Eskom briefing: Capital Expenditure and Winter Electricity Demand Management

Meeting report

Eskom’s Presentation
Mr Bongani Nqwababa, Director: Finance and Mr Kannan Lakmeeharan, Acting Managing Director, Eskom, provided a brief explanation of some of the supply difficulties facing Eskom, as well as a review of the situation in winter 2007, and the predicted demand management schedule for winter 2008. This included Eskom’s Recovery Programme.

The presentation contained a number of detailed slides giving statistics and examples to support the principles (see attached presentation)

It was indicated that there were a number of major issues hampering Eskom’s supply capacity, including the depletion of the reserve margin; quality and availability of coal at power plants; and areas where a single fault in the system could cause major disruptions. It was admitted that the stability of the system was “of concern”. There had been poor communication about the recent load-shedding process, and Eskom apologised for this. However, the major problem lay with industrial customers, who were not meeting energy-saving targets.

Details were given of the load shedding programme, the impact of it, and why it had been ceased.

The Recovery Programme focused on repairing and conducting maintenance at existing plants; building of new power plants; and working with the main municipalities and industrial customers to formulate energy-saving policies.

Mention was also made of Eskom attempting to attract supplies from small-scale electricity producers on a contract basis. Although there had been improvements in energy-saving, the aim of 10% had not yet been reached. As a result, there was likely to be at least some load-shedding in winter 2008. However, this would be a last resort, and would only be brought in if the system security was at risk.

Finally it was noted that there were four main risk areas in the country: Gauteng, KwaZulu-Natal, Mpumalanga, and Limpopo. The specific problems for each of these areas were identified. 

Discussion
The Chairperson was glad that the issue of load-shedding had been raised, and was particularly concerned at how the process had been stopped. Because South Africa did not have neighbours who could assist if South Africa were to run out of electricity, it was  in an unpredictable situation. The Chairperson was worried that, because Eskom was facing so much pressure - politically and socially – it might try to avoid load-shedding and keep the systems running under extreme conditions. There was the danger, if this happened, that this could lead to an entire system collapse later down the line. Thus, the Committee wanted to reiterate that it would prefer to see load-shedding than a  complete system collapse.

The Chairperson pointed out that the presentation had not mentioned the load-shedding schedule for the upcoming winter. She indicated that South Africa was not meeting its 10% energy-saving targets; therefore Eskom could not base its predictions on the hope there would be increased savings. She asked when would the new load-shedding schedule be available.

She noted that it was the government’s responsibility to establish a policy for energy saving; not Eskom’s. She asked whether Eskom had been satisfied with the demand-management by government.

Mr L Gololo (ANC) raised the issue of Eskom’s international customers, asking if they were also experiencing load-shedding, and if they too had been asked to achieve 10% savings. If so, he asked if there had been compliance. He further enquired if those international customers would also be expecting a tariff increase from Eskom, and if it was intended that the cost would increase incrementally over five years.

Mr Nqwababa explained that there were different types of international customers – those with a firm supply (where South Africa wascontracted to supply them with electricity at all times); and those with an “un-firm” supply (where South Africa would only supply electricity when there was sufficient capacity. These deals were brokered at times when South Africa had excess capacity. However, South Africa did also import electricity itself – he gave the example of Mozambique. South Africa would likely have to start buying more as the capacity of the suppliers increased. Thus, South Africa did need to maintain good relations with international customers. However, he confirmed that international customers also faced load-shedding, and would face the price-increases like all other customers.

Mr Lakmeeharan further explained that there were two types of firm contracts: legacy contracts; and those arising from long-term contracts (such as Botswana). Those international customers on firm contracts also needed to carry out savings, and had faced some load-shedding already A number then found alternative sources of energy, while others were being monitored. Those who were on “un-firm” contracts were informed when supply was available, and were able to purchase it. However, they paid higher than standard rates for this service.

Mr Nqwababa stated that Eskom was still vulnerable, and would remain so for the next few years. The issue was one of governance, and too many people attempting to control the process. He said that it was important to place strong people in appropriate positions, and to establish accountability and transparency. If there was a total system collapse, it could last for up to two weeks. Risk management processes needed to be effective. The public needed to appreciate the risks. He thanked the Committee for their support on this issue.

Mr Mqwababa stated that the problem of security supply lay not only in generating capacity; but also in transmission corridors, and in distribution problems. The new power conservation programme would begin on 1 July, and because it was impossible to control power savings through legislation, it had to be done through regulation. There were still significant opportunities for demand-side savings, including use of energy-saving lightbulbs and solar-powered heaters. These programmes might take several years to roll-out, but needed to begin soon.

Mr Lakmeeharan also thanked the Committee for their support. He reiterated that the job of Eskom was to secure system supply; thus he confirmed that Eskom would use load-shedding as an alternative to  facing system blackouts. Load-shedding would therefore continue on similar schedules and timelines throughout this winter. The challenge was how to implement energy conservation from 1 July, as there was not full agreement with government. An energy conservation policy would have to be established before a new load-shedding programme could be devised. However, the new load-shedding schedule would hopefully be implemented by 1 July. Municipalities also needed to establish power-saving processes, as the majority of customers accessed their electricity through their municipalities, not directly through Eskom.

Mr Nqwababa then mentioned issues of generation capacity. While customers needed to save their 10%, Eskom also needed to ensure that plant availability and reliability was at a maximum. Sustained supply and maintenance were important, to ensure that plants did not fail. The plants were now monitored on a daily basis; and there was strict adherence to the maintenance schedules. In order to ensure security of supply, Eskom needed to ensure consistent coal supplies.

The Chairperson asked if Eskom was satisfied that the power stations were up to scratch to meet the challenges of winter.

Mr Lakmeeharan replied that he was not completely satisfied on this point. However, Eskom had identified which power stations remained a concern, through both internal and external assessment. Although Eskom was confident that the problems were understood, and that they knew where the risks were, they often could not predict exactly where the problems would arise. However, once a problem did arise, Eskom was confident that it would be able to deal with that problem. The current coal supply was sufficient if it was maintained as these levels. Positive trends had also started, but there was a need to increase the gains made. Eskom would not resist resorting to load-shedding if was required. If a certain plant was under-performing, then load-shedding would be implemented in order to conduct maintenance. Eskom could be more confident after a complete review of all the plants. At this stage only two more stations need to be looked at.

The Chairperson asked for information about the progress of new alternative-source power stations, such as water-generated power, which were due to come online. She asked if new power stations were being built, and whether these were on or ahead of schedule.

Mr Nqwababa then outlined the progress of a number of power stations being brought online in areas such as Limpopo and the Transkei. Contracts for most of the construction had been awarded, and the majority were in the building-implementation stage. Activity had already begun on the ground for most of these stations. 

Mr Lakmeeharan mentioned a number of other new stations, including Gas 1, which should be coming online between January and May 2009. A number of old plants, which were currently undergoing maintenance, wouldl be coming back online within the next few months. However, these plants needed to go to maturity phase, which could take up to three years. At Grootvlei, the first unit was already online, and the second was due to be online before mid-winter.  Another six units were expected to be online within the next year and a half. It was emphasized that the monitoring of the performance of these stations was the important factor.

Mr Nqwababa stated that the return to full service would be delivered by 2011 as planned. The programme was currently going ahead faster than planned, as numerous stations were being developed in parallel, rather than one at a time.

The Chairperson noted that it was commendable that the planning had been conducted a number of years ago, meaning that the implementation could now be carried out faster. On the issue of demand-side management, the programme of “smart-metering”, which monitored electricity usage in real-time, seemed to be a good system. More clarity on the smart-metering programme was requested.

Mr Lakmeeharan answered that the advantage of a pre-paid system was that no follow-up administration is necessary. However, consumers could always keep topping up their electricity, meaning that it was not possible always to monitor demand. Smart-metering was able to restrict demand at any point. In other words, the system would not allow for use of more than the rationed amount. The system could also provide real-time information on the progress of energy-saving. In theory, each appliance could be monitored separately. However, the system would be expensive to implement as all the old pre-paid meters would need to be removed, a rationing system would need to be established, communication and education programmes would need to be carried out, and there would be issues around administration and payment. Although it was a possibility for managing demand, the question was how to pay for it, and how to roll it out. The system was used effectively in areas in Brazil, but it was driven by a Government Cabinet Minister. 

The Chairperson then asked about the system of medium-term power producers.

Mr Lakmeeharan explained that there were two different programmes. The first programme was developed to bring on line plants where customers produced energy, and were able to use that energy to generate electricity for their own use. Eskom would then give a power-purchase agreement for any excess power being generated. However, groups would need to tender for this. The tenders were due to close at the end of May. Because it was a long-term programme, the process and prices would be established after all the tenders had been received. Medium-term power producers was a slightly different programme. Over the next eight years, Eskom would establish price paths with a ceiling for groups wishing to build their own power-generating plants. Groups would be able to use any technology they wished, and it did not matter how power was generated. If the group could meet the objectives, they would probably get a tender. However, if it would cost more than the pricing ceiling, the programme would need to be evaluated. Tenders were open until the end of December. Preference and better prices were given to groups that could begin producing soon. Although the agreement was only for a set period, power plants could apply to go on to another programme, after the end of that period. In other words, Eskom would provide capital and put in infrastructure for the development of these stations, and would then purchase electricity back from the producers.

Mr Nqwababa then noted that the process had moved quicker than anticipated once approval had been obtained from the regulator about the processes and price ranges. If the proposal fells within the price range, and as long as the process was technically compliant, there would be award of the contract. If the proposal was above the price limit, it would need to be evaluated competitively first. All the details were available on the Eskom website. Contracts would be awarded on a first-come first-serve basis. Once a power purchase agreement had been established, and the prices were transparent, the process could begin. However, bigger industries were not really participating, claiming that Eskom was trying to hamper the process. Eskom wanted it to move forward.

Mr Lakmeeharan pointed out that Eskom would only know the core generation capacity at the end of May. Although Eskom was targeting 1500-3000 megawatt per customer, most would fall within this range.

The meeting was adjourned.