VZCZCXRO8350
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2166/01 2961422
ZNR UUUUU ZZH
R 231422Z OCT 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9966
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 04 PRETORIA 002166 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, ISN, EEB/ESC and CBA, and OES/EGC 
DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER 
DOC FOR ITA/DIEMOND 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EMIN EINV ETRD ECON SENV SF
SUBJECT: Electricity - Economy's Driver or Achilles Heel? 
 
REF: A) 09 Pretoria 1762; B) 09 Pretoria 179 
C) 08 Pretoria 2654 
D) 08 Pretoria 2403 and previous 
 
This message is sensitive but unclassified, not for Internet 
distribution. 
 
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Summary 
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¶1.  (SBU) South African power utility Eskom is struggling belatedly 
to increase capacity to meet demand, while working to engage the 
private sector, secure financing, and correct its pricing to reflect 
market realities.  The utility suffered an electricity supply 
emergency, resulting in rolling blackouts and repeated load 
shedding, from January through April 2008.  While failure to meet 
demand with supply had a significantly negative effect on the 
economy, the global slow-down has given Eskom a temporary 
demand-side reprieve.  As owner and operator of the national 
electricity grid, Eskom is the designated "gatekeeper" for all 
potential market entrants and independent power producers (IPPs). 
Following the 2008 crisis, the utility has announced that it will 
require a capital outlay of $52 billion for new generation capacity 
and an ambitious and controversial tariff increase of about 45 
percent yearly through 2012 to service this capital.  90 percent of 
Eskom's electricity is currently derived from coal combustion.  To 
date, the utility has made little progress in integrating 
alternative sources of nuclear and renewable energy.  Challenges 
include: a shortage of coal, increasing demand related to global 
economic recovery, energy intensity in key industries such as 
mining, and the need to mitigate the increasing carbon load of 
coal-fired electricity.  End Summary. 
 
---------------- 
Eskom's Monopoly 
---------------- 
 
¶2.  (U) South African State utility Eskom dominates electricity 
generation.  It supplies some 95 percent of South Africa's, and 
about 45 percent of Africa's, electric power.  It also owns and 
operates the national electricity grid.  If and when South Africa 
attracts independent power producers (IPPs), Eskom is also the 
designated purchaser of electricity.  Eskom is among the world's top 
seven in generating capacity, and among the top nine in terms of 
sales.  Coal-fired power stations generate 90 percent of South 
Africa's electricity.  A 1800 MW nuclear station at Koeberg near 
Cape Town accounts for 4 percent, and hydroelectric, pumped storage, 
and gas/kerosene-fired plants provide the remaining 6 percent. 
 
 
-------------------------- 
Electricity Crisis of 2008 
-------------------------- 
 
¶3.  (SBU) Long-term underinvestment in power supply, exacerbated by 
cheap prices and an unwillingness or inability to engage/attract 
private investors, culminated in a sudden and severe power crisis in 
early 2008 in South Africa and the region.  Shortage of supply was 
so dire on January 25, 2008 that the system was at risk of total 
blackout.  An alarming admission from Eskom:  a system-wide blackout 
of the national grid could require three weeks to restore power.  In 
January, South Africa's critical mining sector was shut down for 
five days and reopened at a mandated 90 percent provision of power. 
Eskom imposed rationing, rolling blackouts, and repeated daily load 
shedding -- a last-resort measure of interrupting load to certain 
customers, undertaken to maintain the stability of the grid and 
prevent a system-wide blackout -- between January and April 2008. 
Qprevent a system-wide blackout -- between January and April 2008. 
The immediate cause of the emergency was that a large percentage of 
Eskom's existing capacity was unavailable for supply, due to planned 
maintenance, unplanned breakdowns, and reduced output linked to coal 
supply problems.  Together these factors contributed to a situation 
in which some 20 percent of the country's generation capacity was 
out of service at one time.  As South Africa's surplus electricity 
capacity had been depleted, and Eskom's reserve margin - the spare 
power plant available when the highest demand of the year is 
recorded - had fallen to 5-7 percent, the electricity utility was 
unable to meet demand.  The internationally accepted standard 
reserve margin for a country is between 15 and 20 percent.  At the 
same time that the South African Government and Eskom failed to 
increase investment in supply, they had the political mandate to 
increase access to the population since 1994. 
 
¶4.  (SBU) Since the power outages and economic disruptions of early 
 
PRETORIA 00002166  002 OF 004 
 
 
2008, electricity supply has become more stable.  Eskom has recently 
described the electricity system as "tight but manageable".  The 
utility has increased its coal stockpiles at power stations from 
less than 12 days' supply to greater than 40 days' supply, brought 
on new capacity of 4,450 MW since January 2008 (a combination of 
"de-mothballed" older plants and some new gas-fired generation), and 
expanded the reserve margin to just under 10 percent.  Nonetheless, 
other contributors to the crisis, such as policy uncertainty, 
planning confusion, delayed investment in new generating plants, and 
regulatory impediments to attracting private investment, continue to 
contribute to a restricted supply. 
 
¶5.  (SBU) Officials are concerned that South Africa, which is 
hosting the 2010 football World Cup, may not have enough electricity 
to go around.  The capacity-stressed situation has forced Eskom into 
a planned spend of R385 billion (52 billion U.S. dollars) over the 
next five years to increase capacity from 40,000 MW up to 70,000 MW. 
 The planned program includes the development of new capacity, the 
continued recommissioning of mothballed capacity, and the 
refurbishment of existing operating capacity, across a range of 
generation platforms.  The company's new project pipeline comprises 
primarily immense coal-fired baseload facilities.  Some more modest 
gas-fired and pumped storage peaking facilities, renewable 
facilities, and the refurbishment of existing plants are also 
included.  9,600 MW of new baseload capacity is planned from two new 
coal-fired power stations - Medupi and Kusile.  Medupi, situated 
near Lephalale in South Africa's Limpopo province, will be a 
six-unit power station.  Kusile, to be situated near Eskom's 
existing Kendal power station in the Mpumalanga province, will be a 
six-unit mine-mouth power plant.  Each of these power stations will 
have an output of about 4,800 MW.  Medupi and Kusile are planned to 
be fully commissioned and operational by 2016 and 2017, 
respectively, but some units will come on stream as early as 
2012-13, intended to abate the power crisis, while increasing 
dependence on coal. 
 
-------------------- 
From Cheap to Costly 
-------------------- 
 
¶6.  (SBU) Eskom is striving to implement controversial and 
significant tariff increases to cover operational and capital costs. 
 In order to fund its capital program, it has already implemented 
27.5 and 31.3 percent increases in 2008 and in July 2009, 
respectively.  In October 2009, the utility applied to the National 
Energy Regulator of South Africa (NERSA) for further increases of 45 
percent per year for the next three years.  It is not clear how 
long-term contracts with mining and other interests, often linked to 
commodity prices and locking in prices well below the proposed rates 
over time, will be handled. 
 
¶7.  (U) It is unlikely that consumers and interest groups will 
accept price hikes graciously.  One journalist commented, "Has the 
power giant gone stark raving mad?"  According to parliamentary 
testimony by Eskom CEO Jacob Maroga on October 6, Eskom proposed an 
increase in the allocation of free basic electricity (FBE) in their 
tariff increase application as a way of shielding the poor from 
substantial hikes in electricity prices.  Under the FBE 
Qsubstantial hikes in electricity prices.  Under the FBE 
intervention, 50 kWh/m of free electricity would be provided to 
households with an income of less than R800 ($111) per month. 
 
¶8.  (U) Eskom ranked as one of the four cheapest electricity 
producers in the world until the July increase.  The requested 
increases would take the power utility from an electricity price of 
4.47 (U.S.) cents per KWh in 2007 to around 7.80 cents per KWh in 
¶2010.  This would put the price in the same range as developed 
countries like Canada and Sweden.  The electricity cost in the 
United States in 2010 is likely to be above 10 cents per KWh. 
 
----------------------------------- 
Low Prices, High Environmental Cost 
----------------------------------- 
 
¶9.  (SBU) Coal-fired power may be historically cheap, but it has 
high environmental costs in terms of carbon emissions, particulates 
(air quality), and the need to use scarce water supplies for 
cooling.  These costs do not appear to have been taken into account 
by policy makers or by Eskom.  Nonetheless, investment in 
alternatives could be spurred once pricing is adjusted. 
 
---------------------------- 
Post Recession Demand Spike? 
---------------------------- 
 
 
PRETORIA 00002166  003 OF 004 
 
 
¶10.  (SBU) The global recession has alleviated power demand 
temporarily.  In particular, many energy-intensive smelters have 
shut down in response to a drop in world demand for metals and 
alloys.  Prior to the recession, Eskom had based its supply and 
demand projections on a robust power-demand growth of 4 percent a 
year and annual economic growth of 6 percent.  This would have 
required doubling of the generation system to nearly 80,000 MW by 
2025 to keep pace with demand and build an acceptable reserve margin 
of at least 15 percent.  The recession, however, has caused a number 
of Eskom's key industrial customers to adjust their outputs (or shut 
down), and as a consequence, Eskom has re-assessed its demand 
scenarios.  The utility is currently assuming "marginal" to zero 
growth in electricity demand for 2009 and 2010.  Eskom now expects 
the system will need a 60,000 to 70,000 MW capacity by 2025.  A more 
rapid market recovery, and related revival of mine production, could 
cause renewed shortages and force further planning revisions. 
 
----------------------- 
Not Enough Coal to Burn 
----------------------- 
 
¶11.  (SBU) Coal shortage is a serious threat to SA electricity 
supply.  South Africa currently produces about 250 million tons of 
coal a year.  48 million tons of capacity a year will be lost in the 
next ten years, as mines reach the end of their productive lives. 
Eskom's coal consultant Johan Dempers is quoted as saying that South 
Africa will need to commission as many as 40 new coal mines at a 
cost of some R110 billion (15 billion U.S. dollars) in order to meet 
the country's electricity needs by 2020. 
 
--------------------------------- 
Independent Power Suppliers' Role 
--------------------------------- 
 
¶12.  (SBU) The South African Government (SAG) has called for the 
private sector to play a greater role in power generation, but it 
and Eskom have been unable to deliver on this policy.  IPPs are 
intended to generate 30 percent of the additional power capacity; 
doubts have been raised as to whether such a target will be met.  As 
reported in Ref A, IPPs must have capacity of at least one Megawatt 
for renewable sources; reverse-metering by households and 
enterprises that have invested in solar panels or other renewable 
sources are not permitted or encouraged under current regulations. 
Individual IPPs proposing large power generation projects have been 
struggling to finalize purchase agreements with Eskom, including the 
large coal-fired Mmamabula project in Botswana that cannot be 
financed without an Eskom off-take agreement.  Under current 
legislation, all power generated by IPPs has to be sold to Eskom. 
The power utility appears to have made little progress in 
encouraging or introducing additional players and to date has not 
negotiated any new Power Purchase Agreements (PPAs).  In fact, Eskom 
has not signed a PPA since 1976, when the Cahora Bassa Dam 
hydroelectric project in Mozambique came on stream. 
 
----------------------------------- 
Impact on South Africa's Neighbors 
----------------------------------- 
 
¶13.  (SBU) South Africa values its relationships with and potential 
imports from other countries in the region.  Eskom exports 5.7 
percent of the power it generates to neighboring countries and has 
honored contracts and relationships with its neighbors despite the 
Qhonored contracts and relationships with its neighbors despite the 
power crisis.  Eskom imports 3.9 percent of its power from countries 
like Mozambique and the Democratic Republic of Congo (DRC) and owns 
subsidiaries in various African countries.  Of these numbers, Eskom 
imports 1200-1500 MW annually from the Mozambique Cahora Bassa dam, 
but re-exports up to 900 MW transmitted on the Eskom grid back to 
the Mozal aluminum smelter in Mozambique, under the terms of a 
longstanding contract.  The utility currently sells about 3,000 MW 
to Botswana, Mozambique, Namibia, Zimbabwe, Lesotho, Swaziland, and 
Zambia each year. Eskom has reported that its electricity supply 
accounts for 45 percent of Africa's power.  It has pointed out that 
current and future imports could be severely jeopardized if exports 
of electricity from South Africa are restricted.  To prevent any 
future crises, particularly during the 2010 World Cup, members of 
the Southern African Power Pool (SAPP) have agreed to provide 
support, although it is not clear how much they could help.  These 
members include Mozambique, Angola, Botswana, Malawi, Namibia, the 
DRC, Swaziland, Tanzania, Zambia, and Zimbabwe. 
 
------------------------ 
Increasing Nuclear Power 
------------------------ 
 
 
PRETORIA 00002166  004 OF 004 
 
 
¶14.  (SBU) Eskom cancelled its tender for new conventional nuclear 
power plants in December 2008, but the SAG reaffirmed its commitment 
to expanding nuclear power with government playing a greater role. 
The SAG is still formulating its nuclear power plant policy and 
plans, but they will be reduced from its ambitious policy of 2007 
that targeted a fleet of up to 20,000 MW over 20 years. 
 
¶15.  (SBU) The Embassy has been advocating for Westinghouse as a 
supplier of new nuclear plants.  Areva of France is the main 
competition.  Another component of South Africa's nuclear strategy 
is the development of pebble-bed modular reactor (PBMR) technology - 
a reactor technology developed in Germany that uses graphite pebbles 
and very high temperatures to generate energy - as an option for 
future nuclear power generation.  Construction of a demonstration 
PBMR at the Koeberg site,initially due to start in 2007, has been 
delayed.  The estimated cost for the project is R14.5 billion ($2 
billion).  To date the SAG has spent more than R8 billion ($1.1 
billion U.S.) on research and development.  The U.S. Nuclear 
Regulatory Commission is working with South Africa on pre-licensing 
of the new fourth-generation technology, and the USDOE is working 
with PBMR in a number of multilateral research fora. 
 
---------------------------------- 
Opportunity for Renewable Sources? 
---------------------------------- 
 
¶16.  (SBU) South Africa has been relatively slow to initiate 
renewable energy projects, despite the SAG pursuing a renewable 
energy target of 10,000 GWh by 2013.  The National Energy Regulator 
Nersa's recent finalization of source-specific, preferential, 
renewable energy feed-in tariffs (Refit) may stimulate new 
investment in renewable energy projects.  Eskom's managing director 
for corporate services Steve Lennon reports that the company is 
designing a R6 billion ($830 million) pilot solar capture thermal 
plant in the Northern Cape and has restarted procurement for the 
construction of a wind farm.  Each of these sources will be designed 
to contribute 100 MW to the grid. 
 
------- 
Comment 
------- 
 
¶17.  (SBU) As South Africa struggles with the impact of limited 
electricity supply and looming price escalation, the country is 
presented with a watershed opportunity to transform its power 
industry.  This transformation could include:  reducing reliance on 
coal, integrating new private IPP's, increasing the number of green 
suppliers and renewable sources, correcting the price structure, and 
reducing the carbon load.  Getting the prices right will not be 
easy; it is not clear to what extent Eskom's prodigious tariff 
increase requests will survive economic and political hurdles.  In 
this time of protests over service delivery, the inflation impact on 
the poor and on the economy will be significant.  In the short term, 
the utility will have to deal with emissions issues at a time when 
the SAG is committing to mitigating its carbon footprint.  The 
country's abandonment of luring industrial users with cheap 
electricity may impede its ability to fulfill its goal of greater 
in-country processing of mineral commodities to export at a higher 
added value. 
 
¶18.  (U) Opportunities for greater US-SA cooperation in alternative 
energy (nuclear and renewable) may become more attractive as Eskom 
Qenergy (nuclear and renewable) may become more attractive as Eskom 
tries to find different ways of securing future supply.  There will 
also be opportunities for bilateral cooperation and advice as Eskom 
strives to finalize Power Purchase Agreements with IPPs, balancing 
build versus buy and cost and timing implications. 
 
Gips