VZCZCXRO9318
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0982/01 1300853
ZNR UUUUU ZZH
R 090853Z MAY 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4405
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 0206
RUEHBJ/AMEMBASSY BEIJING 0802
RUEHBY/AMEMBASSY CANBERRA 0675
RUEHLO/AMEMBASSY LONDON 1517
RUEHMO/AMEMBASSY MOSCOW 0804
RUEHOT/AMEMBASSY OTTAWA 0634
RUEHFR/AMEMBASSY PARIS 1356
RUEHSG/AMEMBASSY SANTIAGO 0195
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 PRETORIA 000982 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR AF/S, EEB/ESC AND CBA 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DOE FOR SPERL AND PERSON 
DOC FOR ITA/DIEMOND 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EMIN EINV SF
SUBJECT: SAG PREPARES ELECTRICITY SUMMIT AS WAY OUT OF 
POWER WOES 
 
REF: A. PRETORIA 906 
 
     ¶B. PRETORIA 758 
     ¶C. PRETORIA 565 
     ¶D. PRETORIA 315 AND PREVIOUS 
 
 ¶1.  (SBU) Summary.  There are big hopes for the South 
African Government/ANC-convened electricity summit of 
stake-holders on May 16.  Hoped-for outcomes include 
high-level leadership and consensus on the way forward out of 
the power crisis, including consensus on power tariffs and 
the use of load-shedding.  A business-oriented think tank 
hosted a round-table of key players who placed great stock in 
the electricity summit, having identified leadership as a key 
gap that contributed to the emergency.  However, details on 
the summit are still sketchy.  End Summary. 
 
¶2.  (SBU) The center-right, business-oriented Center for 
Development and Enterprise convened stake-holders to a 
round-table on May 5 on the electricity crisis (How did we 
get here and how do we put things right?).  Attendance 
included senior actors of key organizations such as the state 
power company Eskom, the state power regulator (NERSA), the 
Presidency, the Chamber of Mines, labor, and business. 
Although there were a number of government representatives, 
the Department of Public Enterprises, which represents the 
government as sole share-holder in Eskom, was a no-show. 
(Public Enterprises Minister Alec Erwin was vigorously bashed 
in absentia, even more than Eskom, whose CEO was gamely in 
attendance.)  The chair of the National Electricity Response 
Team, Department of Minerals and Energy Deputy Director 
General Nelisiwe Magubane, attended the morning session, but 
was strangely silent.  Ironically, the power went out for a 
few minutes during the comments of the Economic Advisor at 
the Presidency, who voiced views of the government. 
 
------------------------------------------ 
How Did We Get Here? - Need for Leadership 
------------------------------------------ 
 
¶3. (SBU) University of Cape Town Professor Anton Eberhard 
provided context for the power crisis by summarizing the 
ultimate causes as: 
 
-- Insufficient capacity stemming from the moratorium on 
Eskom new build from before 2001 to 2004, while the SAG 
unsuccessfully sought to establish a framework to secure 
independent power producers (IPPs). 
-- Inability of Eskom to keep its generators working due to 
equipment and maintenance failures, exacerbated by skills 
shortages and management negligence in maintaining coal 
stockpiles at power stations. 
-- Unreliable networks, in particular looming problems with 
electricity distribution. 
 
Eberhard summarized the bogus causes trotted out for the 
power crisis as: 
 
-- Demand was higher than expected.  (Rather, forecasts quite 
accurately identified shortfalls beginning in 2007.) 
-- Planning was inadequate.  (There were lots of good plans, 
including the SAG White Paper of 1998.) 
-- Regulated prices prevented Eskom from investing in new 
plant.  (Eskom had good cash flow; the problem was it did not 
have a green light from the government.) 
-- Insufficient coal, poor roads, growth in coal exports 
caused the coal problem.  (While true, these factors were 
Qcaused the coal problem.  (While true, these factors were 
peripheral.  The issue was failures in stock-piling and 
contracting.) 
-- The private sector is not interested in investing.  (The 
government has failed in implementing its intent to establish 
a competitive market.  There are 40  IPPs elsewhere in 
Africa, in tougher investment environments.) 
 
 
PRETORIA 00000982  002 OF 003 
 
 
Eberhard identified key failures in contracting and 
leadership as under-lying the power crisis.  Weakness in 
contracting, as well as non-performance by some small Black 
Economic Empowerment (BEE) contractors, contributed mightily 
to failures in maintaining coal stock-piles and in securing 
IPPs.  In addition, he noted that South Africa is one of the 
most energy intensive countries in the world. 
 
¶4.  (SBU) Other participants elaborated on other contributing 
factors to the power crisis, emphasizing a failure of 
leadership.  Business Leadership SA official Michael Spicer 
feared that there were too many processes and committees, as 
South Africans habitually fall back on process.  He saw a 
risk that process could overwhelm substance.  Chamber of 
Mines Economist Roger Baxter, who participates in most of the 
plethora of relevant committees, echoed the need for 
high-level leadership. He said many of the decisions made in 
the White Paper of 1998 were not implemented, including 
establishment of rationalized regional electricity 
distribution (RED) entities.  Many participants stressed the 
centrality of pricing to getting things right.  National 
Union of Mineworkers official (and former Eskom Board member) 
Frans Baleni and others asked where was the Eskom board? 
Shouldn't they be out there leading and communicating with 
stake-holders and customers?  There was consensus questioning 
of the role and mandate of the Eskom board and the Department 
of Public Enterprises as share-holder and owner for the 
government.  There was also consensus criticism of the 
aluminum smelters which import bauxite, are electricity 
intensive, but are not employment intensive.  The failure to 
negotiate a contract with U.S. firm AES for a peaking 
gas-fired IPP was noted as emblematic of a failure with 
respect to both contracting and engaging the private sector. 
 
¶5.  (SBU) Eskom CEO Jacob Maroga bravely attended the whole 
day's conference and defended Eskom's approaches.  He 
admitted that coal was a big problem, but stated that the 
stock-pile issue could not be solely attributed to Black 
Economic Empowerment (BEE) contracting.  Maroga said some 
coal-fired plants possessed inadequate dedicated coal, so 
there was a commensurate need for coal transport and adequate 
road maintenance.  He admitted the criticality of regaining 
appropriate reserve margin, caused by the delay in the new 
build program and deficiencies in plant performance.  Maroga 
noted that the utilization of current plant installed 
capacity or load factor had reached 70 percent, compared to 
optimum and historical 50 percent.  He noted that the more 
costly to operate peaking plants were running at 50 percent, 
compared to planned 6 percent.  This contributed to the fuel 
funding crisis, which was driving the request for a tariff 
increase.  Maroga admitted that there had been delays in 
procurement which contributed to the delay in new base load. 
He acknowledged the help of U.S. firm Black & Veatch in 
construction management of the new big coal-fired plants 
Qconstruction management of the new big coal-fired plants 
under construction.  Maroga also noted that current plant 
availability was only 86 percent, compared to target 90 
percent.  (Note: Post has heard availability estimates at 
times as low as 75 percent.  End Note.)  Finally, Maroga also 
noted that Eskom was suffering worsening coal quality due to 
mining economics and geology. 
 
--------------------------------------------- --- 
How Do We Put Things Right? - Electricity Summit 
--------------------------------------------- --- 
 
¶6.  (SBU) Professor Eberhard stated that the way forward 
should include restoring coal stock-piles, improving 
generation reliability, securing new build capacity, pursuing 
cogeneration, securing IPPs, and improving energy efficiency 
and demand-side-management (DSM).  Eberhard emphasized that 
the cost of the power crisis is higher than acknowledged, 
noting that the cost of unserved energy is much greater than 
the contracting cost of securing capacity.  He asked, "will 
 
PRETORIA 00000982  003 OF 003 
 
 
the lights stay on?" Eberhard said it depended on Eskom 
restoring an acceptable reserve margin, keeping its "kit" 
working, and maintaining reliable networks.  He said Eskom 
was in fact moving forward on these targets. 
 
¶7.  (SBU) Presidential Advisor Neva Makgetla expressed the 
government point of view.  Makgetla described the 
government's extensive modeling of electricity supply and 
demand, emphasizing the need to reduce energy intensity, 
improve energy efficiency, and bring new capacity on board. 
She criticized load-shedding as a crude and 
counter-productive tool.  Makgetla supported moving to 
economic pricing with incentives for metering and reducing 
demand, but she stressed the need to cushion the poor from 
extreme jumps in prices. 
 
¶8.  (SBU) A number of participants lauded the decision of the 
goverment and ANC National Economic Committee to convene 
stake-holders to a high-level electricity crisis summit on 
May 16.  This is seen as the opportunity to get engagement 
and commitment from the highest levels of government on the 
way forward, including tariff structure and use of 
load-shedding.  Makgetla stated that the government was 
holding a number of meetings to prepare for the summit. 
Business Unity SA (BUSA) official Bobby Godsell hoped that 
the goverment could clarify Eskom's mandate between security 
of supply, competitive pricing, access to the poor, and other 
issues. 
 
¶9.  (SBU) The UK Ambassador stressed that any solution would 
have to be South Africa-specific and inherently political. 
He cautioned that too much emphasis on privatization could 
build political opposition.  He said that the UK experience 
in liberalization and unbundling was instructive, but could 
not be applied directly in South Africa.  He applauded the 
electricity summit as an opportunity to have a national 
debate and reach a national consensus on next steps. 
 
¶10.  (U)  The local Engineering News reported on May 9 that 
the agenda for the national electricity/energy summit on May 
16 is likely to be finalized at a special Presidential 
joint-working group on May 12.  According to the article, the 
summit - which was initially called for by the ruling ANC - 
will be convened by the National Economic Development and 
Labor Council (NEDLAC).  NEDLAC Executive Director Herbert 
Mkhize noted that Eskom's application for a 60 percent 
increase would occupy center stage.  However, he admitted 
that the regulator NERSA will not be invited as it would 
create a conflict of interest for the body, which has to 
deliberate on the pricing issue a few days later.  In 
addition, the role of the state utility Eskom still had to be 
finalized.  Mkhize suggested the government - as Eskom's sole 
shareholder - will likely speak on behalf of the power 
company, but emphasized that Eskom executives would be in 
attendance. 
 
¶11.  (SBU) COMMENT: The decision to convene a high-level 
electricity summit on May 16 is welcome and over-due, but 
details on program and participants are still sketchy. 
Stake-holders are hopeful for clear decisions on the way 
QStake-holders are hopeful for clear decisions on the way 
forward.  The government has unfortunately lacked the 
capacity to get it right so far with respect to IPPs and 
realistic tariffs, thereby letting the country drift to its 
current power conundrum.  Whether it can make an about-face, 
grapple with the political exigencies, and provide clear 
leadership going forward will have huge consequences for the 
investment environment and economic growth. 
BALL