Cablegate: Eskom Faces Challenges - Thin Margin and More

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E.O. 12958: N/A
TAGS: ENRG EPET EMIN EINV EIND ETRD SF
SUBJECT: Eskom Faces Challenges - Thin Margin and More

Ref: A) Pretoria 1751 and previous
B) Maputo 1018
C) Gaborone 818

Sensitive But Unclassified - Not for Internet

1. (SBU) SUMMARY: A meeting with new Eskom Chairman Bobby Godsell
was a good opportunity to assess the state-of-play in South Africa's
power crisis. Godsell's new position is emblematic of Eskom's
serious attempts to address a confluence of management gaps that led
to last year's load-shedding. Eskom's reserve margin remains tight,
bringing on new supply is long-term and difficult, and Eskom
struggles to obtain greater demand reduction. Higher Southern
Hemisphere summer demand and planned maintenance for plants being
run at high loads places Eskom in a vulnerable position. Eskom will
likely only use load-shedding as a last resort, but consumers may be
faced with outages, depending on the success of demand reduction,
implementation of new management practices, and the ability to
finance new capacity in the midst of the global financial crisis.
END SUMMARY.

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Need for Expansion and Comprehensive Planning
---------------------------------------------

2. (SBU) State power utility Eskom's new Chairman Bobby Godsell
(protect) told a visiting International Trade Commission delegation
and Minerals/Energy Specialist in an October 15 meeting that he is
focused on implementing Eskom's ambitious expansion program. He
admitted that Eskom will not be able to immediately increase the
thin five percent reserve margin it currently faces, rendering South
Africa's power supply precarious and vulnerable. Godsell said Eskom
aimed to build 40,000 MW of new capacity over the next 20-25 years,
doubling existing capacity, to meet growth and restore the reserve
margin to safer levels. He averred that slower growth in South
Africa could reduce this need or spread it out over a longer period.
On Eskom's current drawing board are three base-load, coal-fired
power plants, two peaking, open-cycle, gas-fired plants, and two
pump/storage hydro projects. Godsell said the SAG needed to
establish a comprehensive energy policy based on a national energy
debate on sources and uses of energy, instead of the current
confusion with three separate ad hoc energy plans. He noted that
Eskom reports to various, overlapping layers of government. Recent
press reports have high-lighted Eskom's challenge in raising funds
overseas in the current global credit turmoil.

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Getting the Price Right is Hard to Do
-------------------------------------

3. (SBU) Godsell cited the following elements for Eskom's
short-term plan to address shortages until new base-load plants come
on line 2013-14:

-- Aim to price electricity more realistically (South Africa has
enjoyed the cheapest electricity in the world at 1-2 U.S. cents per
kilowatt hour);

-- Reduce consumption by ten percent across the board;

-- Bring three moth-balled power plants back on line;

-- Support Treasury's efforts to keep inflation under control, given
the SAG's commitment to keep electricity price rises for the poor no
Qthe SAG's commitment to keep electricity price rises for the poor no
more than inflation;

-- Gain larger price increases for other user classes: up to twice
inflation for higher-income users and up to three times inflation
for industrial users.

Godsell noted that Eskom had gained a 60 percent nominal increase in
electricity prices this year through two separate applications to
the National Energy Regulator (NERSA). Godsell stated that, at a
minimum, Eskom must recoup production costs, now comprising:

-- Average recovered tariff: 0.25 Rand/kilowatt-hour

PRETORIA 00002403 002 OF 003

-- Cost of production: 0.5 Rand/kwh

-- Cost of production and distribution: 0.75 Rand/kwh

(In other words, Eskom is losing up to 0.50 Rand/kwh, although
approved price increases will whittle away at this loss per unit
produced/sold.)

Getting the price to consumers right remains an immense political
and regulatory challenge.

4. (SBU) Eskom has increased coal stockpiles and has broadly and
successfully imposed a 10 percent reduction on large industrial
users. Deeper mines have negotiated this reduction to 5 percent.
Eskom continues to "jaw-bone" other consumers to reduce consumption,
holding load-shedding as a threat. Eskom is working with the
regulator on establishing financial penalties for consumers and
municipalities that use more than their quota, but has faced
criticism that it is employing an ineffective "one-size-fits-all"
approach. Eskom is refining its demand side management program and
incentives. New Minister for Public Enterprises Brigitte Mabandla
said South Africa may face fresh power cuts early in 2009 because
"voluntary energy savings have fallen woefully below the required 10
percent."

--------------------------------------------- ----
Nuclear Challenge Mounts - Need to Secure Funding
--------------------------------------------- ----

5. (SBU) Godsell noted that SAG nuclear policy aimed to increase
nuclear from the current 2,000 MW to 20,000 MW, about one-half of
the planned new build. Godsell said the contract for new nuclear
build - for which Westinghouse and Areva of France are competing -
has not been awarded yet because there is no firm funding in place.
Godsell said that the Eskom Board has requested approval for the SAG
to guarantee the debt incurred for building the first nuclear plant.
The SAG still has not made a decision, but Godsell hopes to proceed
with one nuclear plant by early next year. (NOTE: Eskom has
publicly insisted that a decision will be made this year, but
Westinghouse anticipates a high probability of delay to early next
year or after the April/May elections (Septel). End Note.) Eskom
Chairman Jacob Maroga told investors in New York that financing for
Eskom's capital expansion, including nuclear, was still up in the
air and may require additional time. He noted that Eskom might
start asking its suppliers to assist in co-finance of its purchases
of equipment. Minister Mabandla was quoted in the press saying "no
final decision on nuclear had been made and the real challenge that
we have to overcome is the cost of the nuclear-build relative to the
cost of a coal-build." An energy analyst, quoted in the
investigative weekly Mail & Guardian, said "as far as I know the
number one reason it keeps being deferred is money. A further
factor was the new guys taking over from the old and not liking the
decisions of the old."

------------------------
Commitment to Renewables
------------------------

6. (SBU) Godsell noted that the SAG aimed to achieve the goal of
renewables comprising ten percent of new generation. He supported
this goal, but stated that Eskom was best suited to deliver large
Qthis goal, but stated that Eskom was best suited to deliver large
scale generation, transmission, and distribution. Eskom is very
good at building and maintaining large coal-fired plants; even
nuclear would be outside of its main experience. Eskom was not the
body to focus on renewables, he said. Godsell noted that
Mozambique's Cahora Bassa hydroelectric facility had significant
capacity for expansion that could help supply the region, but
transmission was an issue (Reftel B).

7. (SBU) Godsell was frustrated with the SAG and Eskom's inability
to establish Independent Power Producers (IPPs) in South Africa. He
questioned whether a rational investor would enter the current South
African market without a clear, transparent energy policy and with
the current price and cost structure. Godsell said the SAG's stated
goal of 30 percent of generation coming from IPPs was not realistic.

PRETORIA 00002403 003 OF 003

He pointed at the Mmamabula coal-fired project in Botswana as an
IPP with real potential, but noted that it was experiencing
significant problems, and wondered whether it would actually be
built (Reftel C). Godsell stressed that the government must play a
stronger role in fighting corruption and promoting good governance
and cooperation with the private sector, citing partnerships with
the likes of Anglo American, BHP-Billiton, and Rio Tinto.
Government and private stakeholders must cooperate to put together
complex infrastructure deals.

8. (SBU) COMMENT: Former Anglo Gold Ashanti CEO Bobby Godsell's
posting as Eskom's Chairman of the Board has been broadly applauded.
He brings a useful mix of experience, pragmatism, charisma, and
struggle credentials to Eskom's challenges. Eskom's challenging
five-year expansion budget has ballooned from Rand 150 billion to
Rand 343 billion (with press reports predicting as high as Rand
400-500 billion - about $50 billion) because of the increased
construction costs for the same targeted plant due to production
queues and component shortages, increased financing costs, and a
weaker rand. Eskom may see its capital investment program pushed
further off into the future, as the SAG and Eskom management
reassess whether they can afford nuclear as a significant part of
the mix. Analysts have noted that the cost of nuclear build is
significantly higher than that for coal. The mission continues to
support Westinghouse as it works to advance its bid for the first
3000 MW tranche of new nuclear build, even if the full fleet timing
and prospects are less clear.

LALIME

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