Power is money

Can South Africa finally put paid to its power crisis?

My old school pal curses as the lights and fans go off in his spacious office above his newly-built petrol station and retail complex at Devon Place, on the outskirts of the famous Stellenbosch wine region of Cape Town, South Africa.

Outside, the pumps are still pumping petrol and the sale terminals are still clocking up the sales. For South African entrepreneurs like Ian Raeside, power cuts are a way of life. He promptly resumes his work, using his laptop's battery power.

The state electricity utility Eskom does not call them power cuts, preferring the more euphemistic term 'load shedding'. Mining, the bedrock of the South African economy contributing about 18 per cent of GDP and employing hundreds of thousands of people, suffered a whole raft of stoppages in January, as did other sectors of the economy throughout commerce and industry.

Debbie Thomas, head of Deloitte's South Africa Desk and UK Mining Leader, contends that the country's entrepreneurial nature means that some companies are going to make money from the present shortage. "Anybody who comes up with an innovative way to get into the grid is going to make money, but that obviously means that the price of electricity has to go up," she says.

"However, the government is obviously keen to keep prices down because they see that as being attractive to foreign investment, but commodity prices are at an all-time high resulting from the huge energy demand of China, India and the like. Mining companies in South Africa see the power shortage as a short-term issue, but while the power is not there, you are not going to send people underground and risk lives."

Maroga scapegoat

When miners were laid off, the public demanded that heads should roll, and despite the cuts being more of a power generation rather than a transmission problem, Eskom's managing director for transmission, Jacob Maroga took the flak - to the puzzlement of some South African electrical engineers. Jack Rowan, managing director of Alstom Transmission & Distribution (T&D) in South Africa is one of them. "It is generally believed that the transmission and distribution networks are in good shape, and credit for that must go to Jacob Maroga at Eskom," Jack Rowan says. "He did a good job."

The problem in South Africa is that of separating the grid from the generator. "Earlier this year, a delegation from the South African electricity supply industry visited Brazil to learn how they had coped with their power shortage," Richard Frantz, honorary treasurer of the IET SA Network Committee and managing director of consulting engineers Merz and McLellan South Africa, says.

"In Brazil, the transmission business is separate from generation and indeed system control is an independent operation even from the transmission business. In the same vein it was always acknowledged that the success of the restructuring in the UK was the separation of the Central Electricity Generating Board (CEGB) national transmission grid from the CEGB power station business.

"However," he adds, "it was only last year that the government and Eskom formally agreed that Independent Power Producers (IPP) would be permitted, but in return Eskom would be the sole purchaser of power transmitted over the grid, which effectively means Eskom can dictate the financial viability of IPPs by setting the power and energy purchase price."

But what are the utilities doing to encourage IPPs? "When IPPs were first asked to enter the market in 2000, they had to compete against Eskom with no fixed-term agreement," Andrew Etzinger, general manager for Demand Side Management at Eskom, says. "Now they can mitigate risks, and prices will not depend on market fluctuations but on negotiated upfront parameters.

"Eskom has three programmes for IPPs; a cogeneration programme, a ten-year power purchase programme for 5MW upwards before 2012 and a programme for large IPPs supplying 400MW or more. After 2012, but preferably before, Eskom would like to sign up 40-year single-buyer contracts. Each plant has to generate at least 2,100MW baseload capacity."

Asked when load shedding would end, he replies: "Because we only took decisions as a country to build new base load capacity in 2004, we are now five years late in our build programme. We had no option in the short-term other than to go for load shedding in November 2007 and January 2008, followed by pre-emptive load shedding in April."

Etzinger claims Eskom has now stopped routine load shedding. From July 2008, the utility will introduce a Power Conservation Programme, when consumers will move to a quota system requiring 10 per cent cuts in power consumption compared to 2006 consumption levels. He argues that this will allow Eskom to accommodate new growth on the system, to stabilise the system and to carry out essential maintenance on power plants. Large industrial customers consume 40 per cent of the country's power output, and they are said to have already achieved an average 10 per cent reduction.

Public anger

Eskom provoked public anger when it asked for a revised tariff increase of 53 per cent in real terms - a nominal rise of 60 per cent, after the regulator approved a 14.2 per cent increase for 2008/09. The utility was seeking a one-off hike to enable it to pay higher prices for both coal, which produces more than 90 per cent of its power, and to invest R343bn (rand - about £22.5bn) in new projects over the next five years.

"The fundamental issue is price, where we are not passing on the full cost of producing electricity to consumers," says Etzinger. "Our prices are set by the National Energy Regulator of South Africa (NERSA) and are currently below the cost of supply, which has also risen. We are looking for 53 per cent to help normalise the situation. The current tariff structure is not even recovering the cost of coal-fired plants."

Etzinger maintains that the artificially low price of electricity is also hampering Eskom's conservation efforts. "Most South Africans would agree that we have been inefficient as an economy due to traditionally low electricity prices and lack of awareness as to how to conserve energy - basic common sense measures such as switching off lights at night when leaving an office building for example," he continues.

"We do not have the regulations in place to ensure that we use efficient appliances, so legislation will be brought into effect shortly. Incandescent lighting will be phased out as we have seen in the rest of the world. The programme for subsidised energy-efficient motors was launched by Eskom in mid-2007, and continuing beyond the pilot phase."

From 2012, Eskom will see new base load power stations coming online. At the moment, it is returning power stations to service and building peaking plant, which is quicker to commission.

Asked if Demand Market Participation (DMP) for residential customers was working and when it would be phased out, Etzinger says: "We will continue to honour our existing DMP contracts. However, we need to resolve some issues before signing up new clients. The contracts we entered into were simply intended to compensate large industrial users like mines and smelters, and some municipalities, for cutting back on electricity consumption in order for us to avoid load shedding."

Current participants represent around 5 per cent of overall consumption and are able to respond dynamically to frequency incidents on the network and to signals from the Eskom's national control centre.

Notifications at this point are in minutes rather than hours, and are a necessary control mechanism to stabilise the grid. Supplemental DMP may be introduced with longer lead times to manage peak demand.

Photovoltaic energy

Harry Schwarz was former SA ambassador to Washington in the Government of National Unity before Nelson Mandela's election and remained in his post for some time after the changeover at the new government's request.

Also former MP for the Johannesburg constituency of Yeoville, Schwarz told E&T: "As a power utility owned by the government, what has been at issue for a long time is whether Eskom should privatise.

"At the moment, there is a minister in charge of Eskom, Alexander (Alec) Erwin of the Department for Public Enterprises, and therefore the responsibility for the current situation is not just with the Eskom board. However, he was not the minister at all material times.

"For example, in 1995 after I returned from Washington, the Public Enterprises minister then was Stella Sigau, who was also prominent under the previous regime. I advocated that if you are going to provide power to rural areas, then you needed to start with solar energy. Photovoltaic energy is still an expensive option but easy to provide, and we had offers of financial assistance from the US and even a visit to South Africa from the US Secretary for energy - but she just brushed it aside."

Schwarz asserts that the issue of alternative energy has not received the attention it should have, and nor has the question of competing generating facilities to Eskom. He adds: "You must also bear in mind that immediately after the change of regime, there was quite correctly a desire to provide power to people who had been without it. The power crisis was foreseen and is the government's responsibility because it should have increased capacity then.

"However, the Eskom board is also responsible, because it could have raised the issue more forcibly."

Schwarz believes the power outages that hit the mines were totally unnecessary and a gross error of judgement. Load shedding to consumers was also an error of judgement, because when their appliances come back on, it causes the destructive activity of power surges on the distribution network, particularly for facilities that have not been properly maintained.

"Poverty erodes freedom," he articulates. "Freedom by itself is one thing, but freedom to live in decent circumstances is another. Another cause for disquiet is increasing power exports, particularly to Zimbabwe, at the same time as Eskom cut power to domestic consumers. People are angry because there is not much sympathy for Mugabe outside of Mbeki and his cabinet, and we don't even know if Zimbabwe is paying for it."

Schwarz argues that Eskom has to raise capital through government-guaranteed bonds as the government has a good rating internationally for possible gilt issues. He concludes: "You cannot have the consumer paying the entire amount required for capital expenditure through unduly high tariffs."

Schwarz's observations proved to be prophetic because Eskom subsequently failed to get its 53 per cent price hike in June when NERSA only approved a 27.5 per cent increase, or 13.3 per cent in addition to the existing 14.2 per cent already awarded.

This prompted Erwin to warn that South Africa faced a severe power crisis by 2010 if Eskom could not raise funds in the capital markets. Erwin told parliamentary reporters: "If Eskom is unable to borrow funds in the capital markets and retain earnings to finance its build programme, we would have a very, very severe energy crisis in one to two years' time."

Maroga gave Eskom's reaction, citing the need to use tariff increases, borrowing and shareholder support to fund the R343bn, five-year capital programme.

In the meantime, the 2010 FIFA World Cup is looming. Deloittes' Debbie Thomas recalls: "Someone involved with the World Cup told me: 'Your first source of power is a generator, your second source is also a generator and then the backup is Eskom'. Using grid energy in the third instance is a FIFA regulation anywhere in the world."

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