VZCZCXYZ0001
RR RUEHWEB

DE RUEHSA #0125/01 0211506
ZNR UUUUU ZZH
R 211506Z JAN 10
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0954
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS PRETORIA 000125 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR AF/S, ISN, EEB/ESC and CBA, and OES/EGC 
DOE FOR TSPERL, GPERSON, MSCOTT, ABIENAWSKI 
DOC FOR ITA/DIEMOND 
 
E.O. 12958: N/A 
TAGS: EFIN ENRG EPET EINV PGOV SENV SF
SUBJECT: ESKOM AND THE WORLD BANK LOAN FOR MEDUPI 
 
REF: A. O9 PRETORIA 2498 
¶B. 09 PRETORIA 2315 AND PREVIOUS 
 
¶1.  (SBU) SUMMARY: Two years after power utility Eskom's electricity 
crisis, the state-owned company continues to grapple with financing 
expanded supply and diversifying its energy mix.  The recently 
released Integrated Resource Plan is a brief, three-year planning 
document, not revelatory in terms of expanding private engagement 
and diversifying the mix to include renewable and nuclear energy.  A 
more robust Integrated Resource Plan is promised by mid-2010.  Post 
is engaging closely with both the SAG and local World Bank 
representatives with respect to the Bank's proposed $3.75 billion 
loan to Eskom to complete the Medupi mega coal plant, to try to 
ensure that the loan addresses appropriately all environmental and 
other issues of concern to the USG.  End Summary. 
 
------------------ 
Spotlight on Eskom 
------------------ 
 
¶2.  (SBU) South Africa's state-owned power utility Eskom is 
grappling with expanding and financing power capacity, augmenting 
renewable energy and efficiency in its mix, maintaining leadership, 
and retaining and developing skills as it struggles  to "keep on the 
country's lights" and ensure improved future service as economic 
growth resumes.  Chronic power shortages in 2008 caused a series of 
country-wide blackouts and load-shedding with a significant negative 
impact on the country's economy and investment environment, with big 
production sacrifices in the electricity-hungry sectors such as 
mining and minerals smelting.  This led to a management "shake-up" 
within Eskom that has resulted in a critical review of planning, 
maintenance, coal supply, expansion funding mechanisms, electricity 
pricing, power purchasing agreements, and renewable energy feed-in 
tariffs (REFIT) over the last two years.  Under a new Acting CEO and 
Board Chair, Mpho Makwana, the utility has contributed mightily to 
an integrated resource plan (IRP) for future power supply and demand 
management, secured a number of loans to finance in part a R385 
billion ($52 billion) generation expansion plan, and applied for a 
35 percent rate increase each year from 2010 through 2012.  Eskom's 
most current request is a revised "multi-year price determination" 
(MYPD), scaling back its original (October 2009) application for 
three years of 45 percent year-on-year rate increases.  South 
Africa's national energy regulator (NERSA) is currently holding a 
series of public hearings as part of its review process prior to 
ruling on the adjusted - and still controversial - tariff increase 
application. 
 
---------------------------- 
The Integrated Resource Plan 
---------------------------- 
 
¶3.  (SBU) SAG Minister of Energy Dipuo Peters published a 
long-awaited, initial two-page Integrated Resource Plan (IRP1) on 
December 31, 2009, in which the SAG underscores the need for new 
electricity generation capacity and provides a brief list of 
short-term projects required, emphasizing energy efficiency, demand 
side management, and renewable energy.  The South Africa Department 
of Energy (SADOE) refers to a process of review "to allow for 
consultation with stakeholders" in the document and characterized 
that a "process of developing an IRP2 will commence in January 
2010".  It is expected that IRP 2 will be a more comprehensive and 
Q2010".  It is expected that IRP 2 will be a more comprehensive and 
longer-term plan for electricity generation than IRP1.  IRP1, which 
was approved by President Zuma's Cabinet, appears to be underpinned 
by a more detailed IRP compiled by Eskom in October 2009, in which 
the utility's planning team provided details of the "build program", 
demand side initiatives, associated forecast assumptions, and some 
limitations and concerns. 
 
¶4. (U) Eskom's document, a copy of which was given to us in 
confidence by a member of the World Bank team (protect), presents a 
"build program" comprising the Medupi coal-fired power station, the 
Kusile coal-fired station, the Ingula pumped-storage station, and 
the finalization of the return-to-service (RTS) program of the 
previously moth-balled coal-fired stations.  All of these generators 
are planned to be commissioned between 2012 and 2013.  In the longer 
term, Renewable Energy Feed-in Tariff programs (REFIT), Medium Term 
Power Purchase programs (MTPPP), and the open-cycle gas turbine 
(OCGT) independent power producer deals (IPP) are expected to 
augment capacity in the medium term.  On the demand reduction side, 
Eskom's IRP includes "known management programs" for commercial, 
industrial, and residential sectors that it expects to be 
successful.  Based on discussions with the SADOE to diversify its 
energy mix, the utility included demand side management projects, 
such as the installation of one million solar water heaters, a solar 
concentration facility, a nuclear fleet strategy (to provide low 
emission base-load alternatives to coal-fired generation from 2020), 
hydro capacity from the region, and a gas-fired option at Moamba, 
Mozambique. 
 
¶5.  (SBU) In its IRP document, Eskom assumed "electricity demand 
growth of 3.5 percent over the next five years alongside a recovery 
in global and national economic performance", tapering off to "a 
longer term average of 3.2 percent over the 20-year planning 
horizon".  Eskom generated a number of "risk-adjusted" scenarios to 
provide for emission constraints (based on the SAG's Long Term 
Mitigation Strategy 2025 targets) and increased private 
participation.  The "least-cost plan" with a significant emphasis on 
cheap coal-fired generation, however, does not include related 
"externalities", in particular, greenhouse gas emissions. 
Importantly, the utility's least-cost plans do "not fully address 
concerns regarding long-term water usage for power generation", 
noting that "the long-term impact on overall water balances in the 
country is still to be addressed". 
 
-------------------------- 
Expansion Plan Funding and 
The Tariff Debate 
------------------------- 
 
¶7.  (SBU) Participants in NERSA's ongoing series of public hearings 
are scrutinizing the accounting for the proposed tariff increase and 
debating alternative funding of Eskom's R385 billion ($52 billion) 
capital expansion plan.  The regulator has said that it will 
announce its decision on the MYPD2 on February 24.  Eskom has 
announced that it is exploring a number of financing options, over 
and above a SAG provision of R60 billion ($8.1 billion) as equity 
and R176 billion ($23.8 billion) in prospective loan guarantees, 
related to the proposed World Bank loan of up to $3.75 billion; the 
African Development Bank loan of 1.86 billion Euro dollars ($2.7 
billion); a private sale of up to 49 percent of the equity in the 
planned Kusile mega coal plant; and a number of small, equipment 
specific loans totaling about R19 billion ($2.6 billion) from export 
credit agencies (for key power station components such as boilers 
and turbines). 
 
-------------------------------------------- 
Cornerstones of South Africa's Energy Supply 
-------------------------------------------- 
 
¶8.  (SBU) Eskom's two new coal-fired power stations, Medupi and 
Kusile, will be among the biggest power stations in the world and 
are planned to generate a combined 8,700 MW, by far the biggest 
sources of South Africa's electricity supply by 2014.  The Medupi 
Power Station is under construction near Lephalale in Limpopo 
Province and is (ambitiously) planned to begin commercial operation 
in 2012.  Coal for the power station will be supplied from Exxaro's 
Grootegeluk mine.  The Medupi project includes Flue Gas 
Desulphurization (FGD) technology and the construction of a 
"supercritical" plant that enables a higher efficiency of natural 
resource use (coal and water) and improved environmental 
performance.  It will be the first power station in South Africa to 
deploy FGD aimed at abating emissions (Note: FGD is used to remove 
oxides of sulphur (SOX), e.g. sulphur dioxide (SO2), from the 
exhaust flue gases in power plants that burn coal or oil.  End 
Note.)  According to Eskom, Medupi will be the biggest dry-cooled 
QNote.)  According to Eskom, Medupi will be the biggest dry-cooled 
power station in the world.  Kusile is being constructed close to 
the existing Kendal Power Station in the Delmas Municipal area of 
the Mpumalanga Province and is planned to start commercial operation 
in 2013.  Kusile's coal will be supplied by Anglo Coal (New Largo 
and Zondagfontein collieries).  (Note:  The plants are more than 50 
km apart.  End Note.) 
 
----------------------------------- 
World Bank Loan for Medupi Unpacked 
----------------------------------- 
 
¶9.  (SBU) A loan for up to $3.75 billion under consideration by the 
World Bank has the stated objectives of "enabling Eskom to enhance 
energy supply security in an efficient and sustainable manner and 
supporting both economic growth objectives and South Africa's 
long-term carbon mitigation strategy."  The Eskom Investment Support 
Project (EISP) would have three components:  1) the Medupi 
coal-fired power station; 2) investments in renewable energy, the 
100 MW SERE wind farm located in Western Cape and the 100 MW 
Upington Concentrated Solar Power project; and 3) Low-carbon energy 
efficiency (through a technical assistance program for improving 
supply-side efficiencies and the Majuba road-to-rail coal 
transportation project).  In an "acceptability assessment," the 
World Bank has found acceptable institutional capacity (in Eskom 
decision making authorities and stakeholders) and environmental 
assessment and land valuation and compensation processes and 
procedures. 
 
---------------------- 
Concerns Raised by USG 
---------------------- 
 
¶10.  (SBU) In the context of the AFDB loan for Medupi, the USG had 
raised concerns about the adequacy of the environmental impact 
assessment (EIA), nontransparent procurements that had already taken 
place, and the adequacy of the efforts to mitigate the impact of 
significant CO2 and SO2 emissions, and emphasized the need for the 
EIA to assess the planned construction of a water transfer scheme, 
required for half of the power plant's water needs, and the required 
expansion of the Grootegeluk coal mine to supply the power plant. 
At that time, the USG also pointed out that without FGD technology 
Medupi would likely exceed World Bank standards for SOX emissions. 
In its statement, the USG also urged Eskom and the banks to "work 
together" to ensure that future procurement complies with the banks' 
rules and that Medupi's CO2 emissions are offset by emission 
reduction initiatives in other parts of South Africa's power sector. 
 
 
¶11.  (SBU) In November and again in January, econoffs raised USG 
concerns with local World Bank Director Ruth Kagia and her team. 
Officers mentioned press reports that Medupi procurements did not 
appear transparent and conveyed US Treasury concerns that Black 
Economic Empowerment equity requirements constitute potentially 
challenging local content strictures.  (Note:   The turbine/boiler 
supplier Hitachi Power is reportedly 20-percent owned by the ANC 
investment vehicle Chancellor House.) Kagia appeared appropriately 
focused on the need for the SAG and the Bank to address these 
concerns in preparing the loan documents and in discussions with the 
USG and other donor nations.  Kagia admitted that existing South 
African procurement and local content requirements pose challenges, 
but said the World Bank was working through the issues to come up 
with solutions.  In Kagia cited a number of key facts:  1) The SAG 
National Treasury is doing its own due diligence for the loan 
guarantees, which would be properly accounted for as contingent 
liabilities; 2) The SAG Long Term Mitigation Strategy was robust 
with broad SAG buy-in; 3) The World Bank loan would lock in a 
variety of clean energy provisions, including using FGD; 
implementing a Majubi light rail coal transport project, which would 
eliminate 600 trucks and 200,000 tons a year of carbon emissions; 
improving energy efficiency; and implementing the related Clean 
Technology Fund, with incentives and requirements to put in place 
concentrated solar, solar water heaters, and wind projects.  Kagia 
described Eskom's current top management as strong, despite the loss 
of the previous Chairman and CEO in a leadership tussle. 
 
------- 
Comment 
------- 
 
¶12.  (SBU) It has now been almost two years since South Africa's 
power crisis "wake-up call"; the global recession gave a welcome 
reprieve in demand.  The Integrated Resource Plan approved by the 
Cabinet provides scant details and begs many questions, including on 
private sector involvement in providing additional electricity 
capacity.  Presumably the more comprehensive second phased IRP 
Qcapacity.  Presumably the more comprehensive second phased IRP 
expected by mid-2010 will provide more detailed commitments. 
Mission will continue to work with the World Bank and SAG to see how 
well they are addressing USG concerns.  While South Africa will 
remain highly dependent on coal in the short and medium term, the 
World Bank proposal and the SAG IRP1 appear to provide key linkages 
and commitments to carbon emissions offsets and diversifying South 
Africa's energy mix over time.  Tariffs, water supply, and financing 
challenges will remain hurdles.  The SAG remains committed to 
expanding nuclear power and Westinghouse remains well positioned 
when the process and timing are clarified, expected also in early 
¶2010. 
 
Gips