South Africa is at a critical turning point. An uncertain environment for private investment, escalating electricity prices, and a lack of available power threaten South Africa’s position as an attractive investment destination for many of the country’s most important industries. Power has been placed at the forefront of the government’s agenda, but South Africa needs a collaborative effort to meet the country’s energy demands and diversify its generation portfolio in order to drive economic growth.
Until the late 1980s, South Africa enjoyed a surplus of some of the cheapest electricity in the world. However, in 2008, after almost no investment in the country’s power infrastructure for 20 years, and facing escalating electricity demand, South Africa found itself in the middle of an electricity crisis. (See “Whistling in the Dark: Inside South Africa’s Power Crisis” in the November 2008 issue of POWER.)
The result was persistent power cuts through programmed load-shedding in periods where short supply threatened the integrity of the national grid system, thereby impacting the country’s mainstay industries. The “National Response to South Africa’s Electricity Shortage” policy document, released in January 2008, issued a plan to open the national power infrastructure to private investment, aimed at achieving supply-demand stability by 2012. Thus far, progress on the national plan has lagged behind initial expectations, and access to electricity remains a major inhibiting factor for economic growth.
The electricity market is dominated by Eskom, South Africa’s vertically integrated public utility. Established in 1923, Eskom is responsible for 95% of the country’s generation. Today, Eskom is the largest power producer in Africa, providing more than 40% of the electricity used across the continent, and the 10th-largest utility in the world by generation capacity. Eskom’s fleet includes 27 operational power stations (including one nuclear plant) with a net maximum capacity of 41,194 MW (as of Mar. 31, 2011). The utility owns and operates the country’s national transmission system and provides electricity to about 45% of all end users in South Africa. The other 55% is resold by redistributors (including municipalities). South Africa’s electricity network consists of 395,419 kilometers (km, 245,702 miles) of power lines and cables (all voltages).
Since 2008, Eskom has been under significant pressure to boost generation capacity and provide a stable supply of power. “In 2008–2009, as a result of the recession, we saw a dip in demand, which allowed us to push forward maintenance on existing plants,” explained Thava Govender, divisional executive of generation for Eskom. “But in 2010–2011, the demand is reaching the levels that we saw before the recession, and now the system is running very tightly. Our total capacity is 42,000 MW, and we have a 15% reserve margin and an operating reserve margin between 5% and 10%, which is not sufficient. If you take out gas generation, there are days when we have no operating margin, depending what is on maintenance, what is on forced [outage], and the demand—that is how tight the system runs.
 |
| Thava Govender, Divisional Executive, Generation, Eskom |
“Since 2008 we have added 1,000 MW of diesel-fired gas turbines to the overall capacity, and they are exceptionally expensive to run. For instance, the burning costs for the most expensive coal fleet are 180 rand (R) to R220 [$22.50 to $27.50] per MWh, compared to R2,000 per MWh for gas turbines.
“Our biggest challenge at the moment is to meet our demand and continue our maintenance schedule. Our fleet is middle-aged, which means they need extensive maintenance (shutting down for 60 to 120 days), and ideally, we would like 10% planned maintenance of our fleet per year, but we are not in a position to do this, and last year we succeeded in only 8%. We have a plan to shut down some of our units over the next five years to make them compliant with environmental requirements. We also need to reduce forced outages, but with a middle-aged fleet, this is a challenge. On average we have 3,600 MW of unplanned maintenance.”
The completion of the Kusile coal-fired power station is expected late 2017/early 2018 and will constitute the last stage of Eskom’s committed capacity expansion program. There has been no approval of or commitment to any new generation after that.
Eskom must raise capital to pursue its committed capacity expansion program and improve and refurbish its current operations. Capital expenditure is expected to grow to more than a trillion rand by 2026 and to be funded from operating cash flows, shareholder loans, and debt financing (raised locally and internationally), as well as the proposed R20 billion government equity recapitalization over the next three years. Eskom also successfully secured a $3.75 billion loan from the World Bank, the biggest loan that the bank has ever given to a South African company. Clauses attached to the loan for Eskom’s new-build program insist on new generation from cleaner energy sources.
A 20-Year Plan
Long-term underinvestment in the South African electricity industry for new generation capacity, further compounded by an aging fleet and the need for upgrades in the transmission and distribution sector, have resulted in significant project bottlenecks. However, the government’s Integrated Resource Plan 2010 (IRP 2010) and subsequent Policy-Adjusted IRP set out a 20-year electricity plan (2010–2030) for South Africa to increase capacity and change the nation’s energy mix and competitive landscape within the context of global warming and globalization. As reflected in the IRP 2010, the power supply crisis accelerated the need to diversify Eskom’s energy mix and move toward more diverse energy sources such as nuclear power, natural gas, and various forms of renewable energy.
The IRP 2010 also outlines the efficient use of existing resources, such as coal, while ensuring continued investment in clean coal technology, intensifying energy efficiency measures, and aligning the country’s power strategy with objectives set in the long-term mitigation scenarios and climate change commitments made at Copenhagen.
These goals, of course, add to the complexity of South Africa’s power supply mix. With 85% of its generation capacity from coal, South Africa is one of the top global polluters and the14th highest emitter of greenhouse gases. At the moment, coal is supplemented by a few small hydro plants (1.5%), pumped storage (3.5%), gas turbines (5.8%), one nuclear plant (4.4%) in the Western Cape, and a few very small wind turbines. In light of South Africa’s commitment to reduce emissions, Eskom has said it will reduce coal’s current share of the country’s primary energy mix to 70% by 2025 by obtaining 42% of new generating capacity from renewable energy, including concentrating solar power (CSP) and photovoltaic (PV) power and wind, plus an additional 23% from nuclear.
Although this document is the first of its kind, as pointed out by Thiru Pillay, director at Deloitte, there are some elements that require clarification: “The first gap is a country-level holistic strategy, similar to the 1998 white paper, that talks to the full value chain, including liquid fuel, primary energy, electricity, energy source mix, as well as the way that we deal with the market structure all the way down to how we deal with distribution. Secondly, we need stronger leadership about how we manage the role of private capital in the sector. We have made a lot of progress over the past two years, but we have been slower than we should be in the sense that we need the power on the ground. This is not a private versus state intervention, but what is the best solution for the country to ensure the continuous investment of capital and infrastructure that the country needs.”
Not So Cheap
South Africa led the world in low electricity prices for many years, providing investors with a very low energy tariff that was only in 2011 surpassed by Canada as the cheapest electricity in the world. At $0.0855/kWh, South African electricity is now 7% more expensive than Canadian electricity on average, having risen by 26% in 2011, largely driven by the need for financing extra capacity.
Thembani Bukula, full-time regulator for the National Energy Regulator of South Africa (NERSA), says that the impact on the country’s industries was taken into account and that this increase won’t make South Africa uncompetitive: “From the perspective of the Energy Intensive User Group, the good years have passed and the years that we are going to have are years where the price of the electricity is going to be very much related to the cost of producing that electricity.... It is a known view that in the past it was not really related. When you look at the whole infrastructure, we had a generation fleet that was depleted and depreciated over a very short space of time. It was producing at levels that are not related to the cost, and when you look at the increases that are projected, these are increases that will bring the price of electricity to the mid-point of the price of electricity in the different countries worldwide. We will still be competitive, but the gap is not going to be the 40% that it was. It will probably be 20%, but we have other advantages, such as the reliability and security of our resources.”
To align with the country’s goals to reduce carbon emissions, the South African government has introduced a 2¢/kWh environmental levy, which rose to 2.5¢/kWh, to be applied to electricity generated from nonrenewable energy sources. In addition, the South African National Treasury issued a discussion paper in December 2010 to look at the issue of a carbon tax. “The proposed Carbon Tax is still be finalised.... but could potentially make South Africa uncompetitive and be detrimental to the economy,” believes Michael Meeser, Investec Capital Markets head of project and infrastructure finance. “The carbon tax is nice to have, but there are more pressing things to be done at this time.”
South Africa’s aspiration is to achieve a peak in national greenhouse gas emissions between 2020 and 2025, followed by a plateau in emissions and, ultimately, a decline in absolute emissions, conditional upon international financial support, technology transfer, and a global agreement on a climate change regime.
To upgrade and expand the country’s electricity infrastructure, in 2005, Eskom decided to embark on an aggressive new-build program. An estimated R343 billion will be spent to fund a new generation of power stations, including two of the largest coal-fired power plants ever built, Medupi (Figure 1) and Kusile, as well as Ingula pumped storage. Eskom expects to build 17.1 GW of new generation capacity by March 2018, followed by a new nuclear plant to come online in 2023. But major funding decisions, technology issues, and localization concerns need to be resolved very soon to ensure achieving this goal. Ultimately, Eskom plans to double its total generating capacity to 80,000 MW over the next two decades. In addition to all existing and planned power plants (including 10 GW committed coal), the plan includes new generation from the following sources: 9.6 GW of nuclear, 6.3 GW of coal, 17.8 GW of renewables, and 8.9 GW of other generation sources.
 |
| 1. Much-needed baseload power. Medupi Power Station is shown here under construction. The six-unit supercritical plant (Eskom’s first) will have a total installed capacity of 4,788 MW. The units are expected to be commissioned between 2012 and 2015. Medupi means “rain that soaks parched lands, giving economic relief.” Courtesy: Eskom |
To fund the capital costs and rising operating costs, Eskom applied to NERSA for a 35% increase in electricity tariffs. The regulator awarded Eskom a second multi-year price determination plan (MYPD2) of electricity price increases of approximately 25% year on year from 2010 to 2013, which were designed to cover expansion and operation costs and provide a reasonable rate of return.
Email
Comments
Print
Reuse
