Eskom’s spending on alleviation of energy crisis, winter plan, & provincial and municipal interventions,

Committee: NCOP Communications and Public Enterprises

Chairperson: Ms MP Themba (ANC, Mpumalanga)

Date of Meeting: 27 May 2008

Summary

Eskom briefed the Committee on issues around the energy crisis. It had identified three phases in the alleviation of the energy crisis. The first was regaining stability on the network after the load-shedding in January. The second was power rationing and the current phase was one of power conservation. Various forums had been set up to seek ways to conserve power. Municipalities, provincial government and industry participated in the process. Power reserves were at a critical level and load-shedding might have to be reinstated if there were any further problems. Eskom had ambitious plans to double the amount of power generated in the next twenty years, but this would require intensive funding. Government would provide R60 billion but the estimated remaining requirement of R240 billion would have to come from consumers and loans. Without an increased funding the company’s credit rating could suffer with a negative impact on their ability to raise loans at the best possible rate.

Members were concerned about the impact of energy supply problems on industry and individual consumers. The proposed tariff increase would impact on the poor but Eskom insisted that the figures which they had requested were necessary to fund its expansion programme. Main drivers in their request were the sharply increasing price of coal and of the new equipment needed for new power stations. The pricing model had been professionally designed considering all the relevant factors. Approval for the increase was still being discussed.


Minutes

Presentation by Eskom on issues around the energy crisis
Ms Ayanda Noah, Managing Director: Distribution, Eskom, said that there were two parts to the presentation. The first part was to put the situation into context. Load-shedding had taken place from January. Eskom had formed a recovery team to deal with the crisis. There were three phases to the recovery process. The first was to ensure stability to prevent the total collapse of the network. The second was power rationing. This phase had lasted four months, and was characterised by load-shedding according to a schedule. The third phase was power conservation. This phase would last for at least four years.

She said there had been interaction between Eskom and various government bodies. The electricity supply issue had been discussed at Ministerial level. The recovery team looked at the three phases. The current reserve margins were low, at between eight and ten percent. This brought challenges for maintenance of the network and in the balancing of supply and demand. Both aspects had to be managed.

Ms Noah said there was a focus on demand side management. Many forums had been established. A National Energy Response Team (NERT) had been established. This was led by the Department of Minerals and Energy (DME) and executed the electricity emergency plan. There were other stakeholders, such as a forum of executives. Municipalities were represented on a number of the forums. Another team was the Industrial Task Team (ITT), a forum through which Eskom could interact with its key customers. Their efforts had led to a 10% saving. A workgroup had been formed. Another forum was the National Task Team (NTT). This had been formed in April 2008 and had already held three meetings. Their next meeting was scheduled for the following Friday. The NTT was a forum to get minds together and work out how the required 10% saving could be achieved across the board. The biggest twelve municipalities had been identified, as this was where the 80/20 principle would be easiest to achieve. A saving of 10% was needed to avoid further load-shedding, which would be re-introduced reluctantly and as a last resort.

She said that the second part of her presentation would address how the R60 billion which government had approved would be spent. In 2002 there had been an energy reserve level of 25%. This had declined to 16% by 2006 and was now only 8%. This was a major challenge. More power stations were needed to improve the situation. The building of new stations was only approved in 2004. Eskom had a five year plan which would cost R300 billion. The question was from where this money would be sourced. She identified three possible sources. The first was revenue from customers who would have to pay an increased tariff. The second source was loans, of which 50% would be raised internationally and the other 50% locally. Finally there would be shareholder equity payment amounting to R60 billion from government.

Ms Noah said that Eskom needed to boost its generating capacity to double the current capacity by 2025. The open-cycle gas turbine (OCGT) stations at Atlantis and Mossel Bay generated 1 000 MW and another 1 000 MW would be needed from these sources by the end of 2009. The Mudipa station would come on stream in 2012 and would produce 4 000 MW. A contract had already been awarded for this project. Other stations would be re-commissioned, which would generate an additional 1 800 MW between them. The R60 billion from government would contribute to these projects.  Projects to improve generation capacity would cost R300 billion. She listed the projects planned by Eskom. These included coal-fired stations, a gas storage facility, a pumping station and a wind generation facility.

She said that it was important for Eskom to maintain a good credit rating. This made it easier to access funds and made it possible to deal with the reputable companies. As many funding options as possible had to be kept open. A good rating would make for easier long term market access. R300 billion was a lot of money to fund off the balance sheet. It was a challenge to find the R340 billion which the expansion programmes would cost. The level of the tariff increase which would be granted to Eskom would impact on the quality of shareholder support required. Shareholder support was needed for funding projects. The money was not yet allocated to specific projects. Security and reliability of the electricity supply was essential.

Discussion
The Chairperson was concerned about Eskom’s plans to meet the winter demand.

Mr W Douglas (ACDP, Northern Cape) was concerned about demand supply management. He asked what portion of the current energy usage was servicing the mines, and how many of these had reduced consumption by 10%. He asked if Eskom had the capacity and skills to maintain and run the planned new power stations. There was a serious skills shortage in the country. It would be pointless to build these facilities if there was nobody to run them. He asked what powers the NTT had to get municipalities to comply with the saving imperative besides load-shedding. He asked in which provinces the new plants would be built, and if there was an estimate on the number of jobs which would be created during the building programme, as well an estimate of the sustainable jobs once the plants were operational.

Ms S Chen (DA, Gauteng) said that people at the grassroots level were confused. They did not know if load-shedding was still happening or not. She asked how Eskom could communicate the current situation to consumers.

The Chairperson said that Eskom had applied to the National Energy Regulator of South Africa (NERSA) for a 53% tariff increase. She asked what the effect would be if this increase was not granted.

Mr D Gamede (ANC, KwaZulu-Natal) noted that Eskom needed more than R300 billion, of which R60 billion would come from government. He asked what the balance of funding would be between revenue and loans. He asked when the terms of the conditions relating to the government contribution of R60 billion were likely to be finalised. Regarding the tariff increase, he asked what the impact would be on the different sectors such as business and people on the ground. He asked if the tariff increase had been agreed to yet.

Ms B Ntembe (ID, Northern Cape) asked about new houses which still needed electricity. More houses were to be built. She asked if Eskom would be able to accommodate these needs.

Ms Noah replied that Eskom wanted to accelerate their demand side management options to cope with the demands of winter. One initiative was the replacement of conventional light bulbs with the CFC bulbs. The position with supply was satisfactory at present. All the major plants had been maintained and this had reduced the risks of extended outages. However, reserves were still low and all consumers had to make a contribution to reduce demand. The power alert notification on television was working. There was positive response and stability had been achieved. Demand was manageable at present and the supply was secure. However, tight reserves were still a challenge. There was not much leeway and even a small incident could trigger load-shedding. Eskom would try to avoid this.

The Chairperson asked about the involvement of provinces and municipalities. They should be part of the alleviation of demand.

Ms Noah said this was correct. The NTT was busy with this at regional level. There was interaction with the provinces, which were driving the demand side management programmes.

Mr Peter Sebola, General Manager: Eskom Distribution, Western Region, said that Eskom and the Western Cape had established an Energy Risk Management Committee. This was purely to address issues of demand. The Committee included representatives of local government, municipalities and business. Ideas were discussed regarding energy saving and contributions were made by the different sectors. These were fed through to the NTT and integrated into the national programme.

Ms Noah said that Mr Sebola spoke only for the Western Region, but similar interactions were taking place in the other regions of the country. She could not put a percentage to the electricity consumption on the mines, but would provide a written reply to this question. They had contributed a lot even though this had proved detrimental to their operations. Eskom still had to get municipalities involved.

She acknowledged that there was a shortage of capacity and skills. Eskom was busy with a big recruitment drive. She had just concluded a series of interviews with South Africans living abroad. Eskom had focused this drive on the United States of America and England. They had been doing this for the last three years and the initiative was proving to be very successful. Eskom was looking for more than three thousand people. These included project managers, engineers and technicians. They were also looking for nuclear engineers for the future, as nuclear energy was part of the future planning.

Ms Noah said that the NTT was populated by committed people who had a conscience. They worked together. Their methods were more in the line of exerting peer pressure and encouragement.

Mr J de Beer, Acting General Manager: Eskom Distribution, said that the NTT was especially concerned with the 10% savings drive. They were not at the same level as the key industrial customers, who consumed a major portion of Eskom’s output. The NTT had no powers but they were looking at mechanisms. The municipalities had to get their customers to make savings.

The Chairperson asked how Eskom divided the country into regions.

Mr Gamede said that there was a smelter at Richards Bay. This was severely affected by load-shedding. Further power outages could see the loss of about eight hundred jobs. Load-shedding also affected operations at the harbour. He asked why this municipality was not included in the group of twelve municipalities in the forum.

Ms Noah said that she did not have an attendance register for the NTT meetings. The smelter at Richards Bay would fall under the group of key customers, and Eskom had separate interaction with these customers. She mentioned some people who were on the NTT. These included the Director-General (DG) of the Department of Public Enterprises, the DG of the DME and a representative of the Department of Provincial and Local Government. There had to be fast-tracking of demand side management programmes. There were issues surrounding their implementation. There had to be investigation of other municipalities. It was critical that all were on board.

The Chairperson said that at the moment she was not fully satisfied with what had been said. She needed information on the effects on rural provinces. In some places there was no television reception and the people therefore did not see the power alert messages.

Ms Noah went on to discuss the building programme. Power stations were primarily sited near fuel supplies, and were thus mainly located in Limpopo and Mpumalanga near the coal mines. This minimised the challenges of transporting coal to the station. A pump storage facility was to be built in the Drakensberg.

She said it would be difficult to envisage the impact if the 53% increase was not granted. Eskom would be unable to fund its programmes. There was a risk that the supply would become increasingly unstable. This would be a very big challenge for Eskom and indeed for the country as a whole. Public hearings had been held the previous Friday, and she understood that there had been discussions with NERSA. A decision was to be taken by 6 June, but she believed this would now be delayed until 18 June so that NERSA could obtain more input. She had no answer on the R60 billion at present. This was a work in progress, and the matter was under discussion with National Treasury. The proportions of funding for the remaining R300 billion would depend on the NERSA ruling. New housing fell under the electrification programme. This was funded by the DME. Plans were in place.

Mr Gamede said that the 53% increase had not been in the plans for the previous financial year. He asked what the initial build-plan was. He asked how the increase would affect people and programmes. The public had never taken such a big knock before.

Mr Douglas had read that Eskom’s credit rating had been downgraded. He asked if the problem had been identified and if corrective action had been taken. The current infrastructure of the national grid was ageing. Load-shedding had imposed further strains on the network. He asked what percentage of funding was needed for the upgrading and maintenance of existing structures.

Ms Noah said that electricity in South Africa was very cheap compared to other countries such as Canada and New Zealand. The price of coal had increased. New Zealand and Canada had different funding models, which were more dependent on fuel costs. Eskom had asked for an 18% increase in 2007 but had been given 14.2%. There had been a lot of load-shedding, which had resulted in the OCGT stations being run at a high loading. The fuel for these was expensive and their running costs were R2 per MW/hour. This was very expensive. These stations were not designed for this, but rather to be run at peak consumption hours only. Another problem was that fuel was being used, which was being diverted from the transport industry.

She said that 70% of coal procurement was through long-term contracts. The remaining 30% was procured through short-term contracts. This supply was subject to shortages as a lot of coal was sent to the export market. This was a significant factor in Eskom’s increased running costs. This was why they had requested a 53% increase. Eskom anticipated further price increases.

Ms Noah said she was not a financial expert and could not comment on the impact of the downgrading of the company’s credit rating. She did know that it was difficult to improve a rating once it had been downgraded. A company needed to have a good balance sheet in proportion to loans. If Eskom had to pay more interest on loans it would have an impact on customers. Eskom had done all it could to protect customers until now. One factor was funding. If there was no tariff increase then lenders would become anxious and would look to downgrade the credit rating.

She said there were programmes to address the ageing infrastructure. Capital expenditure was divided into various categories. The strengthening and refurbishment of the network were being addressed, and the programme was related to the age and condition of equipment. Money was allocated for this.

Mr Gamede was still not convinced. Unless something was wrong with his arithmetic, he could not understand what motivated a jump to a 53% increase when Eskom had initially asked for 18%. South Africa produced its own coal, but it seemed the good quality coal was being exported. He asked why there was a shortage of supply.

Ms Noah replied that coal was being bought. Suppliers were able to export coal, and were looking for more money on the local market as well. This was the reason for the price increase. It was a major challenge. Eskom needed support, and government intervention should be considered. Coal was a national asset, and there should be a different way to manage it. Energy reserves were low, and this was why demand management side options were being explored. Programmes had to be accelerated, but funding was needed. These factors were not as pronounced when the application for the 18% increase was made. In January daily load-shedding had to be implemented. On 24 January there was a shortage of 4 000 MW. This had forced Eskom to reassess the situation. She asked if this convinced Mr Gamede.

Mr Justice Mavhungu, Stakeholder Centre Manager: Eskom, said that when the Build Programme had been proposed the figures had started at R84 billion. This estimate had increased progressively to R94 billion, R150 billion and R300 billion at present. This was the biggest variable. The whole world was building new power stations. This had seen the price of new equipment soaring. It had approximately doubled in a year. Eskom also had to respond to environmental issues. They used the same local coal, but there was a different technology used for a reduced environmental impact. This technology would be used at Mudipa. He compared the cycle to the bread price increase, which had had to take into account external factors such as the wheat price and transport.

The Chairperson asked if a different type of coal was used.

Mr Mavhungu replied that the coal was still mined locally. Different technology was used for environmental compliance.

Mr Chen said that if the 53% increase was granted, she wondered what would happen in the future. She asked what increases could be expected in the short, medium and long term.

Ms Noah replied that there would be a sharp spike now. The increase requested for 2009 was 43%. After that increases would be linked to the inflation rate.

Mr Douglas understood the need for the 53% increase. He asked how Eskom had got to this figure. He asked why the increase could not be a smaller figure such as 30% or less over time. The requested increases would see the price of electricity double over a two year period. This would have a staggering impact on the poor.

Ms Noah said Eskom had looked at its sources of funding and the requested increases. Other factors were debts, the market and shareholder equity. Eskom had approached a company which did financial modelling. All the factors had been given and the company had come up with the best model for Eskom. The cost of technology and environmental compliance were also considered. This had shown that the increases being requested were the best model to satisfy Eskom’s needs. There was a need to preserve a sound financial position or else Eskom’s credit rating would suffer. She did not have figures beyond 2009.

Ms Ntembe asked how a 53% increase would affect the subsidy for indigent customers.

Ms Noah said that the energy summit was being facilitated by Nedlac. The price increase was being discussed. Any electrification project was funded by the DME. New houses were being connected to the grid. This had involved some 125 000 new homes in 2007 and was an ongoing process. All consumers would be impacted by the price increase; however the free allowance of 50 kW/hours per month would still apply. Additional consumption would cost more.

Mr Gamede, assuming the Chair, said that the Committee must engage with NERSA. He did not know how this should be done. Most people would feel the pressure and it was necessary to find the best way to address all the issues while cushioning the blow. The Committee’s door was open for more engagement.

The meeting was adjourned.