about the factors that influence this. He acknowledged the cost of primary energy was often brought up and that Eskom was making the effort to manage its relationship with coal suppliers to get the best price. He mentioned that Eskom had renegotiated several contracts in order to make sure that they were in the best interest of the country.

Mr Oberholzer acknowledged that Eskom’s tariff was not cost effective and that they were in negotiation with regulators to address this issue. However, he said that when compared to the rest of the world, Eskom’s tariff was extremely competitive.

On Ankerlig, he said that these projects were designed for emergencies, however they were not being used for this purpose. At the beginning of the year, Eskom had projected how much diesel it would use and at the end of winter, it had used significantly less diesel than had been forecasted. Despite this, he said that there was still a risk of load-shedding during the summer.

Although there was no question about system performance, he elaborated on this and said that it was going to be difficult to predict how Eskom’s 37-year-old plant was going to perform. He said that up until that stage, Eskom would make use of its emergency reserves, open cycle gas turbines and pump storage. Eskom currently had a forecast for diesel expenditure which it said was significantly less than what was predicted at the beginning of the year.
He said they were looking to convert open cycle to closed cycle and would be using gas as a cheaper input. Eskom was currently in negotiation with Transnet, but this matter was still to be concluded.

He then addressed the cost of electricity throughout its value chain, specifically generation and distribution. He said that the generation component accounted for approximately 70% of the cost, of which 60% was the cost of coal. He said that ten years ago, Eskom paid R180 per ton for coal and that currently it spends R134 just on transport for a ton of coal. For this reason, input costs had increased significantly.

He confirmed that the Sierra wind farm was still in operation and that it was providing energy towards the national grid. He said that there was currently a big debate surrounding the cost of IPPs within Eskom. He said that there had been a reduction in costs since the construction of the first IPP and that he believed that South Africa should enjoy the benefit of this.

Mr Lester clarified that he was trying to draw a comparison between what Eskom was able to produce in the battery storage project and what would be required to get through Stage 1 load-shedding in the province. He said that one would not cancel out the other, but that the capacity for battery storage was quite good and that with time it would become more cost effective. He cited Laibach, Stellenbosch as one of the pilot projects for battery storage where they were testing if they could manage a network using battery storage and if it was possible to do energy trading between customers in the area.  They found that Laibach was one of the areas that never experienced load-shedding because of its battery storage and that customers were able to trade electricity. Customers who generated more energy than they needed were able to trade with other customers who needed more energy and that this coincided with the drought period, where customers were trading electricity for water. This pilot showed that at that scale it was possible to maintain a network and to offset some of the issues Eskom was experiencing with load-shedding.

He defined formal electrification as an area that had been proclaimed and a location where a house would be built in the next three years. Informal was, therefore, an area that was unproclaimed, with no plan for construction in the near future. He said that load curtailment currently targeted big customers at a network level. In order to work at the household level, an entire community would have to agree to curtail their use. However, this would still be difficult because most large primary customers were still on conventional meters which allowed Eskom to easily predict their energy usage based on annual trends, whereas at the household level, prepaid meters were used which made it difficult to see how much energy was really being used. The curtailment program generally was not geared towards small customers.

He said that there were two projects in the Karoo, however, these were not specifically for the Karoo, but were intended to strengthen the network for an incoming IPP. He stated that the Karoo would benefit from increased reliability in that area and that they would provide more information on the specific location of the project.

He said that there was no maintenance breakdown allocated. When addressing the differences in budget allocation and actual money spent, he assured the Committee that budgets in the Western Cape were always spent and that maintenance was programmed for the whole year. He said that Eskom routinely performed opportunity maintenance concurrently, when dispatched to address outages. 

He said that the five-year period was sufficient for Eskom to learn the technology and to learn how to maintain the battery storage system and how to safely operate it.

On the question of zero connections in the Karoo, he said that municipalities had not yet identified and communicated any areas that required electrification. However, he reiterated that Eskom did its own investigations and recommended to municipalities any informal areas it thought it could easily electrify. He qualified his point by stating that a municipality would not want to electrify an area it could not provide with other basic services, such as water and sanitation.

He clarified that the Western Cape did not have any formal electrification backlogs as no houses that had been constructed lacked electricity. He said Eskom had a commitment to the province and municipalities to electrify areas within six months of a request to do so.

Second round of questions
On the regional distribution of electricity and the complications that had been experienced with Eskom directly providing some customers within a municipality and some households beings provided electricity by the municipality within the same area, Mr van der Westhuizen asked if Eskom would be willing to transfer their assets to the municipalities. He mentioned the challenge of backyarders and the issuing of additional meters and asked if customers were able to resell or to get free electricity for more than one family.

The Chairperson said that in her understanding, Transnet needed to either install or maintain pipelines in the Saldanha Bay region in order to import liquid natural gas. She wanted to specifically know what was currently happening and what needed to be done in order to import liquid natural gas through the Saldanha Bay port. She asked what would be necessary for Ankerlig to move from diesel to gas.  She said that she could not remember the exact amount of expected economic growth for the Western Cape if the transition from diesel to gas was made, but indicated that it was a large sum and asked for Eskom to elaborate on that matter.

Ms Nkondlo wanted confirmation that the Executive had already given the mandate for sourcing gas supplies.

Mr van der Westhuizen asked for confirmation that the Western Cape had always been a net importer of electricity. He referred to the fact that distribution accounts for 30% of electricity production and asked if this cost should be included in the calculation of the overall cost of electricity production in the province. He asked if the Western Cape was still at any risk of infrastructure failure because of its reliance on big electricity producers in other parts of the country.

Eskom’s Response
Mr Lester said that municipalities applied to Eskom and regulators about the transfer of assets and that several factors were taken into account, such as the percentage of infrastructure belonging to Eskom and what would best serve the interests of the customers. He said that at the moment, the Department of Energy only allowed for an additional point of supply and that the regulator did not allow customers to resell electricity as Eskom and municipalities were the only entities permitted to legally resell electricity. He did acknowledge that practically, illegal selling was occurring in the case of backyard shacks and that Eskom had asked the general public to report such instances. He said that customers who were reselling electricity to backyard dwellers often did not qualify for free electricity because there was one registered point of service and their consumption exceeded the limit for eligibility because of the combined consumption of additional users.

Mr Oberholzer stated and confirmed that, under the development plan, there was a mandate to look for natural gas sources over diesel, however he could not give feedback on the progress but promised to find out and let the Committee know at a later date. He said that the use of natural gas as a solution made economic sense.

The Chairperson asked for clarification on whether or not the pipelines had already been constructed.

Mr Oberholzer said that the pipelines had not yet been built.

Mr Oberholzer confirmed that the Western Cape was indeed a net importer of electricity. In terms of the cost of electricity, he said that Eskom looked at its total investment for the cost to create an electron and get it onto the network. He said that the Western Cape’s dependency was not on other provinces like Mpumalanga but rather on the national grid operating the way it was expected. He said that vandalism was an issue threatening the infrastructure and that there was always a possibility that the transmission of electricity to the province could be disturbed by this. However, he acknowledged that Eskom had identified this risk and any other risks along the value chain and was taking a wholistic approach to address challenges at all stages of production.

Eskom Presentation on National Strategy
Eskom’s Debt
Mr Oberholzer said that it was important to approach Eskom’s debt by looking at the income statement and the balance sheet. He said that on the income statement, Eskom’s revenue was approximately R190b per annum and expenses were approximately R160b, giving Eskom a profit of R30b per year. However, he said that on the balance sheet, Eskom has a debt of R450b which required R70b per year in finance and infrastructure costs. Although Eskom was making a profit of R30b, it still had to pay R70b. He said that in addition to the R450b debt, Eskom had outstanding debt referring to municipalities owing Eskom. This debt currently stood at R45b. He said that municipal debt had grown by over R3b in the last three months. In addition to this, Eskom still has to borrow R46b for ongoing projects. He said that these were the issues that had put Eskom in a tough financial situation. He said that Eskom found itself in this situation because it has had to fund and build three power plants, namely; Ingula, which cost R30b, Medupi, which had a projected cost of R78b but a final cost of approximately R145b; and Kusile, which initially had a projected cost of R82.5b but was now R160b. He acknowledged that Eskom did have inefficiencies, internal challenges and expenses which had increased and which it had to deal with. He said that it was important to understand that raising profits to R60b would be helpful, but would not be enough and that Eskom needed debt relief. Although government was giving Eskom R23b this year, it was still not enough and the company would need an additional R46b. He said that Eskom was aware that they were the biggest risk to business that the country was facing.

Mr Oberholzer said that Eskom’s system still faced the risk of load-shedding, but that Eskom understood the impact that this had on the economy and that they were committed to do whatever they could to address this.

Discussion
Mr van der Westhuizen asked if Eskom would not be at its most economical when using its equipment at full capacity given that this would reduce any redundancy and unused capital. He asked what implications for the future cost of electricity was, if prices were increasing despite assets being used to their fullest potential. He asked how much power was being produced by renewable energy sources and how much they were contributing towards the national grid. He asked for a comment about the high levels of corruption during primary energy procurement. He asked for information about the high cost of poor management, corruption and poor supply chain management processes. Lastly, he asked what Eskom’s policy stance was on competition in energy generation.

Ms Makamba-Botya said that based on Eskom’s current financial debt, did the company think it would recover. She asked how much of Eskom’s debt was a result of corrupt practices and poor management.

Ms Nkondlo asked if the government’s attempts to engage with municipalities concerning their outstanding debt to Eskom was yielding results. She asked about the concept of unbundling, what it entailed as a strategy, what internal conversations were happening amongst employees and if it had raised any sensitivities stemming from the potential instability it would cause.

Mr van der Westhuizen asked if Mr Oberholzer knew who the third shortlisted candidate was for the CEO position.

The Chairperson asked how much Eskom was supposed to pay Kusile and Medupi and how much they overpaid for them. She asked how much would be saved from making the transition from diesel to gas in Ankerlig and Gourikwa and what the economic injection would be. She said that she knew that in the third and fourth rounds of bidding for IPPs, the price was brought down to 62 cents per KWh which she compared to Eskom’s 102 cents. She said that the cost of IPPs in the fifth round of bidding was expected to be almost below 50 cents bringing the cost of IPPs to less than half the price of Eskom. She asked if there would be another round for IPPs, when it would take place and if Eskom knew how much it would be buying from IPPs. She asked how much savings the economy was making from IPPs. She asked for the names of the companies that had been overpaid at Kusile, if they were not part of a confidential investigation. She asked if the new legislation holding accounting officers liable for any corruption or losses at departments applied to Eskom. She asked which municipalities were getting paid by their constituents but were not paying Eskom.

Ms Nkondlo asked for a list of the locations that were considered un-electrifiable.

Eskom’s Response
Mr Oberholzer said that Eskom was using its equipment at full capacity due to the high demand it was experiencing. This required that all machines be utilised at all times, which presented a challenge because it became difficult to pull some machines out of operation in order to perform routine maintenance.  He said that in the 1990s, Eskom was running at a 10% unavailability which allowed them to perform routine maintenance when demand was low, however unavailability had increased to 20%. Newer power plants like Kusile and Medupi would ensure that electricity provision was not compromised when older power stations reached the end of their lives.

He said that Eskom had performed a study about salaries and found that its executives' earnings were, on average, market related and, in some cases, were below the market rate. He said that Eskom had not paid any bonuses in the previous year and would not be doing so this year and that there would not be any salary increases for senior executives, given the current financial difficulty.

He acknowledged that there was corruption at Eskom, however, he said they were not aware of all cases of corruption as it was not limited to senior levels and was happening throughout the organisation. He said it was difficult to ring-fence corruption to particular functions. He said that Eskom was decisively dealing with corruption whenever it was made aware and that he was personally working with the Special Investigating Unit, Asset Forfeiture Unit and the Hawks to address the issue. He said that there was no doubt that Eskom had lost billions through corruption, but he did not have an exact figure. He mentioned that five companies at Kusile were currently under investigation for being overpaid more than R4b.

He said that Eskom welcomed competition that provided cost-effective tariffs, as it benefited the country. Eskom’s main priority was to resolve its issues in order to be able to provide reliable electricity at a cost-effective rate and to attract investment into the country. 

He said that it was difficult to deal with municipal debt and that Eskom was in negotiations with other ministerial government departments to get political support in resolving this issue. He said Eskom understood the financial implications municipal debt had on the company and the country and was acting decisively.

He said that Eskom believed that its people were its most important asset and that it was difficult that the company could not offer the bonuses its employees were used to. He said he was engaging with staff three times a month to encourage leaders within Eskom and boost overall morale. 

On unbundling, he said that Eskom had looked at its performance and decided that it had to change the way that it was operating and needed to give back authority to line managers in order to increase accountability. The company had decided to run distribution, transmission and generation as separate businesses and legal entities under the umbrella of Eskom. He said that this process would take approximately two to three years. He said that this move was a way of getting Eskom back to being the best utility company in the world, just as it had been voted for by its peers in 2003/2004.

He said that after the interviews for the CEO position, he spoke to the Chairman who said the shortlisted names would be discussed with the board. He said that he was aware of the names that had been publicised in the newspapers, however, he did not know who the third shortlisted candidate was.

He said that when Eskom went to the board in 2006/2007, it was to pay R78b for Medupi and R82.5b for Kusile. He said that there were two figures for each plant, a P50 price- which was the price given if 50% of the risks identified by Eskom materialised and a P80 price- if 80% of risks identified materialised. He said that currently the 2014 budget indicated a P50 price of R134b and a P80 price of R145b for Medupi. For Kusile, it indicated a P50 price of R156b and a P80 price of R161b. Medupi still required a flue gas vent to be built which required an estimated R40b. He said that at the time, Eskom did not have the luxury of time to plan these projects well and these price estimates were based on the last power station they had constructed and were far from reality. He did admit that Eskom had made some mistakes and had taken this as a case study on how to implement projects in the future. 

He said that at the moment, he did not have the figures for expected savings from the Ankerlig and Gourikwa projects. He clarified that Eskom’s price was 89 cents and not 102 cents and that they were buying from IPPs at more than double that figure. He said that it was difficult for Eskom to provide information on the next round of IPP bidding, because this was a process run by the Department of Energy.

He said that he was unfortunately unable to provide the names of the five companies that had been overpaid, because the investigation was still underway. 

He said that the law holding accounting officers liable, applied to Eskom and that the CFO was representing the company, however, the leaders of departments found to have committed offences would be held accountable.

Mr Lester guaranteed to the Committee that the Western Cape did not have any issues with municipal debt.

Mr Oberholzer said that only the Free State, Mpumalanga and North West had issues with municipal debt stemming from 2012.

 Mr Lester said that the list of electrifiable areas would be provided.

The Chairperson thanked Eskom for their presentation and acknowledged the challenge of discussing the company because of its significant contribution to the Treasury which could be beneficial and detrimental.  She acknowledged the financial burdens that load-shedding has had on the Western Cape and how providing Eskom debt relief would lead to R13b in budget cuts over the next three years, which could have financed 65 schools. She said that this was why it was crucial for the province to understand how Eskom intended to use its funds. She said that the Committee would be inviting the Department and the Minister to meet on 19 November and that Eskom was welcome to attend this meeting.

The meeting was then adjourned.

 

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