VZCZCXRO1613
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2403/01 3081207
ZNR UUUUU ZZH
R 031207Z NOV 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 6259
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 0872
RUEHBY/AMEMBASSY CANBERRA 0748
RUEHLO/AMEMBASSY LONDON 1624
RUEHMO/AMEMBASSY MOSCOW 0883
RUEHFR/AMEMBASSY PARIS 1460
RUEHOT/AMEMBASSY OTTAWA 0714
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 002403 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, EEB/ESC AND CBA 
DOE FOR SPERL AND PERSON 
DOC FOR ITA/DIEMOND 
 
E.O.   12958: N/A 
TAGS: ENRG EPET EMIN EINV EIND ETRD SF
SUBJECT: Eskom Faces Challenges - Thin Margin and More 
 
Ref: A) Pretoria 1751 and previous 
B) Maputo 1018 
C) Gaborone 818 
 
Sensitive But Unclassified - Not for Internet 
 
¶1. (SBU) SUMMARY: A meeting with new Eskom Chairman Bobby Godsell 
was a good opportunity to assess the state-of-play in South Africa's 
power crisis.  Godsell's new position is emblematic of Eskom's 
serious attempts to address a confluence of management gaps that led 
to last year's load-shedding.  Eskom's reserve margin remains tight, 
bringing on new supply is long-term and difficult, and Eskom 
struggles to obtain greater demand reduction.  Higher Southern 
Hemisphere summer demand and planned maintenance for plants being 
run at high loads places Eskom in a vulnerable position.  Eskom will 
likely only use load-shedding as a last resort, but consumers may be 
faced with outages, depending on the success of demand reduction, 
implementation of new management practices, and the ability to 
finance new capacity in the midst of the global financial crisis. 
END SUMMARY. 
 
--------------------------------------------- 
Need for Expansion and Comprehensive Planning 
--------------------------------------------- 
 
¶2. (SBU) State power utility Eskom's new Chairman Bobby Godsell 
(protect) told a visiting International Trade Commission delegation 
and Minerals/Energy Specialist in an October 15 meeting that he is 
focused on implementing Eskom's ambitious expansion program.  He 
admitted that Eskom will not be able to immediately increase the 
thin five percent reserve margin it currently faces, rendering South 
Africa's power supply precarious and vulnerable.  Godsell said Eskom 
aimed to build 40,000 MW of new capacity over the next 20-25 years, 
doubling existing capacity, to meet growth and restore the reserve 
margin to safer levels.  He averred that slower growth in South 
Africa could reduce this need or spread it out over a longer period. 
 On Eskom's current drawing board are three base-load, coal-fired 
power plants, two peaking, open-cycle, gas-fired plants, and two 
pump/storage hydro projects.  Godsell said the SAG needed to 
establish a comprehensive energy policy based on a national energy 
debate on sources and uses of energy, instead of the current 
confusion with three separate ad hoc energy plans.  He noted that 
Eskom reports to various, overlapping layers of government.  Recent 
press reports have high-lighted Eskom's challenge in raising funds 
overseas in the current global credit turmoil. 
 
------------------------------------- 
Getting the Price Right is Hard to Do 
------------------------------------- 
 
¶3.  (SBU) Godsell cited the following elements for Eskom's 
short-term plan to address shortages until new base-load plants come 
on line 2013-14: 
 
-- Aim to price electricity more realistically (South Africa has 
enjoyed the cheapest electricity in the world at 1-2 U.S. cents per 
kilowatt hour); 
 
-- Reduce consumption by ten percent across the board; 
 
-- Bring three moth-balled power plants back on line; 
 
-- Support Treasury's efforts to keep inflation under control, given 
the SAG's commitment to keep electricity price rises for the poor no 
Qthe SAG's commitment to keep electricity price rises for the poor no 
more than inflation; 
 
-- Gain larger price increases for other user classes: up to twice 
inflation for higher-income users and up to three times inflation 
for industrial users. 
 
Godsell noted that Eskom had gained a 60 percent nominal increase in 
electricity prices this year through two separate applications to 
the National Energy Regulator (NERSA).  Godsell stated that, at a 
minimum, Eskom must recoup production costs, now comprising: 
 
-- Average recovered tariff: 0.25 Rand/kilowatt-hour 
 
PRETORIA 00002403  002 OF 003 
 
 
 
-- Cost of production: 0.5 Rand/kwh 
 
-- Cost of production and distribution: 0.75 Rand/kwh 
 
(In other words, Eskom is losing up to 0.50 Rand/kwh, although 
approved price increases will whittle away at this loss per unit 
produced/sold.) 
 
Getting the price to consumers right remains an immense political 
and regulatory challenge. 
 
¶4.  (SBU) Eskom has increased coal stockpiles and has broadly and 
successfully imposed a 10 percent reduction on large industrial 
users.  Deeper mines have negotiated this reduction to 5 percent. 
Eskom continues to "jaw-bone" other consumers to reduce consumption, 
holding load-shedding as a threat.  Eskom is working with the 
regulator on establishing financial penalties for consumers and 
municipalities that use more than their quota, but has faced 
criticism that it is employing an ineffective "one-size-fits-all" 
approach.  Eskom is refining its demand side management program and 
incentives.  New Minister for Public Enterprises Brigitte Mabandla 
said South Africa may face fresh power cuts early in 2009 because 
"voluntary energy savings have fallen woefully below the required 10 
percent." 
 
--------------------------------------------- ---- 
Nuclear Challenge Mounts - Need to Secure Funding 
--------------------------------------------- ---- 
 
¶5.  (SBU) Godsell noted that SAG nuclear policy aimed to increase 
nuclear from the current 2,000 MW to 20,000 MW, about one-half of 
the planned new build.  Godsell said the contract for new nuclear 
build - for which Westinghouse and Areva of France are competing - 
has not been awarded yet because there is no firm funding in place. 
Godsell said that the Eskom Board has requested approval for the SAG 
to guarantee the debt incurred for building the first nuclear plant. 
 The SAG still has not made a decision, but Godsell hopes to proceed 
with one nuclear plant by early next year.  (NOTE: Eskom has 
publicly insisted that a decision will be made this year, but 
Westinghouse anticipates a high probability of delay to early next 
year or after the April/May elections (Septel).  End Note.)  Eskom 
Chairman Jacob Maroga told investors in New York that financing for 
Eskom's capital expansion, including nuclear, was still up in the 
air and may require additional time.  He noted that Eskom might 
start asking its suppliers to assist in co-finance of its purchases 
of equipment.  Minister Mabandla was quoted in the press saying "no 
final decision on nuclear had been made and the real challenge that 
we have to overcome is the cost of the nuclear-build relative to the 
cost of a coal-build."  An energy analyst, quoted in the 
investigative weekly Mail & Guardian, said "as far as I know the 
number one reason it keeps being deferred is money.  A further 
factor was the new guys taking over from the old and not liking the 
decisions of the old." 
 
------------------------ 
Commitment to Renewables 
------------------------ 
 
¶6.  (SBU) Godsell noted that the SAG aimed to achieve the goal of 
renewables comprising ten percent of new generation.  He supported 
this goal, but stated that Eskom was best suited to deliver large 
Qthis goal, but stated that Eskom was best suited to deliver large 
scale generation, transmission, and distribution.  Eskom is very 
good at building and maintaining large coal-fired plants; even 
nuclear would be outside of its main experience.  Eskom was not the 
body to focus on renewables, he said.  Godsell noted that 
Mozambique's Cahora Bassa hydroelectric facility had significant 
capacity for expansion that could help supply the region, but 
transmission was an issue (Reftel B). 
 
¶7.  (SBU) Godsell was frustrated with the SAG and Eskom's inability 
to establish Independent Power Producers (IPPs) in South Africa.  He 
questioned whether a rational investor would enter the current South 
African market without a clear, transparent energy policy and with 
the current price and cost structure.  Godsell said the SAG's stated 
goal of 30 percent of generation coming from IPPs was not realistic. 
 
PRETORIA 00002403  003 OF 003 
 
 
 He pointed at the Mmamabula coal-fired project in Botswana as an 
IPP with real potential, but noted that it was experiencing 
significant problems, and wondered whether it would actually be 
built (Reftel C).  Godsell stressed that the government must play a 
stronger role in fighting corruption and promoting good governance 
and cooperation with the private sector, citing partnerships with 
the likes of Anglo American, BHP-Billiton, and Rio Tinto. 
Government and private stakeholders must cooperate to put together 
complex infrastructure deals. 
 
¶8.  (SBU) COMMENT: Former Anglo Gold Ashanti CEO Bobby Godsell's 
posting as Eskom's Chairman of the Board has been broadly applauded. 
 He brings a useful mix of experience, pragmatism, charisma, and 
struggle credentials to Eskom's challenges.  Eskom's challenging 
five-year expansion budget has ballooned from Rand 150 billion to 
Rand 343 billion (with press reports predicting as high as Rand 
400-500 billion - about $50 billion) because of the increased 
construction costs for the same targeted plant due to production 
queues and component shortages, increased financing costs, and a 
weaker rand.  Eskom may see its capital investment program pushed 
further off into the future, as the SAG and Eskom management 
reassess whether they can afford nuclear as a significant part of 
the mix.  Analysts have noted that the cost of nuclear build is 
significantly higher than that for coal.  The mission continues to 
support Westinghouse as it works to advance its bid for the first 
3000 MW tranche of new nuclear build, even if the full fleet timing 
and prospects are less clear. 
 
LALIME