Power Outages: briefing by Minister and Eskom

Meeting report

Eskom’s Presentation
Minister of Public Enterprises Alec Erwin and Mr Jacob Maroga, CEO, Eskom, provided an overview on the current electricity situation and historical demand. What had led to the current situation was as a result of the late start of the new Build Programme, an insufficient reserve margin, the medium term planning effectiveness and demand growth increasing from 1994 to 2007. A national response plan was launched on 25 January 2008. It consisted of a long-term Adequacy Plan, a capacity building program on the supply side, and power conservation programmes and behaviour change programmes on the demand side. In terms of pricing, Eskom’s prices would still remain competitive and Eskom supported a pricing policy which ensured predictable price increases.
In the capacity build programmes, there would be two new gas-fired power stations in the Cape, and at least 430km of additional transmission lines have been installed. The capacity expansion programmes were intended to minimize slippage on the capacity build program. However these programmes faced a number of challenges which included the upward pressure on capital cost on the back of high global demand for equipment, the availability of suppliers and tight timelines. There were also credit ratings concerns after Eskom was placed on “credit watch” as a result of the new capital and financial plans.  On the recovery programme, the power situation would be tight for a number of years and it represented an excellent opportunity for RSA to embrace energy efficiency.
Discussions
Mr  J Sibiya, (ANC, Limpopo)  said page 5 of the presentation indicated that the narrower the wide space became, the more strain was placed on the system. Has Eskom done all it can to prevent a complete crisis in the future? Eskom should also provide clarity on whether they had looked into using infrastructure from neighbouring countries such as the Cahora Bassa Dam in Mozambique.

Dr M Van Dyk (DA) noted that the Minister made no mention about Eskom’s position as a monopoly and the inability of other companies to enter the market. Mr Erwin should also comment on whether he was informed about the looming crisis after June 2006, when he informed the public that the Department was confident that there would be reliable energy supply in the future. If he had been informed about the matter, why was it not reported to Parliament? It had been reported that Eskom got rid of coal supply companies with massive capacity and employed small emerging contractors who failed to supply enough quality supply to power stations.

Ms J Terblanche (DA, North West) asked Mr Erwin to comment on the issue of illegal coal mining operations and how he and his ministry planned on addressing the matter.

Ms L Matlhoahela (ID, Northern Cape) noted page 21 of the presentation on credit ratings concerns, where it was said that financial planning had not yet been defined. She asked when the plans would be defined. Eskom planned on looking into fining industrial customers in an effort to reduce consumption. How much would the fines be? And would there be any job losses as a result of the reduction in consumption?

Mr H Schmidt (DA) said that it was unfortunate that Parliament was only briefed five weeks after the crisis began. There was a concern that the nation was being lulled into false sense of security. The energy crisis had had the worst effect on the mining community, and according to reports 17 000 jobs were to be lost. On the Open Cycle Gas Turbines (OCGT), it was estimated that the OCGT would cost up to R400 M per month. It was also concerning to see that Eskom had been placed on a negative credit watch as a result of management concerns.

The Chairperson reminded members that the briefing by Eskom was scheduled in November. The Committee was however worried about being lulled into a false sense of security, when the country was still in crisis mode. On the Chancellor House (the ANC’s investment company) matter, Eskom should once again go through the process and see whether extraordinary measures were taken to ensure the integrity of the process of benefiting from a state contract. On the stockpiling of coal, Eskom should comment on whether any specs had been taken with the local or international mining houses.

Ms A Mchunu (IFP, KZN) refrred to the requirement of 45 million tons of coal, Eskom should comment on whether it was it possible to reopen mines in Kwazulu Natal. Was it also possible to look into using Jozini dam in the KZN to assist with the production of electricity?

Mr C Gololo (ANC) asked Eskom to provide a rough estimate on how much consumers would be charged for electricity, and also how the rationing of power was going work.
 
Mr M Gumede (ANC) asked how Eskom was going to address the skills issue.

Mr Z Kotwal (ANC) asked for clarity on how the Independent Power Producers (IPPs) related to South Africa having the cheapest electricity in the world.

Mr W Douglas (ACDP) asked whether the expansion programmes to non electrified areas would still continue.

Minister Erwin replied that in order to prevent a situation where blackouts would occur, Eskom would have to go through a process of caution, and more load shedding would take place if needed. The Ministry and the Department were very conscious of the need to prevent a situation where there was a complete collapse, and measures addressing prevention of a total crisis were being looked into.  The mining industry was greatly affected, and meetings had to take place with the industry in order to develop efficient energy savings methods. On the use of neighbouring infrastructure such as the Cahora Bassa Dam, South Africa had no interest in the dam, as it did not have the capacity needed to supply South Africa with sufficient electricity. There were no projects in neighbouring countries which could supply South Africa with the necessary energy.

The issue of monopolies has extensively been debated, and the model that was adopted has proven to be the most common and most successful model.  As state owned, Eskom could undertake projects that private companies could not and the Department was also bringing in IPPs.  On the history of government’s knowledge of the blackouts, one would need to look at the 1998 White Paper. At the time energy supply was not a major issue, and government thought it was important to focus on energy distribution. Eskom should have at the time been asked to build a base load station, in order to divert the crisis. The Department however believed that they could get through the crisis and assured the public that South Africa was in a situation where there was not a total catastrophe. The Ministry and Department acknowledge that they incorrectly predicted the short to medium term issues.

South Africa was however saving significantly as a result of industrial customers. The mining industry had indicated that it was possible to save 10%, and the target was not imposed on every single mine. Issues pertaining to illegal mining should be reported to the Department of Minerals and Energy.  In terms of ratings, Eskom was an electricity utility which was highly rated and it was not correct to blame management problems. On the capital structure of Eskom and the price increases, more work still needed to be done and at present 14% was the ideal percentage. On industrial customers and fines, there was a power conservation programme in place, and in order to get people to use less electricity one would have to ration the users. It was very difficult to control the individual user; therefore it was decided to ration the big users. It was decided to look at different parts of the economy where there was potential to save. The hospitality sector was one of the sectors where the potential existed. Eskom was looking into setting energy saving targets, and imposing high tariffs on anyone who went beyond the targets. The system could not be implemented immediately, as further discussion was needed. 

Minister Erwin continued that the briefing to Parliament was not late; Eskom was hard at work dealing with the crisis. It was however not Eskom’s intention to create a situation of false security. Eskom’s intention was merely to bring about a behavioral change in the use of electricity. The challenge was to use 10% percent less electricity for every unit of output. On the OCGT, it was too expensive and too problematic and it would be used too heavily. On the Chancellor House deal, the Department supported Eskom in taking extraordinary measures on the tender process. There has never been such a thorough forensic assessment for any tender in South Africa as there was for Chancellor House.  The Ministry could not dictate to the supplier who they wanted to be their BEE partner. There were only two bidders, the winning bidder came back and said that they were unable to provide what was required, and Eskom was forced to go back to the unsuccessful bidder. 

On the mines in KZN, the matter was left in the hands of the private sector. It might however be very difficult to revive the mines. Coal prices were also very high, and were likely to remain high. On the build programmes and the skills, there was a world shortage on high level skills. There was however a hunt for engineers and through the Joint Initiative for Priority Skills Acquisition (JIPSA), the issue of skills was being looked into. On IPPs, the IPP price was higher than the average price. Eskom had to choose between bringing in an IPP and charging them a higher rate or building their own infrastructure at a lower cost. One also should note that there was a very big possibility of Eskom carrying all the risk if an IPP was to be brought in. If Eskom carried all the risk then it would not be a proper commercial proposition.  On the issue of housing, Eskom wanted to continue the housing programme. Consumer patterns only increased as their standards of living increased.

Mr Moraga added that when one built a power station, one built it on the coal resources. All the coal stations had lifetime contracts with the big suppliers such as Anglo. There were two stations where coal had to be brought in by rail and road, as the supply of the mines could not match the requirements of the station. The power stations were being run harder beyond the contractual limits. On the availability of coal, the coal reserves were there, the challenge was mining them fast enough. Another issue was road transportation placed a huge pressure on the roads. On the OCGT, it would be very expensive to use them as base load stations. On the procurement of tenders, there was a rigorous process that went through various auditing processes and it was very difficult for a single individual to influence the tendering process. Chancellor House was identified as having ties with a political party, however there were no signs of political influence. Chancellor House was unsuccessful the first time round. Even after the contract was awarded, a further auditing process was undertaken. On the importation of electricity, hydro potential generation was an option; however the closest river with enough hydro potential capacity was in the Congo. On the electrification of communities, Eskom was going full steam ahead with the electrification.

The Minister added that on the issue of skills, he was unaware of the reports of 17 000 job losses. There were detailed protocols that dealt with issues pertaining to the retrenchment of workers, and one needed to be very careful in making any kind of assertion on this.

Mr Gololo asked for clarity on the procurement of coal supply, and the process of how one would go about providing the service to Eskom.

Dr Van Dyk asked Eskom to comment on why the power stations were running overtime. The Department was responsible for oversight over the State Owned Enterprise (SOE) and yet no word was no mentioned of crisis was mentioned. The Department said that there were proper risk management procedures in place, they therefore should comment on why there was a huge crisis.

Ms Tereblanche asked for comment on what was being done to address problems of illegal electricity connections. Eskom said that coal had to be trucked to certain power stations and this created pressure on the roads. Clarity should be provided on how local municipalities could be assisted to address the problem.

Ms Matlhoahela said attention needed to be focused on the poor energy saving mechanisms of hotels. On the reduction of usage, would there be any job losses?

Ms Mchunu suggested going back to the old tradition of making wonder boxes for cooking to assist with saving electricity in households. Other innovative ways included converting cow dung energy into electricity.

The Chairperson asked the Minister to comment on what the Department was doing to reduce consumption. On IPPs, what had been ascertained was that big players like Anglo would be importing electricity into the country and maybe selling it to Eskom. Clarity should be provided on how far the process was. On the reduction of the monopoly, it was true that no private sector could embark on the building programme that Eskom was embarking on. However Eskom needed to attract investors and in order to attract investors, Eskom also needed to maintain its competitiveness in having the cheapest electricity in the world. Eskom should also comment on how they planned on dealing with issues pertaining to global warming.

Ms Themba asked how were people in the rural areas informed about the outages.

Mr Kotwal said the presentation should have made mention of “vampire” usage of electricity in households. On coal mining, many communities were sitting on vast quantities of coal. How could the members of the communities be empowerd to start up their own coal mining operations?

Minister Erwin replied that nobody predicted the set of events that occurred this year. The Department would have to accept the fact that there was poor risk management. However the risk had been identified, and the Department needed to look at whether the risk management process could be refined. Illegal connections by households was a problem, and it was something that needed to be looked into more carefully. On the roads issue, the Department was looking at rail transportation. The hospitality industry was where electricity could be saved the most, and it was where the highest tariffs were set. On job losses, retrenchments were a matter of last resort, and trade unions would be the first to be consulted and not the press or Parliament.
 
The innovative ways of saving electricity were welcome, as it was important for one not to depend on the massive grid. It was important to encourage local authorities to promote saving methods. The Department was interacting with local governments to devise plans and proposals. On the IPPs, there was some merit in the IPPs, and there needed to be a sensible balance and position on the matter. The decision where Eskom was a single buyer was a very important one and Eskom and the Department needed to come up with proposals on where they thought they should be going.
 
Mr Maroga replied that there was a need for more coal transport, and there would be an opportunity for more coal transport and the relevant details would be forwarded to members. Illegal connections were still a problem; however it did not impact greatly on the national grid. Communication to rural communities was a challenge and radio was still the most effective way of reaching out to community members. On global warming, South Africa still had cheap coal and a lot of it was being used. There needed to be an efficient use of coal and the development of technology that would capture carbon dioxide. Eskom also planned on reducing reliance on coal, and was looking into using nuclear energy.

On the IPPs, it was more about using waste heat in industrial processes which had not been cost effective in turning into electricity in the past. There were new projects, particularly the platinum mine projects where waste heat was used and other projects were looking into the matter as well.  On the mining rights to communities, there would be a broad based BEE structure implemented. On the move from electricity to gas, Eskom was looking into the matter and hopefully a resolution would come out soon

Mr Gololo asked whether the aluminum smelters managed to look at other sources of electricity.

Mr Maroga replied that the aluminum smelters were in South Africa for the cheap price of electricity. It would not be very cost effective for them to start building their own plants.

Ms Matlhoahela asked if there would be any reaction that would take place if carbon dioxide was released into the earth.

Mr Maroga replied that the technology was still new and if one could assess the geology and keep it there without it escaping, that was the direction.

The meeting was adjourned.