This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 PRETORIA 000094 
 
SIPDIS 
 
STATE PLEASE PASS USAID STATE PLEASE PASS USGS 
 
E.O.   12958: N/A 
TAGS: EPET ENRG EINV EIND ETRD ECON SF
SUBJECT: RESTRUCTURING OF THE SOUTH AFRICAN ELECTRICITY 
INDUSTRY -- THE SUPPLY SECTOR 
 
 
    ¶1. (U) Introduction:  In light of recent government 
    initiatives to restructure the South African energy industry, 
    post will submit separate reports on the supply, distribution 
    and transmission sectors.  Each cable will serve as a general 
    review of that sector, and be the launch-pad from which 
    subsequent cables on specific topics are prepared, as 
    developments take place in each sector.  The first, dealing 
    with the supply sector, follows.  The purpose of these cables 
    is to indicate the potential opportunities for investment, 
    technology and service providers created by the energy- 
    restructuring program.  End introduction. 
 
    --------------------------------- 
    Electricity Supply Industry (ESI) 
    --------------------------------- 
 
    ¶2. (U) Summary: At the beginning of this decade, in the 
    absence of new supply, the South African Government concluded 
    that demand for electricity would soon overtake existing 
    generation capacity.  Government tasked the National Energy 
    Regulator (NER) to develop a National Integrated Resource 
    Plan (NIRP) for insuring security of future supply.  The 
    first NIRP was completed and published in March 2002.  At the 
    beginning of 2003, the NER established an Advisory and Review 
    Committee (ARC) to solicit stakeholder contributions to the 
    NIRP process.  The updated study (October 2003), generated 
    under the guidance and approval of the NER, was carried out 
    by a NIRP team comprising the Eskom Resources and Strategy 
    Group (headed by their Managing Director, Dr Steve Lennon), 
    the Energy Research Institute (ERI) of the University of Cape 
    Town, and the NER. 
 
    ¶3. (U) In the early seventies Eskom forecast an electricity 
    growth rate of 8%, and consequently built and commissioned a 
    number of six-pack (six generation units per station) coal- 
    fired stations.  In the middle of the construction program, 
    the demand growth rate dropped as low as minus 0.4%, causing 
    a serious over capacity, and three of the stations - Camden, 
    Komati and Grootvlei - were "mothballed".  Decommissioning 
    ended in about 1990.  The excess capacity allowed Eskom to 
    become the lowest cost producer of electricity in the world. 
    Eskom's tracking of electricity consumption identified a 
    significant increase in demand (from about 2000), and they 
    forecast that new peaking capacity would be required by 2007, 
    and new base load capacity by 2011.  In October 2003, the 
    NIRP-team updated the 20-year energy supply plan based on the 
    new demand projections, and estimated capital expenditure of 
    some $17 billion to 2010.  The main purpose of the plan was 
    to identify the most cost-effective and environmentally 
    friendly combination of options and technologies available to 
    ensure South Africa of a timely, reliable and quality supply 
    of electricity in the future.  Schedules and technologies 
    will inevitably change over time as new developments occur. 
    End summary. 
 
    Current Capacity and Technology Mix 
    ----------------------------------- 
 
    ¶4. (U) South Africa's total licensed generation capacity is 
    about 44,000 MW of which Eskom (state-owned electricity 
    utility) owns 42,000 MW.  Eskom mothballed 3,600 MW of 
    capacity in 1990 and their total net operating capacity (NOC) 
    at December 31, 2003 was 36,200 MW.  Coal-fired stations 
    generate 86% of the electricity, nuclear 5%, pumped-storage 
    4%, hydro 2%, emergency gas turbines 1%, and 2% is imported 
    from the Cahora Bassa hydro station in Mozambique. 
 
    ¶5. (U) Eskom currently operates 10 large coal-fired power 
    stations, a two-reactor 1,800 MW nuclear station (Koeberg 
    located 30 kilometers north of Cape Town), six small hydro 
    stations, and two pumped-storage schemes that play a critical 
    role in meeting peak demand.  Municipalities own 22 small 
    power stations and back-up gas turbines, but these total only 
    5% of national generation capacity and generally run at low 
    load factors.  Municipalities also own the transmission lines 
    and the transformers located within their boundaries. 
    Private generators comprise the remaining 2% of capacity.  In 
    2003, the peak demand was 32,000 MW, equal to 89% of NOC. 
    Estimated demand growth is at least 1,000 MW per annum, and 
    the current growth rate stands at around 4.6%. 
 
    ¶6. (U) According to Mike Cary, Managing Director of Rotek 
    Engineering an Eskom group engineering company, a 
    complicating factor to the capacity problem is that the power 
    stations are ageing.  The ages of the newest stations vary 
    between 10 and 24 years, and the equipment on these stations 
    can be as old as 30 years.  Although Eskom has a 
    comprehensive maintenance program, the old equipment is more 
    prone to failure.  Part of the risk-management strategy is to 
    carry spares, but financial constraints limit this option. 
    Over the past 12 months, Eskom has experienced an abnormally 
    high failure rate (14 major supply disruptions in the 
    Johannesburg area alone) and some of the plant transformers 
    have failed to such an extent that some critical spares are 
    no longer available. 
 
    ----------------------- 
    Eskom's Expansion Plans 
    ----------------------- 
 
    ¶7. (U) Government decided in 1998 to restructure Eskom and to 
    establish a multi-market model (MMM) for electricity trade in 
    South Africa.  During the four-year model planning process, 
    Eskom submitted its investment program for new electricity 
    capacity (as its contribution to the NIRP) on an annual 
    basis.  The estimated cost of the expansion program was about 
    $32 billion (over 20 years), and aimed to ensure that South 
    Africa had enough electricity to power its growing economy. 
 
    ¶8. (U) However, during this time Eskom became a virtual "on- 
    looker" as government decided that Eskom would not be allowed 
    to build any new generation capacity as the government wanted 
    to have the MMM in place before the excess capacity ran out. 
    Eskom, however, remained the supplier of last resort and 
    obligated to ensure sufficient supply to the country.  Part 
    of the plan to restructure Eskom was to sell 30% of their 
    generation capacity, valued at more than $4 billion, to 
    foreign power utilities.  Due to a policy shift, this process 
    remained in limbo.  Eskom and Government now face crucial 
    decisions about new power plants, and the balancing of 
    financial, operational and environmental criteria in 
    selecting the type and mix of energy projects it should 
    develop. 
 
    ¶9. (U) Following the April 2004 elections, new Public 
    Enterprise Minister Alec Erwin (Eskom's shareholder 
    department) rescinded the "restructuring" of Eskom.  This was 
    part of a general policy shift aimed at strengthening State 
    Owned Enterprises to ensure that the social objectives of 
    government would be met first.  Erwin fast-tracked the go- 
    ahead for new investment in electricity supply, as outlined 
    in the NIRP.  On October 20, the Cabinet approved $13.5 
    billion in capital expenditure for Eskom to return to service 
    the mothballed stations, build 70% of new capacity, and 
    upgrade existing stations, transmission lines, and 
    distribution networks.  Government expects Eskom to source 
    much of this capital from the markets.  Erwin also "offered" 
    independent power producers (IPP's), particularly foreign 
    utilities, a 30% slice of the proposed new generation 
    capacity.  In this way, he hopes to ensure healthy 
    competition for Eskom and to attract foreign direct 
    investment into the infrastructure sector of the country 
    without damaging Eskom's ability to lead the expansion drive. 
    Steve Lennon, Eskom's Managing Director for Resources and 
    Strategy, has stated that the investment decision was in time 
    to avoid early supply disruptions in 2006 and 2010. 
 
    Short-Term Expansions to 2010 
    ----------------------------- 
 
    ¶10. (U) The latest update of the NIRP's power expansion 
    strategy (October 2003) deals with expansions envisaged up to 
    ¶2022.  The first phase deals with immediate electricity needs 
    over the next five years.  This requires Eskom and IPP's to 
    add at least 1,000 MW of capacity every year, from 2005 to 
    2010, to avoid shortages during peak usage time.  The 
    investment package portions the $13.5 billion as $9.7 billion 
    for generation, $2.2 billion for distribution, and $1.6 
    billion for transmission.  The plan is for Eskom to return to 
    service three coal-fired stations between 2005 and 2011 -- 
    total base-load capacity of 3,600 MW.  In addition, Eskom is 
    to build a new 1,000 MW open cycle gas turbine (OCGT) plant 
    by 2007 (location not specified), and by mid 2005 the DME 
    plans to request the private sector to tender for a 1,000 MW 
    OCGT plant (location not specified), fueled by a light diesel 
    distillate, to be operational by 2008. 
 
    Longer-Term Expansions - 2011-2022 
    ---------------------------------- 
 
    ¶11. (U) By 2010 Eskom will have to start commissioning power 
    plants that will add to the base load for which planning will 
    start in 2005.  According to Lennon, the program was based on 
    the forecast of an increase in demand of 1.5%-4% per year 
    over the next 20 years.  However, there are contingency plans 
    for an uptake of 5% should demand exceed estimates.  The long- 
    term base load capacity would include a combination of new 
    power plants and imports of electricity from a number of 
    African projects.  Capacity increases include: 
    -- a $0.7 billion, 1,330 MW pumped-storage scheme at 
    Braamhoek in KwaZulu/Natal Province, by 2013, 
    -- a $0.8 billion, 1,000 MW pumped-storage scheme at 
    Steelpoort in Mpumalanga province, by 2014, 
    -- a third 1,000 MW pumped-storage facility at Monontsa in 
    the Free State province, and planned for 2019, 
    -- a $1.4 billion, 1,500 MW combined cycle gas turbine (CCGT) 
    facility, possibly located near Coega (new deep water port 
    under construction) in the Eastern Cape Province, by 2013, 
    -- three generation units (total rated capacity of nearly 
    2,000 MW) added to the six already operating at the Mathimba 
    power station in Limpopo Province, at a cost of $3.2 billion, 
    -- a 4,000 MW greenfields coal-fired power station, at an 
    estimated cost of almost $6.4 billion, near coal reserves in 
    either Limpopo or Mpumalanga provinces, or in neighboring 
    Botswana or Mozambique. 
    Summary of Capacity Expansions to 2022 
    -------------------------------------- 
 
    ¶12. (U) Some electricity expansion options considered by the 
    NIRP team extend beyond the 2022 time-period, but are shown 
    for information completeness.  Obviously, these technologies 
    and time schedules will change over time as energy demand, 
    innovations and other developments occur. 
 
    Generation Stations                Implementation New (MW) 
    and Technologies                    Schedule       Capacity 
    --------------------               -------------- -------- 
    3 De-mothballed coal-fired         2005-2011      3,600 
                                  (possibly fast-tracked to 2009) 
    10 Single/Open Cycle Gas (SCGT)    2006-2010      2,640 
    1 SCGT                             2022             240 
    3 Dry-cooled coal-fired            2016-2022      9,630 
    2 Pumped-storage                   2012-2014      2,330 
    1 Pumped-storage                   2019           1,000 
    5 Fluid Bed Combustion             2012-2014      2,330 
    1 IPP Open Cycle Gas (OCGT)        2008           1,000 
    Total new capacity                                22,770 
 
    Other possible options for the future (probably beyond 2022) 
    include: 
    3 Combined Cycle natural gas                      3,470 
    1 Nuclear Pebble Bed cluster of 8 reactor units   1,320 
    1 Coal-fired                                      3,780 
    1 Pumped-storage                                  1,000 
    Total possible new capacity                       9,570 
 
    PBMR 
    ---- 
 
    ¶13. (U) According to Lennon, environmental criteria are 
    critically important in deciding the combination of new power 
    plants to be developed.  This could benefit non-coal 
    projects, as Eskom's coal-fired plants are the chief emitters 
    of carbon dioxide and other pollutants.  Environmental 
    considerations could also provide a boost to development of 
    South Africa's fourth-generation nuclear-based pebble bed 
    modular reactor (PBMR), which could be ready for commercial 
    launch by 2013, and features in Eskom's long-term expansion 
    plans, from about 2015 onwards.  The capacity of a single 
    PBMR reactor unit is 165 MW, and that of an 8-pack cluster, 
    1,320 MW.  Johan Kriek, CEO of PBMR Ltd, plans to start 
    construction of a PBMR demonstration unit in the second 
    quarter of 2007, the first commercial unit by 2013, and to 
    supply Eskom with 24 units (three clusters) between 2013 and 
    ¶2023.  Lennon said that negotiations have started in the 
    process to develop a PBMR supply agreement between PBMR Ltd 
    and Eskom. 
 
    Imports 
    ------- 
 
    ¶14. (U) The African electricity import projects on the Eskom 
    drawing board include Cahora Bassa in Mozambique, the 
    proposed Inga3 hydro-electric project in the DRC, and buying 
    surplus power from the Southern African Power Pool, as 
    available.  Lennon said that part of Eskom's strategy could 
    be to put equity into Cahora Bassa, depending on the 
    financial details of such a deal.  In addition, in November 
    2004, the South African utility was one of five Southern 
    African utilities that bought equal equity stakes in Westcor, 
    the company earmarked to build the $5 billion power station 
    at Inga3, and the associated transmission and interconnect 
    supply lines.  The project has the potential to supply 3,500 
    MW of electricity by 2011, but many experts believe this to 
    be an unrealistic target, given the political (and 
    investment) uncertainties in the DRC. 
 
    Status of the Expansion Plan 
    ---------------------------- 
 
    ¶15. (U) The first phase of the expansion, dealing with 
    new capacity over the next five years, is well under 
    way.  Eskom has commissioned the return to service of 
    three mothballed power stations at a total cost of $1.9 
    billion.  These three facilities, when refurbished, 
    should supply 3,600 MW to the grid.  The largest of the 
    three, Camden, is set to return to service in 2005.  The 
    DME has also authorized Eskom to build a new 1,000 MW 
    open cycle gas turbine (OCGT) plant by 2007 (location 
    not specified), and a 1330 MW pumped-storage station 
    (Braamhoek) by 2013, as part of a $13.5 billion 
    investment.  In December, the DME issued an IPP 
    "Expression of Interest" document for a 1,000 MW OCGT 
    facility (location not specified), fueled by a light 
    diesel distillate, to be operational by 2008.  The 
    tender document should be available by August 2005, and 
    Eskom, as the purchaser of the electricity, cannot bid 
    for the project.  The final leg of Eskom's short-term 
    revamp will be to upgrade a number of its older base- 
    load stations, including a $160 million upgrade of the 
    2,100 MW Arnot station.  Through demand and supply side 
    efficiency-improvement strategies, Eskom management 
    plans to take 4,000 MW out of the system by 2013. 
 
    Financing the Expansions 
    ------------------------ 
 
    ¶16. (U) Eskom spokesman, Fani Zulu, has indicated that Eskom 
    would finance the $13.5 billion expansion for the first three 
    years through a combination of cash flows and loan financing. 
    After that, Eskom is likely to revert to the local and 
    offshore capital markets.  Eskom, has a relatively low 30% 
    gearing, and has some room on its balance sheet to raise its 
    debt level.  A crucial part of the financing would be the 
    electricity price, which the NER determines.  The regulator 
    has recently granted Eskom below-inflation tariff increases, 
    but Minister Erwin has backed Eskom's call for more realistic 
    prices to enable the huge capital expenditure requirement. 
 
    ¶17. (U) In summary, the main conclusions drawn from the 
    latest NIRP study by energy experts, are that: 
    -- Options for diversifying away from coal-fired plants are 
    insufficient to meet forecast electricity demand over the 
    next 20-years, 
    -- Economic justification for diversification plants would 
    prove difficult in the absence of persuasive measures such as 
    penalties and subsidies for non-use or use, 
    -- Clean coal technologies and demand side efficiency 
    strategies are required to meet environmental standards, 
    -- Base load plants would be required for commercial 
    operation after 2010, 
    -- At assumed future costs, and after returning the Eskom 
    mothballed plants to service, fluidized bed combustion (FBC) 
    technology offers the most economical option, followed by 
    coal-fired plants, and then CCGT plants (in the western 
    Cape), using imported gas/LNG, 
    -- NIRP plans indicate that 920 MW OCGT peak load plants must 
    begin commissioning from 2008, 
    -- NIRP plans assume the attainment and sustainability of 
    demand side management targets, power plant availability, 
    imports, and interruptible supply strategies, 
    -- short-term peak-load requirements can be facilitated using 
    single cycle gas turbines fueled by locally-produced 
    synthetic gas. 
 
    ------------------------------------------ 
    Summary of South African Energy Statistics 
    ------------------------------------------ 
 
    ¶18. (U) Projected Electricity Supply/Demand (MW) 
 
                             2004    2008    2012    2016    2022 
    Generating 
    Capacity            38,620  41,990  46,060  50,700  57,540 
    Peak Demand         34,620  38,530  42,020  45,660  51,890 
    Reserve 
    Margin (%)               11.6    9.0     9.6     11.0    10.9 
    New capacity        -        3,390   8,460  13,140  19,990 
    Current Supply (MW) 
 
    Eskom: 
    Coal-fired               32,070 
    Nuclear              1,800 
    Pump Storage         1,400 
    Hydro                       570 
    Gas Turbines           340 
    Total                36,180 
 
    Non-Eskom: 
    Coal-fired           1,320 
    Pump Storage           180 
    Hydro                        70 
    Gas Turbines            90 
    Total (MW)            1,660 
 
   Imports: 
    Cahora Bassa (hydro)    780 
   Total                 38,620 
 
   South Africa's Energy Mix 
   Product        Electricity    Energy         End Use % 
                       Generation %   Supply % 
   Coal                86             69%            30 
   Crude               -              18%            - 
   Biomas              -              9              8 
   Nat gas        1              3%             - 
   Hydro               2