Cablegate: U.S. Firm Aes Charges Into South Africa's Electric Power

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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2118
INFO RHEBAAA/DEPT OF ENERGY WASHINGTON DC
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E.O. 12958: N/A
TAGS: ENRG EINV EPET SF
SUBJECT: U.S. FIRM AES CHARGES INTO SOUTH AFRICA'S ELECTRIC POWER
SECTOR

PRETORIA 00003490 001.2 OF 002

This cable was a collaboration between Congen Johannesburg and
Embassy Pretoria.

1. Summary. An AES Corporation (AES)-led consortium has been
selected as the preferred bidder by the Department of Minerals and
Energy (DME) for two open-cycle gas turbine peaking power stations
to be constructed in South Africa. The AES-led consortium, which
won the bid over a Suez-led consortium, will finance, design, build,
own and operate a 750 MW power station in Durban and a 330 MW plant
in Port Elizabeth, at the Coega industrial development zone. AES
will be one of the first firms to enter South Africa as an
Independent Power Producer (IPP) and will sell its production to
South Africa's state-owned electric power company, Eskom. Over $600
million will be spent on construction of the plants. End Summary

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Background - Need to Build Power Plants
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2. The South African Government has embarked on a program to
greatly increase its energy production capacity and upgrade its
aging power infrastructure to meet the demand created by its strong
economic growth and activities related to the 2010 FIFA World Cup in
South Africa. It is estimated that up to 2,000 MW will need to be
built each year for the next twenty years in order to match demand.
Government policy calls for 30 percent of the country's power to
come from private power producers. This was the first IPP project
to be bid out by the DME. The project will set the bar for similar
efforts to introduce IPPs in neighboring countries, including
Namibia, Botswana, and Mozambique. Comment: Half of the additional
power requirements for the next 20 years, or up to 20,000 MW, is to
be supplied by nuclear power. Westinghouse of the U.S. is one of
two companies, along with Areva of France, that have been selected
to compete for the next nuclear power contract. The winning company
for that contract is expected to be chosen in early 2008. End
Comment.

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Market Opening Efforts by U.S. Mission in South Africa
--------------------------------------------- ---------

3. The South African state-owned electric power company, Eskom has
dominated the electric power sector in South Africa and neighboring
countries and has long been closed to U.S. exporters of
energy-related services and products. While there are no regulatory
barriers denying U.S. firms access to this largest power producer in
sub-Saharan Africa, long standing preferences for European
suppliers, developed during the United States' apartheid-era
divestment from the country, have persisted.

4. The U.S. Embassy in South Africa, led by the U.S. Commercial
Service South Africa (CSSA) and the U.S. Trade and Development
Agency (USTDA), developed a strategy to increase U.S. participation
in the power sector in South Africa. To promote U.S. firms with
appropriate technologies, goods, and services, CSSA and USTDA
jointly organized programs to introduce U.S. energy companies to
South African decision-makers. These programs included two
orientation visits (OVs) funded and organized by USTDA with
delegations led by CSSA. The first OV was primarily composed of
Eskom officials while the second included DME officials and
representatives from throughout southern Africa. USTDA and CSSA
also organized in partnership with Eskom a U.S.-South Africa Power
Industry Supplier Conference, held in Johannesburg in October 2006.
These efforts have helped breach the procurement barriers and
initiate Eskom's acceptance of and preference for technologies from
U.S. suppliers. These activities helped companies such as AES to
demonstrate their capabilities as well as their interest and plans
to enter the South African market. Several other companies,
including Black and Veatch and Honeywell have directly attributed
the award of recent contracts with Eskom to these USTDA and CSSA
activities.

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U.S. Company Enters the Market
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5. Representatives from AES directly and indirectly benefited from

PRETORIA 00003490 002.2 OF 002

these programs. AES participated as a gold sponsor for the
U.S.-South Africa Power Industry Supplier Conference, where AES
representatives had access to the senior management of Eskom and key
officials within the Department of Public Enterprises, which
oversees Eskom, and DME. Two senior DME officials responsible for
the IPP bid also participated in a site visit to an AES facility in
the U.S. during the November 2007 orientation visit. Additionally,
in response to a request from AES and its Broad-Based Black Economic
Empowerment (BBBEE) partners, USTDA funded a $550,000 technical
assistance grant in May 2006 with Tiso Energy, one of AES's BBBEE
partners, to provide support and build capacity within the BBBEE
partner companies throughout the drawn-out bid period during which
all but two of the original short-listed companies withdrew from the
competition.

6. AES partnered with Tiso Energy, Mbane Power and Kurisani Youth
Development Trust on its bid, as part of its Broad-Based Black
Economic Empowerment (BBBEE) program strategy. To ensure the bona
fides of AES' potential BBBEE partners, CSSA conducted due diligence
research and provided reports to AES that became the basis of these
partnerships. The resulting consortium successfully competed
against the French Suez-Inkanyezi consortium for this project, which
will allow AES to build, own and operate a 750 megawatt power
station in Durban and a 330 megawatt plant in Port Elizabeth at the
Coega Industrial Development Zone.

7. COMMENT: This $600 million project is both a great win for AES
and representative of the significant opportunities available to
U.S. energy firms in South Africa and the southern Africa region.
The growing success of U.S. firms in South Africa's electric power
sector is directly related to the sustained and combined efforts of
the multiple trade agencies of the U.S. Mission in South Africa.
BOST

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