The generation and distribution of electricity are vital to the sustainable growth and development in South Africa. Sharon Davis finds out whether Eskom’s plans are sufficient to meet the country’s growing electricity needs and carbon footprint goals.

The harsh reality of power outages and scheduled load-shedding caught most South Africans by surprise late in 2007. It hit production, hurt the economy well into the first half of 2008, and sent frustration levels skyrocketing.

Already unpopular for the poor management that created the crisis, Eskom’s reaction to the power shortage is to invest heavily in more coal-fired power plants and to increase the cost of electricity to pay for the expansion. The proposed 35% increase for the next three years, which was reduced by the industry regulator to 24.8% this year and 25.8% and 25.9% in 2011 and 2012, was not well received either.

The decision to invest in coal plants instead of cleaner renewable options was so unpopular that several parties tried unsuccessfully to lobby the World Bank not to give Eskom a ZAR 26bn loan.

The Democratic Alliance also opposed the loan from the World Bank but a different reason. It had to do with a conflict of interests. Eskom, as a government utility provider, had awarded a lucrative contract to Hitachi Power Africa to supply boilers for its two new coal-fired power stations. But 25% of Hitachi is owned by Chancellor House, the investment arm of the ANC, effectively resulting in government benefitting from the awarding of a government contract.

Why do we have a power crisis?

On a simple level, the power crisis was, and is, the result of a lack of investment in energy infrastructure over a reasonably extensive period. But despite the knee-jerk reaction to blame state power utility, Eskom, which provides 95% of our power, the problem is more complicated than ‘just’ a management issue.

Investment stalled, at least in part, because South Africa’s government has not taken a firm stance on the privatisation of Eskom. Budget requests for infrastructure investment were turned down in the 1990s because of this, and the ANC-SACP-COSATU alliance remains divided on this issue today.

 By 2007 Eskom’s capacity of a little over 40 GW saw the utility’s operating reserve margin fall below recommended levels and demand exceeded supply when Eskom needed to take generating units off the grid for maintenance, repairs or refuelling. 

The result was rolling outages on a rotating schedule, which negatively impacted on GDP growth and investor confidence.

Eskom was criticised for supplying low-cost electricity to individual businesses and for continuing to export power to neighbouring countries during the height of the power crisis, and the fact that it the utility has managed to suspend load shedding from May 2008, after increasing coal stockpiles and improving plant performance, suggests that the problem was partly capacity constraints exacerbated by inefficient management.

What is the proposed solution?

Eskom’s solution is to throw money at the problem. The utility plans a massive ZAR 3tn investment in infrastructure by 2025 to scale-up supply to meet South Africa’s growing power consumption. This will double Eskom’s current production capacity to 80GW, says Brian Dames, Eskom’s Chief Officer: Generation Business.

The problem, according to Dames, is that there is a long lead-time of between seven and ten years between starting construction on a power plant and commissioning it. In addition, costs escalate during this period, and construction needs to be financed until the plant begins to generate an income.

Eskom started its new build programme in 2005 and has already commissioned an additional 4,453.5MW, with an additional capacity of 16,304MW planned to come on the grid by 2017.

The Ankerlig and Gourikwa open cycle gas turbine stations were commissioned in October 2007, and both have subsequently been expanded.

Construction on two new coal-fired plants, Medupi power station in Limpopo Province and Kusile power stating in Mpumalanga, began in 2007 and 2008 respectively and will add some power to the national grid from 2012 and 2014.

Three coal-fired power stations - Camden, Komati and Grootvlei – are being returned to service and Ingula, a pumped-storage scheme in KwaZulu-Natal is expected to be operational by 2013.

Given the long construction periods, escalations in financing costs on these loans is, in fact, the biggest reason for an increase in our project costs, according to Eskom says Dames.

Eskom built the Majuba coal-fired power station near Volksrust for ZAR 11bn in the 80s and early 90s. Medupi power station is now costing almost ten times that at around ZAR 100bn he explains.

Also, there are often changes in project scope, to cater for design improvements and new technology, which Eskom has done by adding the fluidised gas desulphurisation plant to the new Kusile station.

Eskom’s approved capacity expansion budget is ZAR 385bn to 2013 but rating agency Standard and Poor’s forecasts a funding gap, despite the World Bank loans and increased tariffs, to emerge in the 2010/2011 and 2011/2012 financial years. 

In addition, the power supply will remain tenuous until 2013, according to Eskom’s Managing Director for systems operations and planning, Kannan Lakneeharan.

Is this the best course of action?

Since global warming and clean energy is high on the global agenda, Eskom has come under fire for throwing money at carbon-heavy solutions, and for the fact that it has been slow in introducing systems that allow it to purchase energy from third parties producing renewable energy.

Dames says Eskom is committed to helping SA reduce our carbon footprint, “but environmental imperatives have to be balanced against economic constraints, which calls for a more pragmatic approach.” But groups like Climate Justice Now and the Federation for a Sustainable Environment have not been convinced by this argument.

According to Saliem Fakir of the World Wildlife Fund, private finance from the likes of the World Bank would be better directed towards renewable energy and timely provisions for renewable energy feed-in tariffs.

The fact that the increase in electricity costs was approved and came into effect in April before the finalisation of the Integrated Resource Plan (IRP) for power has also been criticised, and both Eskom and the Department of Energy have declined to comment on how Eskom’s capital expenditure shortfall will be financed until the IRP is finalised in August or September.

This suggests hasty solutions to a pressing problem, but however the finance gap is breached we still face the prospect of a power shortage in 2011 and 2012. 

As part of the IPR discussions Eskom in negotiating a power usage cut of between 7% and 10% with mining houses and other large energy users. Whether this will be enough to power the economy and keeps the lights on elsewhere remains to be seen.

This article by Sharon Davis was published in 2010 in the Wits Business School Journal.