Eskom on Power Outages; Security of Electricity Supply in South Africa Department & Business Expert briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
14 February 2007
ESKOM ON POWER OUTAGES; SECURITY OF ELECTRICITY SUPPLY IN SOUTH AFRICA DEPARTMENT & BUSINESS EXPERT BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Presentation by Eskom on the state of electricity supply to South Africa
Presentation by Prof Anton Eberhard on electricity blackouts in South Africa; causes and recommendations

Audio Recording of the meeting: Part1, Part2 and Part3

SUMMARY
The meeting covered three presentations. The first was an explanation from Eskom of the reasons for recent power outages. The main cause was the lack of reserve margin capacity, which had slowly diminished from 1998 to its current 8% position relative to the 15% international benchmark. These margins were totally expended during summer maintenance programmes and the system was thus unable to cope with any shortfalls during those periods. Other causes were the unexpected rise in the economy growth rate, government’s conscious decision to prevent the expansion of Eskom’s capacity, and lack of general investment.

The Department of Public Enterprises addressed security of supply arguing that there was contention around who was responsible for managing energy supply, but that the White Paper on Energy encouraged private sector involvement. In 2004, the decision to place on hold expanding Eskom’s generating capacity was overturned but the Department maintained that private sector involvement was still being sought for about 30% of the country’s electricity needs.

Prof Anton Eberhard’s presentation highlighted the root causes of current problems which included: government expansion prevention, Department of Minerals and Energy programmes for securing private sector generators being behind schedule, and the supply and demand relationship being too tight not allowing for any shortfalls. His recommendations included: clear electricity standards, more integrated and transparent planning, streamlined investment approval, and private sector participation.

The Committee’s questions included: alternative sources of energy, reduction of coal supply, exporting of electricity supply, and clarity around the 70/30% power production sharing arrangement between Eskom and the private sector.

MINUTES
Introduction by Chairperson
The Chairperson welcomed the Members of Parliament and the respective delegations, especially thanking Mr Vali Moosa (Chairperson of the Board of Eskom), who had prior commitments, for prioritising the meeting. He remarked that Eskom was managing the issue of succession well alluding to the change in Chief Executive Officer (CEO) effective in ten months.

The Chairperson recapped the questions posed by the Committee to Eskom via a letter to Mr T Gcabashe (current CEO). The questions were: what were the causes of the national outages of 18 January 2007, why were the outages not anticipated, what are the implications of the outages for the supply of electricity over the next few years in particular during winter this year, what is the latest progress update regarding the generation of new electricity, what role can the public play in conserving energy, and what role can Parliament play in this regard?

Eskom presentation
Mr Moosa said he would make some comments on behalf of the Board of Eskom. The Members of the Board were independent and non-executive, which was important because Eskom should be accountable to the people of the country, a purpose which the Board intended to serve. South Africa was at a time when corporate governance was particularly important. If Eskom were publicly listed it would be among the biggest companies in South Africa. It currently had the biggest capital expenditure plans of any public or private company in South Africa, which meant that corporate governance was very important. The country was not necessarily at the absolute limits of the capacity to generate power, however essentially the reserve margin is not large enough to deal with all eventualities. It was highlighted that mid-summer maintenance reduces the margin to zero, and under those circumstance, if something were to happen there would be inconveniences. The inconveniences could be expected over the next few years, and could occur any time during the year, but would be more prevalent during mid-summer maintenance operations. During winter when the demand is too high the reserve margin may also be used, which provides another precarious position for power supply.

Mr Moosa said that for good or for poor reasons government policy for the past decade was that Eskom should not expand its capacity, which he argued, in hindsight might not have been the right approach. However, during the crucial periods, Eskom had control of the situation. The public needed assurances that the ‘wheels are not coming off’’. When the crisis did hit on the 18^th of January, Eskom staff was quickly mobilised and it took less than 12 hours to rectify the situation. There was no general blackout, but cutoffs took place for limited time periods sporadically, and before sunset the system was up and running soundly. The lesson that Eskom needed to learn from the incident was to improve communication to the public. The time should be managed to prioritise the rectification of a problem over and above efforts to communicate the problem. Eskom’s capital expenditure plans would be highlighted by Mr Gcabashe’s presentation but they were on track. As far as the future is concerned, Mr Moosa said that the power sector was at a turning point for a variety of reasons including climate change and global warming considerations to reduce green house emissions.

Mr Gcabashe thanked the Committee for the opportunity to present Eskom’s understanding of the events surrounding the 18 January incident. He would point out some issues that would frame his presentation. Firstly, the present power system was problematic, because the in-store capacity, though sufficient to meet demand, does not allow a margin to deal with any eventuality or unplanned breakdown. Secondly, regarding the transmission system, there are constraints on certain power transmission corridors which meant that problems could cause restrictions. At the distribution level, Mr Gcabashe argued that across the system including municipalities, there is a backlog of investment in infrastructure meaning that power would sometimes have to be restored manually. The reliability to those networks is compromised by the backlog in investment. The causes were a delay in building new generation capacity and municipal decisions to delay investment pending the restructuring of the distribution industry.

Mr Gcabashe also maintained that faster economic growth than were anticipated meant an increase in demand that has to be dealt with at a time when investment was low. Eskom was returning mothballed stations to service which will provide an additional 3600 megawatts (MW) when the stations are fully functional. It was expected that by June this year 1100 megawatts would become available. Eskom has also committed R97 billion to a capital expansion program, R10 billion of which was spent during the last financial year on infrastructure. This year a further R16 billion would be spent and next year’s budget will be even higher.

Energy utilities in the Southern African Development Community (SADC) were also being engaged including a cooperative Southern African power pool, which has twelve Members. Eskom was also looking at further possibilities for importing power from the SADC utilities. He also highlighted Eskom’s efforts in promoting efficiency in energy usage. Although these problems might seem insurmountable one should not lose sight of the fact that Eskom has 32 000 loyal staff who are committed to ensure the system keeps running and that problems are minimised.

Mr Gcabashe’s detailed presentation first looked at background information on Eskom’s supply and demand, which included capacity, peak demand which was forecasted to increase from the record demand in 2006, and the current reserve margin. The latter was at 8 to 10%, while the global benchmark was 15%. The reserve margin had been in steady decline from 2001. Reasons for the decline included the late start to construction of new capacity, the GDP growth being higher than anticipated, and the growing customer base. The maintenance procedure was also highlighted. The presentation also looked at the methods used for energy forecasting, and maximum demand, which are fed into Eskom’s planning model. After reviewing the forecasting model, Mr Gcabashe’s presentation covered several tables of power activity and forecast an adequate ability to meet demands over the summer and winter period of 2007 with the utilisation of contingencies such as increased importation and the initiation of mothballed stations.

Mr Gcabashe’s presentation also looked at the problematic events of 18 January. The key reasons for the outages were boiler leaks, air heater repairs, and a turbine trip. The presentation indicated that Eskom could not cope with that particular crisis without outages because 4934 megawatts were unavailable. The lesson learnt from the incident were a need for earlier customer alerts, the role of RJCCs (regional joint command centers) and ERCC had to be clarified, clear and prompt load shedding schedules had to be provided, and the need to improve communication with stakeholders in an emergency. The key power system risks included extended outages from 600 to 900 megawatts, outages of lines in the major transmission corridors, premature failure of major generation and transmission transformers, aging plants, not meeting environmental requirements leading to plant shutdowns, the dramatic reduction in coal stockpiles for coal power stations, and the unavailability of liquid fuel for open cycle gas turbines.

Regarding progress made on the capacity expansion project, Mr Gcabashe’s presentation indicated that the implementation is taking place, but the reason for higher expenditure was as a result of the acceleration of some projects so they could be accomplished quicker. The expansion was strongly coal based while the Board also required source diversification. He thus highlighted the alternative power generating options included in the project which consisted of nuclear, gas, wind, solar and hydro-power plants.

Regarding demand side management (DSM), Mr Gcabashe highlighted Eskom’s key response plans, including increased national awareness, and an average saving strategy of 500 mega watts per year for the next six years. The presentation also highlighted some recommendation for what the public could do. Here the public was encouraged to use electricity sparingly by media campaigns, using power alerts on the SABC to indicate when to cut usage of electricity, buy electricity efficient appliances, and fitting of energy saving devices. With regard to the role of leadership, the presentation indicated that an example of energy saving should take place, with MPs conveying energy saving messages to their constituencies, and providing support for efficiency projects over the next few years. The role of Eskom is to champion accelerated DSM, increase expenditure on energy efficient upgrades, use national power alerts on SABC TV, and the use of the billion kilowatt hour campaign, which entailed making use of electricity by Eskom’s own system more efficient. A comprehensive plan is being considered to address these issues and there are plans to manage the supply situation nationally including key stakeholders, apart from DSM and Operation Thekgo. Eskom would be appealing to customers and the public to reduce consumption to prevent power disruptions.

Department of Public Enterprises (DPE) presentation
The DPE presentation was a response to an article in the Sunday Times on 4 February concerning the security of supply of power in South Africa. Mr James Theledi argued that there was some contention around who should be responsible for expanding energy capacity in addition to Eskom’s attempt to use mothballed stations. In line with the White Paper on Energy, the view was that there was a need to liberalise the input sectors that were essential to the economy. One of the ways in which this could be accomplished was to encourage the participation of the private sector in electricity generation.

Mr Theledi pointed out that in 2004 the decision that Eskom should not expand generating capacity was reviewed. It was found that after investigating examples of international liberalised energy sectors, black outs and brown outs still persisted, and the conclusion was made that more government influence was needed in this sector. In light of these findings a decision was made to approve the expansion of Eskom capacity. However, there was still a need to encourage private sector involvement. Thus the decision was taken that Eskom would be allowed to expand capacity by up to 70% while the remaining 30% would come from the IPP (Independent Power Producers) process. Mr Theledi maintained that a number of studies had been conducted prior to the current crisis and it was known that capacity was diminishing, for example, the reserve margins were declining. It was Eskom’s responsibility to ensure security of supply, but DPE was working with Eskom and the Department of Minerals and Energy (DME) on the investment programmes and through the DPE’s shareholding in Eskom they were able to monitor the expansion program.

Discussion
Mr C Wang (ANC) asked if the Environmental Impact Assessment (EIA) processes were a hindrance to quick supply expansion.

Mr Gcabashe indicated that it was not always possible to keep up an expansion schedule due to the lengthy appeals procedures of the EIA process.

Mr Moosa said that from Eskom’s point of view the EIA was working as it should. However, the EIA process is by necessity a long process as it can go through a period of appeals.

University of Cape Town (UCT) School of Business presentation
Prof Anton Eberhard pointed out that 50 gigawatts of electricity was not supplied on 18 January which led to a cost of R3.75 billion to the economy. The proximate causes were the shortfall of 2800 megawatts, 4934 megawatts out on maintenance, a further 4904 megawatts lost due to problems with 13 units, and peak demand exceeding forecasts. He applauded Eskom’s remarkable accuracy of forecasting amidst views that electricity demand growth was higher than expected because of high economic growth, so the problem of high economic growth compromising ability to supply everyone with energy was false.

Prof Eberhard’s presentation also considered the fallacies of the causes of supply failures including: regulatory prevention by refusing license applications, disallowed capital expenditure, and restricting revenue through low price increases. He claimed that obstruction by the regulator or the shortage of finance was not the reason for Eskom not investing earlier in building their capacities. He argued that the ultimate cause of supply failure was in fact the prevention by government of Eskom building new generating plants between 2001 and 2004. The second cause was that DME procurement of IPP generators was behind schedule. He suggested that while there was planning some earlier assumptions, such as too high estimates of plant availability had been incorrect. Prof Eberhard said that currently supply security relies on imports and demand-side management, and that supply and demand remains extremely tight. He presented a review of forecasts for May and September 2006 that suggested that there was enough reserves in only four of those weeks, and that ultimately forward planning revealed a tight supply and demand situation for the years to come.

Prof Eberhard also revealed that even with Eskom’s capacity expansion plan reserve margins might still be too low. His presentation concluded that security of supply was inadequate and the policy uncertainty between 1998 and 2004 still had to be addressed. Medium term supply needs to be secured through policy and institutional reforms, while supply security in the short term would be addressed by Eskom. His presentation ended with several recommendations. These included: the establishment of a clear electricity security standard; integrated, transparent and coordinated electricity planning, a streamlined investment approval and licensing process, and finally, facilitation of private participation in electricity generation.

Discussion
Mr P Hendrickse (ANC) asked if Eskom was doing enough to keep their staff happy and loyal in order to secure human capacity. Regarding solar geysers for houses, he asked if anything was being done to create incentives for home owners to invest in this initially expensive option. He also raised concern about the lack of clarity in load shedding schedules. With regard to servitude problems, he asked if it was caused by not being able to purchase land, or government departments that are not cooperating. Has Eskom thought of making use of expropriation? What were the causes of the reduction in coal supply? What incentives for job creation and the local economy existed if a new nuclear power plant were to be constructed?

Mr Moosa, concerning Prof Eberhard’s assumptions of Eskom delays and IPPs, said that the theory was that it was good for the private sector to be involved in the power industry because of the positive impact of private sector efficiency, technological innovation, no risk to taxpayers, and improving competitiveness. However, the private sector is not showing a willingness to commit to this sector. Eskom would be glad if a private company could build a power plant as it would ease the burden on Eskom, but the private sector would not be able to sell power as competitively as Eskom. The private sector would then want conditionalities such as the assurance that it has a customer base that would always buy their power and that they be compensated for costs. In this manner, market elements and risks were removed. Mr Moosa maintained that the Board of Eskom found these requirements to be ridiculous because there was no entrepreneurship from business, and that Eskom was better handling power supply themselves. Eskom would welcome it if the private sector would partake in a more entrepreneurial manner that will include competitiveness and market dynamics. Ultimately, one should not expect the private sector to get involved as it would require long term costs, and thus Eskom had to be committed to taking on the burden.

Prof Eberhard responded by suggesting that there were a number of reasons why it was necessary to bring in the private sector to deal with at least a small portion of the power supply, as they served as a good benchmark. He accepted the fact that the cost of capital for business was very high, but argued that business still might do things more efficiently and thus be more competitive. He felt that there was a fair amount of interest from the private sector. He related this to the interest expressed at the conference on gas turbines where five consortia showed very strong interest, but they felt that the main impediments were environment regulations and the uptake agreement with Eskom. Prof Eberhard argued that it could be done as examples in other African countries proved it was possible in a more favourable investment climate. The enabling environment had to be adequate for investment.

Mr Hendrickse asked for information about IPPs in other African countries to be provided to the Committee, because he was not sure how the independent producers were supposed to operate.

The Chairperson argued that Business Day has been saying that there is a lot of interest from the private sector but the chairman of Eskom’s Board was arguing that we should not expect their participation, which was insightful.

Mr Moosa said that the interest was there if government shouldered the risks, but he argued that the point of private business was to take on some risk, which government and Eskom were not always willing to shoulder. The reason why business was successful in other African countries was because they lacked a powerful bargaining institution such as Eskom.

Mr Gcabashe, addressing the question of staff moral said that it has been a difficult time for staff because of the systems problems. Eskom was committed to making the staff comfortable and generally the staff is highly committed to their jobs, but sporadic disgruntlement was unavoidable in an organisation of 32000 employees. Regarding the issue of solar geysers, the proposal was being processed so he could not indicate what incentives or support would be provided to consumers who are interested in this option. Concerning the load shedding schedules, Mr Gcabashe acknowledged the problem but said Eskom was continually working on handling these problems. With regard to servitudes, under the new Electricity Regulation Act expropriations were permissible but the regulations were yet to be published and the means of expropriation were not clear yet. As soon as those regulations were in place expropriations might be carried out swiftly. Regarding coal stockpile problems he said that there were no problems, but bad weather was a negative influence on transportation and stock supply might be interrupted.

Mr Moosa said that the report of coal supply problems was influenced by a disgruntled coal transport contracted company whose contract was not renewed; so the report was purely political.

Mr Gcabashe, regarding nuclear power plants, said that there was not intention for them to become IPPs. The economic and job creation advantages would be at the construction phase and that post construction they would only employ about 500 people.

Mr R Nogumla (ANC) said that there was a huge outcry from the business sector regarding the power outages last year, and asked whose fault it was and how it was being handled. Secondly he asked who was responsible for security of supply.

A Member of the Committee asked what Eskom’s response was to the recommendations of Prof Eberhard. Secondly, he asked whether electricity was still being exported to other SADC countries and if that might compromise the reserve margins discussed. Thirdly, he asked if fast tracking of the building of power stations might compromise the quality of the structures and would they therefore require more maintenance. Finally he asked if the outages were going to be something that the population would just have to live with for now.

Mr K Minnie (DA) asked where the municipalities fit into the 70/30 formula and who was responsible for driving the 30% that Eskom was making available for IPPs.

Mr Z Kotwal (ANC) asked if alternative sources of electricity would include LED (light emitting diodes) technology. Secondly he asked if Eskom could persuade the Camden mines to assist the Mpumalanga community with regard to their shortage of coal.

Mr Gcabashe, regarding the responsibility for outages last year, said Eskom had contractual arrangements with the customers and has said that people should come forward and make claims in light of a particular contract and it would be dealt with. To address the question of the responsibility for security of supply, Mr Gcabashe said that Eskom under the old act used to have an obligation to supply until changes were made, but with Cabinet decision of 2004 obliged Eskom to make power available. However, the Electricity Regulation Act, 2006, put responsibility with the Department of Minerals and Energy.

Eskom would take Prof Eberhard’s recommendations into account, but would prefer to give a considered response because they did address root causes. Some of the conclusions, such as planning assumptions and the good track record of demand and supply, were contentious.

Mr Gcabashe, addressing the export of electricity, said that its relationship with the South African pool varied as some contracts were based on day-ahead markers, while others were long tem contracts of five to seven years. The cooperative pool was very useful and enjoys the support of SADC member governments. At a strategic level, Eskom wanted an integrated system where the northern part of SADC was hydro-electric and the southern part would comprise coal-fired stations and nuclear energy which would make it a robust integrated system that in the long run would provide security for everybody. When there was a complete shortfall in the system the rules of the power pool allowed the declaration of an emergency, but total sales of exports only amounted to 3% of revenue so it is not a large margin.

Regarding the issue of fast tracking Mr Gcabashe said that there was strong concern for quality and that there was no risk of quality compromise. On living with the inconvenience, he said that we needed to accept that all contingencies will not be met all the time; however he urged customers to use energy more efficiently. Mr Gcabashe said that of the R97billion, R75 billion would go into the transmission and generation area, the balance would be in Eskom’s distribution network. The point was that municipalities should make a similar investment in their networks. Eskom’s programmes did not include municipalities though he encouraged them to make similar efforts. As far as the policy split of 70/30 he maintained that 30% was dedicated to IPPs and refers totally to generation capacity, which would be driven by the DME (Department of Minerals and Energy). Considering LED technology, Mr Gcabashe said it is being looked at but at this stage it is an end user technology that the private sector could get involved in and could be part of the efficiency drive.

Mr Hendrickse said that his constituency was complaining about the weather and power outages and asked what caused this. He asked if wind power was still a viable option as far as Eskom was concerned.

The Chairperson expressed concern at Prof Eberhard’s assertion that given the contingencies Eskom was still not able to meet the 15% reserve margin benchmark.

Mr Wang asked for more information on the progress of Eskom’s solar energy option, as he argued that there has been implementation of the solar energy option by MTN for example in rural areas.

Mr G Gololo (ANC) asked if Eskom was still bound by the target of 70% power generation barring in mind the potential for private sector involvement.

Mr Theledi said that it was a DME process but the DPE did get involved in negotiations and endorsed the 70/30% policy. There was a need for private sector involvement, but DPE was interested in making sure that there is security of energy supply. Currently the responsibility is Eskom’s until the DPE gets clarity around the DME’s policy issues.

Mr Gcabashe said that Eskom was the only party that has built wind power generators on an experimental basis, and as a result there is Board approval for the building of wind farms for 100 mega watts, but it still remained very expensive. Regarding Prof Eberhard’s assertion of the tight relationship between supply and demand, Eskom concurred. People should understand that we should all play our part in managing electricity so we do not have to live with the inconveniences of outages. Meeting the 15% standard would entail the enlisting of Eskom’s stretch plan to sustain levels within five years. Mr Gcabashe was optimistic about using the power alerts on SABC TV as he maintained that it was effective in helping reduce power usage and containing crisis as on 18 January 2007. Addressing environmental issues would entail an assertive look into renewable energy, which Eskom was undertaking.

Prof Eberhard said that while the supply demand balance would probably improve, it remained tight and the risks were high in the short term. He had tried to emphasise the policy and institutional measures of assistance, but as far as the medium term and big decisions were concerned the enabling environment was particularly important. Lastly he argued that the Committee would eventually have to engage with the new capital expenditure of Eskom because as new projects came on-stream the expenditure will increase above the R97 billion.

The Chairperson asked the DPE to provide the Committee with a one-page report on what it has done for security of supply of energy. Parliament must take responsibility for preventing any further impediments. He did not agree with the Eskom’s assertion that economic growth has played a role in compromising adequate supply. Eskom had to ask itself why it did not lobby Parliament more for an expansion policy bearing in mind the knowledge that capacity would not be enough. He also asked what government could do to force or provide incentives for the private sector to get involved in energy generation and distribution. He was concerned about the issue of distribution which he found to be problematic. The Chairperson emphasised the need for communication with the general public to relieve their anxieties.

The meeting was adjourned.