Eskom Annual Report: briefing

Meeting report

MINERALS AND ENERGY; PUBLIC ENTERPRISES PORTFOLIO COMMITTEES: JOINT MEETING
19 October 2005
ESKOM ANNUAL REPORT: BRIEFING

Chairpersons: Mr E Mthethwa ( ANC); Mr Y Carrim (ANC)

Documents handed out :
Eskom Annual results 2004 / 2005 presentation
Eskom Annual Financial Report 2004 / 2005 [available at www.eskom.co.za]

SUMMARY
The Committees were briefed on Eskom's Annual Report and Financial Statements for 2004/ 2005. The main financial result was that group profit after tax had gone up from R3.4 billion to R 5.2 billion. The key challenges for the next financial year were safety, coal, logistics and generation capacity.

Members asked questions about power outages, progress in rural electrification, Eskom’s plans for generation locally and beyond the borders, its HIV/AIDS program, safety and corporate signage and uniforms, fatalities at work, green house gas emissions and sources of renewable energy.

MINUTES
Mr. Mthethwa noted that the practice from now on would be that Eskom would jointly brief the Minerals and Energy and Public Enterprises Portfolio Committees.

Mr. Mohammed Valli Moosa stated that he had assumed duties as the chairman of Eskom from 1 August 2005 and since then was able to familiarise himself with this state enterprise. He stated that the report presented today covered the period from 1 January 2004 to 31 March 2005 which was not a 12 months period because government required Eskom to change its reporting period and financial year. He stated that Eskom had delivered exceptional performance and that it was an enterprise in exceptionally good financial health. He stated that it placed Eskom in a good position to pursue the ambitious 5-year infrastructure investment plan that government had.

Eskom Briefing
Mr. Thulani Gcabashe, CEO highlighted the theme of the report which was " building capacity and embracing the future". He stated that Eskom had made sure there was a perfect alignment between the share holder compact and the corporate plan.

He raised the issues of delivery on social commitments, sustainability, price of electricity, customer service performance, sustainability initiatives, demand side management, the Eskom development foundation, corporate social investment, electrification per province, BEE procurement, Black economic empowerment, managing the impact of HIV, employment equity, education and training, safety, environmental performance, research and development, energy demand, technical performance and financial statements.

Discussion
Mr Carrim stated that they would have to look at Eskom’s performance over the last 15 months, their financial statements and capital expenditure. He stated that to submit annual reports on 30 September was too late for Parliament and the Portfolio Committee felt that all annual reports should be tabled by 30 August. The Committee wanted public hearings and to give the Eskom report to an independent energy specialist who could evaluate it. He emphasised that this standard would be required within the next two years for all the reports from State Owned Enterprises (SOEs) to Parliament.

Mr. V. Moosa replied that from Eskom’s point of view this timetable was quite achievable and the annual report would be submitted by August every year. He further stated that Eskom took all the feedback from Parliament very seriously.

Mr Carrim requested that Eskom and all other SOEs in future produce a more user-friendly version of their annual reports in several languages for distribution to the public.

Mr Mthethwa stated that he wished to isolate electricity generation and that the major challenge was capacity. What progress had Eskom made on this issue? He also believed that another challenge was the City Power problem in Johannesburg where the role players such as Eskom, City Power, and the National Regulator were not all working together to solve the power outages. He requested more information relating to the reactivation of mothballed power stations.

Mr. C Morkel (Independent) wanted to know the costs of changing the corporate logo on uniforms and the replacement of hard hats for Eskom staff. He requested more details about the work related fatalities that had occurred, specifically from burns and head injuries and wanted to know if employees had been wearing the correct equipment at the time the fatalities occurred.

Mr. C Gololo (ANC) wanted know about their HIV and Aids program and who was doing research for them. He also wanted to know the progress on the Pebble-bed Modular Reactor (PBMR) and whether Eskom was contributing to the current summit on global warming.

Mr. Carrim wanted to know what progress Eskom had made in the challenge of deep rural electrification. He suggested that the Public Enterprises Committee have a specific discussion on the PBMR. He stated that the issues that environmentalists had raised related to the PBMR were safety, value for money, delivery time and the fact that other countries had dispensed with it.

Mr. R Pieterse (ANC) stated that there was a need for a balanced view on the PBMR especially the safety and financial aspects. He also wanted to know the percentage increase in green house gas emissions over the reported period and why government had taken over Eskom’s share in the PBMR. In addition, he asked how green house gas emissions were going to be reduced and whether Eskom had sufficient generation capacity to meet the requirements of the 2000 megawatts Coega aluminium smelter. Finally, he asked about Eskom’s generation plans for the rest of Africa.

Mr. Combrinck (ANC) wanted to know the time frames for the PBMR and the building of power lines from Mpumalanga to Coega. He expressed frustration about particular lobby groups that used the environmental impact assessments to frustrate and delay projects often at the expense of poor people and asked about reviewing the method of conducting these assessments.

Mr E Lucas (IFP) stated that there was still a lot of work to be done in improving the electrification of the rural areas and asked why rural areas experienced power surges that badly affected electric equipment. He also believed that the fatalities caused by illegal connections were an indication that people could not afford electricity and it should be looked into more seriously. He also wanted to know more about Eskom’s plans for generation in the Southern African Development Community (SADC) region.

Mr. Mthethwa expressed concern that Eskom had only done a price comparison of its electricity prices with affluent countries and no developing countries had been included in this survey.

Mr. Carrim stated that they welcomed Eskom’s move towards a multi-layer pricing system; however, the statement that the price of electricity would increase because of the need to fund capex could only be acceptable if the poor were not disadvantaged and the free subsidy program undermined. He asked for more clarity on Eskom’s cost structure. He also asked if it was true that Eskom was the lowest industrial deliverer of electricity in the world, but in respect of residential customers it was only the fourth lowest.

Mr T Gcabashe stated that there was a plan to reactivate the three power stations a unit at a time; firstly the commissioning and then handing it over to generation that was the operating side. Once this was done, it was in commercial operation and that was what he had referred to in his presentation that was that the first unit was now being operated by generation.

He responded to the question on whether Eskom, the National Electricity Regulator (NER) and City Power worked together by saying that the NER had been informed of all their plans because of the cost implications and they worked off the national plan that the regulator had provided. On City Power, there was a standing rule that whenever a power outage occurred, Eskom offered their assistance.

Mr Brian Dames (MD: Eskom Enterprises) referred to the capacity expansion program and stated that Eskom planned in terms of the demand they expected within the country and they then added a reserve margin to take care of any contingencies that might arise. The three mothballed stations that would be reactivated were Camden, Grootvlei and Komati. Once they were all fully commissioned, they would return 3800 megawatts to the system by the end of 2011. This plan was integrated with the demand forecast for the country. The total investment for the three power stations was R12 billion and this was a unique effort and provided a significant challenge technologically.

Demand would peak in Winter 2007 when Eskom would need about 1000 megawatts more. Eskom’s response was to build two open cycle gas turbines with 1000 megawatts capacity each at Atlantis and Mossel Bay. The contracts had been awarded, but the biggest challenge was the record of decision for the environmental impact assessment. Eskom needed to turn soil in January 2006 in order to have those units ready by June 2007; leaving them just 9 months to construct the transmission lines and integrate the two power stations.

Eskom would make decisions on base load capacity in 2010 and 2011. Three options were available, including three coal-fired stations and one combined cycle gas station for Coega. The possibility of importing power from Namibia through using a combined cycle gas option utilising the Kudu gas field was being explored.

Mr. Carrim stated that what was planned was enormously ambitious; however, he doubted if Eskom had the capability to complete the capex projects by the deadlines. He asked the CEO and board for assurances that this could indeed be met timeously.

Mr. Gcabashe responded categorically that the timetables were achievable, but they were not without challenge because one did not know the state of the plant until it started operating. Lead times tended to be long but plants could be assembled within 18 - 20 months on site and the base load stations were the plants that took the longest to complete.

Mr Pieterse (ANC) stated that there had been absolutely no mention of renewable energy such as wind turbines and solar energy. He wanted to know if there was any space for this form of energy.

Mr. Gcabashe replied that Eskom normally looked at proven technology that they knew would deliver a certain type of performance. Eskom had a lot of renewable projects in their research and development but none of them could be put into use as commercially available technology. He said that large-scale solar concentration plants and the PBMR were still in the pilot phase, so they not yet prove the technology.

Mr L Greyling (Independent Democrats) asked about solar energy in the Western parts of the country and wanted to know what progress had been made on this project.

Mr Gcabashe replied that Eskom had looked at a number of large-scale solar energy projects; however, the current projects were still in the pilot phase. He continued that the technology required to give Eskom 100 megawatts was also still in the pilot testing scheme. In terms of government policy, targets of 130 000 gigawatt hours within ten years had to be achieved.

Mr. Morkel wanted to know if South Africa had to hold the Soccer World Cup right now whether Eskom would be able to satisfy all power requirements.

Mr. C Molefe (ANC) wanted to know if Eskom would dump outage problems on local municipalities, and who would be responsible for aging equipment.

Mr Carrim stated the need for Eskom and local municipalities to work closer together and urged Eskom and City Power to make a concerted effort to co-operate in preventing power outages.

Mr. Mthethwa stated that City Power and Eskom had to report back to Parliament that they had an initiative to solve the power outages problem.

Mr. V. Moosa stated that Eskom took these comments seriously and as a public enterprise they intended to be more proactive and would work more closely with City Power. He was confident that the outages would not be a permanent feature and would be addressed.

Mr. Gcabashe stated that with regard to the change in corporate image and signage, Eskom had decided to prioritise signage and they had agreed to implement this over a period of two years after which they would do a compliance audit. With regards to the question on fatalities Eskom’s procedure was to have the manager and supervisor report to the operations committee and they would have to account for the accident before the full investigation in terms of the law was carried out. If the wrong equipment had been used it would be stated in the report. Eskom could provide the details if requested to do so.

On the HIV/AIDS program, Eskom had spent R83 million on a vaccine project run by the Medical Research Council. Clinical trials had begun and the surveillance studies had been outsourced and were being done on an anonymous and voluntary basis.

On rural electrification, Eskom had not overcome the problems of topography and density of settlement and it was getting more expensive to connect houses because of density, topography and load density.

On whether Eskom had excess capacity to connect the new aluminium smelter at Coega, he said that this had already been factored into Eskom’s plans since about 2001. The combined cycle gas turbine plant at Coega was subject to the availability of liquefied natural gas because there was no natural gas at Coega. He continued that if the project were viable, Eskom would build a plant at Coega. However, it was Eskom’s obligation to ensure that there was more power available so they were extending the capacity of the transmission lines.

Eskom’s generation plans for the rest of Africa included development of hydro potential in Mozambique, work on the Ingwe development in the Democratic Republic of Congo (DRC) and a 3000 km transmission line through Angola, Namibia and Botswana to South Africa. He stated with regards to Cahora Bassa in Mozambique, there was potential to develop the north bank of the hydro scheme which would give a further 500 megawatts and there was also further potential to develop a second station downstream. There was also potential for an 800 megawatt gas-fired combined cycle station in Namibia using the Kudu gas field.

He referred to the abuse of the EIA process which ended up delaying projects, but stressed it was important that they were done and that they received quick records of decision to avoid construction delays.

He stated that with regard to rural electrification, Eskom was increasingly trying to integrate electrification with other infrastructure development in rural areas.

Mr. Carrim asked what Eskom had done about the delivery of non-grid options to reach people in the rural areas.

Mr. Gcabashe replied that grid-connected options were getting more expensive by the year. However, non-grid connections were still being researched and the technology was not yet viable or sustainable at this point.

Mr. M Ntsokolo stated that power surges in rural areas remained a challenge due to the long overhead lines and electrical storms. The technology used to mitigate this was expensive if the load carried was low and vice versa if the load carried was high.

Mr Gcabashe responded to the question on whether illegal connections were a reflection on affordability by saying there was no evidence to prove this. There was no correlation between the two and the losses incurred from illegal connections were minimal. Non-payment was a far biger problem.

Mr. Carrim asked if a figure for illegal connections was available. Mr. Nsokolo responded that it was between 16 and 18 percent.

Mr. Carrim stated that Members should do all they could to warn people about the dangers of illegal connections.

Mr C. Morkel suggested that safety information in the form of pamphlets be distributed by MPs to their constituency offices.

On Eskom’s price comparison with affluent countries, Mr Gcabashe stated that an outside party had done this survey. However, it was the correct type of survey to use for a utility of their size.

Dr. U Roopnarain (IFP) asked if the survey price was based on a price that was given to a municipality or a price that the municipality gave to the consumer. Mr. Gcabashe stated that it was a price given to industrial customers that consumed over a particular amount. When it came to domestic supply, half the consumers were supplied by Eskom and the balance by municipalities. They had over 200 different tariffs right across the system. Multi-layer pricing affected the poor most and this was the main motivation for government setting money aside for free basic electricity.

The reason for green house gas emissions increasing by 25 % over two years was because of extremely high demand growth for electricity forcing Eskom to run all of their stations at very high levels. Eskom took global warming and climate changes and green house gas emissions very seriously and they were looking at clean coal technology, hydro generated power from SADC and nuclear power from the PBMR. On the PBMR, he pointed out that Eskom would be a customer and were therefore not a developer. As a result, their shareholding had been reduced as other investors had joined the project. Eskom would buy power from the PBMR only if it met its price criteria. They would not pay a premium for PBMR power.

Mr. Carrim asked who was funding the PBMR project. Mr. Gcabashe replied that the current shareholders were the Industrial Development Corporation (IDC) and British Nuclear Fuels (BNF). National Treasury had set aside money for the project and were looking for shareholders from the private sector to invest in the project.

Mr. Molefe (ANC) asked about municipal rates and capacity. Mr. Gcabashe said it was a concern that not all municipalities had the capacity to maintain and provide services and Eskom’s role was to ensure they added capacity.

Mr. Carrim stated that the Public Enterprises Committee was aware of the magnitude of Eskom’s capex plans and that these should be more fully discussed. The Committee was very impressed with the HIV/AIDS program, but needed to know more about alternate sources of energy and financial improvements.

Mr Mthethwa summed up that there were no questions about the transformation program in Eskom, but its commitment to the Kyoto Protocol was unclear.

Mr. V Moosa responded that Eskom’s target for universal access to electricity by 2014 was in sight. He would inform the Board of all the comments raised. Eskom would increase its spending on renewable energy as Government placed a high priority on its obligations on global warming and the Kyoto Protocol. Eskom planned to exceed the minimum legal requirements set in legislation on green house gas emissions.

The meeting was adjourned.