VZCZCXRO7823
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #2498/01 3381452
ZNR UUUUU ZZH
R 041452Z DEC 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0477
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 PRETORIA 002498 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, ISN, EEB/ESC and CBA, and OES/EGC 
DOC FOR ITA/DIEMOND 
DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER 
TREASURY FOR D.PETERS, P.STEWART 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EMIN EINV ETRD ECON SENV PGOV SF
SUBJECT: ESKOM REDUCES TARIFF HIKE REQUEST, LOOKS FOR PRIVATE 
CAPITAL, AND JOUSTS WITH GOVERNMENT 
 
REF: A) Pretoria 2315; B) Pretoria 2166 and previous 
 
This message is sensitive but unclassified, not for Internet 
distribution. 
 
¶1.  (SBU) SUMMARY: State power utility Eskom backtracked on its 
controversial 45 percent tariff hikes for each of three years, at 
the last moment revising its application to the regulator down to 35 
percent per year.  At the same time it announced a number of new 
strategic initiatives, a desire for private investment, and delays 
in some projects.  Many stakeholders deemed the revised rates still 
too high and inflationary.  Separately, the SAG released some 
details of its newly Cabinet-approved Integrated Resource Plan, with 
timeframes for some projects differing from Eskom-announced plans. 
The Energy Minister highlighted security of supply for pursuit of 
nuclear and other projects despite budget woes.  USAID Southern 
Africa is currently exploring the possibility of providing 
assistance to the SAG under its Africa Infrastructure Program.  End 
Summary. 
 
---------------------------- 
Never Mind 45% - We Want 35% 
---------------------------- 
 
¶2.  (SBU) Eskom, South Africa's state-owned power utility, made a 
number of significant announcements on December 1.  Eskom submitted 
a last minute revised tariff application to the National Energy 
Regulator of South Africa (Nersa), reducing its requested rate 
increases to 35 percent from 45 percent per year over the next three 
years.  To budget for lower tariff increases, the utility announced 
that its second proposed coal-fired power station - Kusile - will be 
phased in one year later than originally planned, and that a private 
equity partner will be sought for as much as 30 percent of the 4,800 
MW power plant, initially scheduled to start coming on line in 2013. 
 In addition, Eskom is recommending that South Africa postpone its 
already-delayed nuclear power program, new gas-fired peaking plants, 
and a wind project at Sere. 
 
--------------- 
Strategic Shift 
--------------- 
 
¶3.  (SBU) Acting Executive chairperson Mpho Makwana characterized 
the decisions as marking a "significant strategic shift" for Eskom, 
mainly referring to the quest for private investment in some 
projects.  The local investigative paper Mail & Guardian depicted 
Makwana as a new super hero "Mister Electricity" providing new 
"energy" sorely needed at the utility.  Eskom forecast a budget 
shortfall of $1.9 billion over the next three years, less than the 
$4.0 billion originally projected.  Eskom announced that it will 
reduce the shortfall, despite the slower rate increases, through 
project-level private equity partnerships, project deferrals, and 
power conservation and demand management initiatives.  Makwana 
warned that the revised funding plan was based on finely balanced 
assumptions on economic growth and the cost of primary energy.  An 
Eskom spokesperson asserted there was no short-term threat to 
security of supply, but admitted the system would remain vulnerable 
from 2011 through 2012 when the first turbine of the Medupi 
coal-fired power plant comes on line.  She said strong demand-side 
initiatives were essential to help mitigate any vulnerability.  A 
power analyst at Frost & Sullivan still predicts power outages from 
Qpower analyst at Frost & Sullivan still predicts power outages from 
mid-2010 to 2012. 
 
 
------------------------------------ 
Not so Fast - Government does Policy 
------------------------------------ 
 
¶4.  (SBU) On December 3, Energy Minister Dipuo Peters released some 
details of the SAG inaugural integrated resources plan (IRP1), which 
had been approved by President Zuma's Cabinet December 2.  It 
appeared that the SAG was reasserting its preeminence on strategy in 
announcing this long-anticipated planning document, which presented 
some misalignment with Eskom's announcements in conjunction with the 
revised tariff request in the same week.  According to Minister 
Peters, the IRP1 is premised on no delay in Kusile or the other 
projects that Eskom proposed delaying to make its numbers work. 
Minister Peters said the SADOE believed that all the projects are 
necessary to "keep the lights on."  She added, "We cannot stop 
planning [for security of supply] simply because there is no money. 
In my view you have to plan and then look for the money based on the 
 
PRETORIA 00002498  002 OF 003 
 
 
plan."  SADOE acting Deputy Director General (DDG) Ompi Aphane, who 
has overseen drafting of the IRP1, indicated that Nersa will use the 
IRP1 to make its determination on the capital project aspect of 
Eskom's application.  Aphane said the SAG would begin broad 
stakeholder consultations in January to formulate a second stage 
IRP2.  Aphane also announced that an Independent System Operator 
(ISO), separated from Eskom in a phased procedure, would be created. 
 
 
--------------------------------- 
Negative Reactions to Tariff Hike 
--------------------------------- 
 
¶5.  (SBU) Meanwhile, business, labor, and politicians were almost 
uniformly critical in their reaction to Eskom's revised 35 percent 
tariff hike request.  Business Unity SA (BUSA) said, "We view the 
revised proposal as still being on the upper side.  It could have 
unintended outcomes on the economy."  The Agricultural Business 
Chamber said, "The revised price hike is very high - probably too 
high."    Labor federations, other business groups,  the ruling 
African National Congress party and opposition parties all took 
issue with the requested hikes. 
 
----------------- 
Inflation Worries 
----------------- 
 
¶6.  (SBU) Economists agreed that the scale of South Africa's 
impending electricity tariff increases are the biggest single threat 
to the country's inflation outlook.  Eskom has hiked its power 
prices 91 percent since 2005.  Many commentators have opined that 
the requested tariff hikes will be inflationary, but it is not clear 
how much sophisticated analysis of direct and indirect costs have 
been modeled.  ABSA Capital said the revised 35 percent increase in 
electricity tariffs would directly contribute 0.6 percentage points 
to the inflation rate over a full financial year.  A Barnard Jacobs 
Mellet analyst told Deputy Economic Counselor that with a 35 percent 
nominal tariff increase, he would expect inflation to remain within 
the 3-6 percent target band for most of 2010 and 2011.  Nonetheless, 
Eskom had told the analyst that  the 35 percent increase is in real 
terms, which would represent about a 41 percent rise in nominal 
terms.  Reserve Bank Advisor Brian Kahn said publicly that tariff 
increases of 30 percent would probably see inflation remaining just 
below the 6 percent inflation target ceiling.  Therefore, any higher 
increase could prevent the country from attaining sustainably lower 
levels of inflation in the medium term.  The Reserve Bank assumed a 
25 percent tariff increase in its latest economic projections. 
 
--------------------------------------------- - 
Private Project Capital, but not Privatization 
--------------------------------------------- - 
 
¶7.  (SBU) Most commentators were positive about Eskom's decision to 
seek private project capital, but skeptics noted the failure to set 
up any independent power producers (IPPs) in the past.  Government 
policy has long targeted up to 30 percent provision of power by 
IPPs, but it has been unable to set up a transparent environment to 
attract investors.  For example, the then-Department of Minerals and 
Energy tender for peaking power plants failed to negotiate a 
contract with preferred bidder U.S. firm AES, which eventually 
Qcontract with preferred bidder U.S. firm AES, which eventually 
dropped contract negotiations, or with runner-up Suez of France. 
The newly-approved Integrated Resource Plan has been promised to 
provide the framework and policy for engaging IPPs and developing 
nuclear and renewable energy.  According to aspects of the IRP1 
released, there is only 1,100 MW set aside for renewable energy, 
cogeneration, and conventional IPP power between 2010 and 2013. 
SADOE said the IRP2 planning for post 2014 would quantify power 
arising from IPPs as "likely to be far more material". 
 
¶8.  (SBU) Neither the SAG nor Eskom has broached privatization of 
Eskom itself. Some economists have suggested that Eskom be broken up 
and listed, but discussion of privatization of Eskom and parastatals 
generates knee-jerk negative howls from many sectors of the South 
African scene.  One of the sources of Eskom's challenges is that 
government's attempts to involve independent power producers were 
not successful, for a number of reasons, and many stakeholders 
became disillusioned.  Delays in capacity investment during that 
period allowed demand to overtake supply, discrediting the potential 
of private power in the eyes of many.  Eskom and other South African 
parastatals have boards that ultimately defer to the single powerful 
"shareholder" - the government.  As one commentator noted, "the 
 
PRETORIA 00002498  003 OF 003 
 
 
government wields power without responsibility; the boards have 
responsibility without power." 
 
---------------------------- 
Nuclear and Renewable Energy 
---------------------------- 
 
¶9.  (SBU) Energy Minister Dipuo Peters has reaffirmed the SAG's 
commitment to nuclear and renewable energy in public comments. 
Speaking at a recent nuclear conference, she said that the SAG had 
taken the lead in formulating the process for selecting a technology 
partner for providing up to 20,000 MW of conventional nuclear power 
plants.  (The Eskom turn-key tender was cancelled in December, 
2008.)  The SAG is still expected to announce the way forward by 
March 2010.  The Minister said the first new nuclear power plant 
would be up and running by 2020.  Westinghouse remains well 
positioned to be a technology supplier, given its global track 
record in technology transfer.  The SAG is still determining its 
level of support to the new fourth generation Pebble Bed Modular 
Reactor, which is still many years away from commercialization for 
power and industrial process heat. 
 
¶10.  (SBU) With regard to renewable energy, Minister Peters 
reaffirmed at the nuclear conference that the SAG aimed to install 
10,000 gigawatt-hours of renewable energy capacity by 2013, 
introduce one million solar water heaters by 2014, advance demand 
side management (DSM), and introduce new energy efficiency 
initiatives.  She also cited the importance of climate change 
negotiations and South Africa's Long Term Mitigation Scenarios. 
While the regulator has established viable renewable energy feed-in 
tariffs (REFIT), thus far South Africa has had only very modest 
success in implementing renewable energy projects, largely due to 
uncertainty about Eskom purchase agreements for independent 
producers and other aspects of SAG policy. 
 
-------- 
COMMENTS 
-------- 
 
¶11.  (SBU) Tariff tussles and management turmoil at Eskom are likely 
to continue to slow strategic planning at the utility and in 
government to establish a fruitful framework for engaging the 
private sector and diversifying the energy mix, not to mention 
mitigating carbon emissions.  The boardroom struggle at Eskom that 
led to the departure of the CEO and Chairman (Ref A) resulted from 
ambiguity and meddling from the highest levels of government.  This 
kind of institutional uncertainty could continue to discourage 
private investment. 
 
¶12.  (SBU) Continued negative reactions to proposed tariffs may 
force Eskom to further pare its rate increase proposals, perhaps to 
25 percent per year.  This is a tricky balance, to allow tariffs to 
reach a more normal market basis to improve Eskom's balance sheet 
and attract private investment while keeping the impact reasonable 
on inflation, the economy, and consumers.  South Africa's 
electricity pricing is complicated by municipalities and 
residential/industrial/concessionary considerations, but even after 
two years of significant increases, current prices are among the 
world's very lowest.  Three years of significant increases would 
move them much closer to international parity.  Prices that would 
allow private investors more profitability could make a difference 
Qallow private investors more profitability could make a difference 
in attracting outside capital, as well as encouraging conservation 
and improved efficiency.  Without private capital, demand may again 
outpace supply, resulting in new capacity shortfalls and new threat 
of load-shedding. 
 
¶12.  (SBU) U.S. ASSISTANCE, OPPORTUNITIES FOR U.S. PRIVATE SECTOR: 
U.S. investors will continue to look seriously at the South African 
market, but will be looking for clarity on tariffs, regulatory, and 
policy frameworks.  USTDA is looking at opportunities to provide 
feasibility studies and or technical visits to facilitate U.S. 
exports or investment related to power projects.  USAID Southern 
Africa is currently exploring the possibility of providing 
assistance under its Africa Infrastructure Program to the SAG.  The 
current situation strengthens the case for such assistance.  The USG 
also aims to launch a bilateral strategic energy dialogue and 
implement a recently-signed nuclear energy R&D agreement. 
 
Gips