South Africa: Time is ripe for independent power

Africa’s biggest producer of electricity is at a crossroads. On-off plans for nuclear power seem to be ‘on’ again and the regulatory red tape that has thwarted independent power producers could be cut, says Chris Webb.

Chris Webb

South Africa supplies two-thirds of the continent’s electricity and until recently, was one of the four cheapest electricity producers in the world. But lack of investment in the sector in recent years has left state-owned enterprise Eskom struggling to meet demand.

Kendal coal power station could face the real threat of coal shortages if new mines are not commissioned
Source: Eskom
Click here to enlarge image

Widespread rolling blackouts and outages continue to be a major problem. Eskom is responding with a major programme of investment but it won’t be soon enough for the 2010 football World Cup, which is expected to attract 500 000 tourists. Almost 90 per cent of South Africa’s electricity is generated by coal fired power stations.

Koeberg, a large 1800 MW nuclear station near Cape Town, provides about five per cent of capacity, while a further five per cent is provided by hydroelectric and pumped storage schemes. Few, if any, new economic hydro sites remain which could be developed to deliver significant amounts of power.

Dominating the field

Generation is dominated by Eskom, which supplies some 95 per cent of South Africa’s electricity, and also owns and operates the national electricity grid. In global terms, the utility is among the top seven in generating capacity, among the top nine in terms of sales, and has one of the world’s biggest dry-cooled power stations à‚— the Matimba facility.

So vast that it was recently described by a senior banker as the ‘flywheel of SA’s economy,’ the company nonetheless faces challenges on several fronts. Not least is the threat of mounting industrial action, started by construction workers which could paralyse its modernization plans. The unrest stems from high inflation, growing socioeconomic inequality and huge salary gaps between management and workers.

There are concerns that industrial action could spread to projects in the power sector, such as Eskom’s new coal fired power stations at Medupi and Kusile. Construction began on the Kusile power station last August, with completion scheduled for 2017. The new baseload power station, which will consist of six generating units producing a total of approximately 4.8 GW, is situated close to the existing Kendal power station near the town of Witbank in Mpumalanga Province. The first generating unit is scheduled for completion by 2013, followed by the completion of an additional unit at eight month intervals.

Last year’s lack of sufficient supply capacity caught Eskom on the back foot. New capacity had been brought into use à‚— notably two new peaking power stations in the Western Cape province in 2007, providing an additional 1050 MW of electricity during times of high demand – but they were not enough to prevent a crisis hitherto unseen in the sector.

Now officials are worried that South Africa, which is hosting the 2010 football World Cup, may not have enough electricity to go round. To prevent such a disaster, members of the Southern African Power Pool (SAPP) have clubbed together to provide support from Mozambique, Angola, Botswana, Malawi, Namibia, the Democratic Republic of Congo, Swaziland, Tanzania, Zambia and Zimbabwe.

Eskom is itself at the centre of a row over increased prices. After much pressure from the company the National Energy Regulator of South Africa (NERSA) agreed to grant it a huge tariff increase of 31.3 per cent, effective from the beginning of July. Eskom has attempted to assuage a consumer backlash, telling them that it was inevitable and they must accept that the days of cheap electricity are over.

Eskom says the rise is needed to revitalise the country’s capacity-stressed electricity market, and has pledged to spend R385 billion ($47 billion) to expand its generation and transmission capacity over the next five years.

Specifically, the company is shoring up cash to fund the construction of coal power plants to double capacity, from 40 GW to 80 GW. While this is bad news for the pockets of consumers in the short term, it is very good news for companies such as Siemens, which is continuing to budget for growth in orders and sales in South Africa and Southern Africa this year despite the descent of Africa’s biggest economy into its first recession in 17 years. The company has recently completed a major contract to assist Eskom in doubling its open cycle gas turbine facilities in the Western Cape, raising capacity to over 2000 MW.

Concerns over coal and costs

Ambitious though they are, Eskom’s plans are not welcomed by everyone. Critics believe there is no need to raise capital at all, as there is no shortage of private investors willing to invest billions in green energy if the necessary incentives and take-off agreements are in place. They believe Eskom has calculated its need for a hike in tariffs based solely on the cost of new coal power plants without taking the power produced by independent power producers (IPPs) into account. They claim that if Eskom bought from IPPs and added more renewable sources, it would not have to load its capital spending.

Greater exploitation of recently discovered domestic offshore and onshore gas resources are needed
Source: Eskom
Click here to enlarge image

“Eskom needs to wake up and settle outstanding issues with IPPs so that South Africa won’t experience electricity shortages again when the economy recovers,” Geoffrey Qhena, CEO of the Industrial Development Corporation, commented recently. IPPs planning large power generation projects are struggling to finalize purchase agreements with the power utility. Under current legislation all power generated by IPPs has to be sold to Eskom. “If we want South Africa to benefit from growth when the economy recovers, we have to be ready,” said Qhena.

Another area of concern is the very real threat of a shortage of coal. South Africa currently produces about 250 million tonnes of coal a year. In the next ten years, it is estimated that about 48 million tonnes a year of this capacity will be lost as mines reach the end of their productive lives and close. Eskom’s own specialist coal consultant Johan Dempers has been quoted as saying that South Africa will need to commission as many as 40 new coal mines at a cost of some R110 billion in order to meet the country’s electricity needs by 2020.

The more immediate concern for bosses at Eskom is growing hostility in the wake of the huge rise in electricity prices, coming as it does at a time when township businesses and their customers are already struggling to pay their bills. In early July, the National Union of Mineworkers threatened strike action at Eskom after the utility failed to meet its demand for a 15 per cent wage increase.

The increase is seen as particularly galling after Eskom’s inability to generate enough power in the first half of 2008 brought many businesses to their knees. And the electricity outages are not over yet, but instead causing ongoing industrial as well as domestic, agony. Manufacturing and mining accounts for more than 50 per cent of local electricity consumption.

A call for diversification

Many industry observers want to see diversification in the energy and electricity sector. The Cape Chamber of Commerce says the recent increase in the price of electricity makes it imperative that South Africa develops its offshore and onshore gas resources as rapidly as possible. It is also urging Eskom to consider producing cheaper power by using natural gas.

According to chamber president Jeremy Wiley, a major cost for Eskom has been the increased use of imported fuel to generate peaking power in the open-cycle gas turbines at Atlantis and Mossel Bay. Due to recent problems at the Koeberg nuclear power station, the gas turbines, which were planned to run for up to two hours a day, were now running for extended periods at great cost. Wiley said the cost of fuel to run the turbines could be as high as four times the present unit cost of electricity to commercial users in Cape Town, and about 12 times the cost of power from large coal fired power stations.

Wiley wants to see the exploitation of other sources, such as methane gas found in coalfields and the natural gas supply discovered off the West Coast. Currently the Mossel Bay station runs on kerosene supplied by PetroSA, while the Atlantis station receives its diesel from a Cape Town supplier. “Using our own gas reserves would bring down the cost of producing electricity at periods of peak demand, which would give some relief from the kind of tariffs Eskom is now charging,” said Wiley.

The power of the private sector

South Africa’s Department of Minerals and Energy (DME) has confirmed it is in negotiations with a new private electricity producer.

Officials are not giving away details about the company but they say they’ll be able to make an announcement soon on their preferred bidder. DME hinted that the new player would provide around 1000-2000 MW capacity. DME spokesman Bheki Khumalo said the new tariff represented a double-edged sword, saying he was confident that higher electricity prices would help the country attract more world class private electricity producers.

And here the issue of IPPs crops up again: “We are quite pleased that this particular event is nowabout to happen because, quite clearly, Eskom does need a lot of help from private providers. The cabinet had approved that we must set aside 30 per cent of the country’s generating capacity, particularly for involvement by outside parties in the form of IPPs.”

However, despite Eskom being unable to meet demand in the long-term, there has been little evidence of any urgency to encourage, let alone introduce, additional players. While Eskom is the only buyer of power from IPPs, it has made little progress negotiating Power Purchase Agreements (PPAs) with them. Issues around price determination and the management of relations between IPPs and Eskom have also been sluggish to materialize.

Eskom has not signed a PPA since 1976 when the Cahora Bassa Dam project came on stream. And there are now clear signs that frustration is increasing among prospective IPPs because of regulatory red tape swamping their attempts to register and get take-off agreements. These steps are essential to secure investment. Most want to put up wind farms and concentrated solar power plants.

It was only last October that Eskom pre-qualified 27 national and international developers as part of its bid to secure additional power from private companies under the IPP programme.

Ultimately, it is planned that power plants developed under this programme will be located at various sites, and development will be on a build-own-operate (BOO) basis with contracts estimated to last for 25 years.

Nuclear POWER and climate debate

South Africa, despite being a developing nation, has not escaped the Climate Change debate. Although it has signed the Kyoto Protocol it has not committed itself to reducing its carbon emissions, as it believes the problem has been caused by developed countries, which should, therefore, shoulder the responsibility for slowing down global warming.

Koeberg, a 1800 MW nuclear plant near Cape Town, currently provides around five per cent of the country’s electricity
Source: Eskom
Click here to enlarge image

Others have a different view. Speaking at a climate change summit in Durban in July, Dr Zoe Lees, an associate director at KPMG, said that South Africa produced 495 million tonnes of carbon dioxide in 2007, 53 per cent of it from coal. “Eskom, which relies on coal to produce power for the national grid, is a major contributor to this and needs to eventually change its energy mix,” she said. “South Africa’s emissions are higher than those of most countries in the world and very close to China’s.”

However, it is unlikely that targets would be imposed on South Africa until sometime between 2020 and 2025, as huge capital projects with enormous energy demands would become nonviable if they were not allowed these long lead times.

“The saving grace for Africa, if South Africa’s nuclear projects do not get off the ground, could be hydroelectric projects, such as those in the Democratic Republic of Congo, although there are major challenges across Africa to bring them on stream,” she said.

South Africa’s on-off courtship with nuclear power remains a fascination to onlookers. Eskom, which was seen to kill-off its bidding programme for Nuclear-1 in December last year, has now reconsidered and submitted a revised application to the environmental authorities. This new application requests permission to be allowed to combine authorisations to develop Nuclear-1, Nuclear-2 and Nuclear-3 power stations at all three coastal sites earmarked for the nuclear programme.

The three sites are Bantamsklip near Pearly Beach in the Overstrand, Thyspunt near Oyster Bay in the Eastern Cape and the Koeberg site of Dynefontein, 30 km north of Cape Town. Previously within the environmental impact assessment (EIA) the three sites were to be assessed as alternative locations for the proposed Nuclear-1.

But amendments to the environmental legislation which are in the pipeline have prompted Eskom to apply to Water and Environment Affairs to ‘sequentially construct’ nuclear plants at all three sites in a combined application, starting with Dynefontein, followed by Bantamsklip and then Thyspunt.

If all goes according to plan, site preparation for Nuclear-1 will start in January next year and the plant will come online in July 2018; site preparation for Nuclear-2 will begin in January 2013 and come online in July 2020 and Nuclear-3 site preparation start in January 2015 and come online in July 2022.

South Africa already has two nuclear reactors generating five per cent of its electricity, the first of its commercial nuclear power reactor beginning operations in 1984. After last December’s hiatus, the government’s commitment to the future of nuclear energy would appear to be gaining strength.

The South African nuclear sector employs about 2700 people, while the Koeberg plant near Cape Town has earned more than R1.5 billion from uranium exports in the past five years. The Nuclear Energy Corporation of South Africa (NECSA) has direct commercial sales amounting to about R300 million a year.

But South Africa is pinning its nuclear hopes for the future chiefly on the Pebble Bed Modular Reactor (PMBR), based on high temperature reactor technology developed in Germany.

Construction of a demonstration PBMR at the Koeberg site was initially due to start in 2007 and the PBMR consortium was scheduled to deliver the demonstration plant to Eskom by next year. By the time construction finally starts, the original estimated cost of R14.5 billion will probably pale in comparison to its final bill.

The government has spent more than R8 billion since 1999 on developing the nuclear reactor, which uses graphite pebbles and very high temperatures to generate energy, but the country has yet to see a functioning model. Yet recently the project received a boost with the signing of a memorandum of understanding (MoU) in Beijing between Chinese and South African developers of pebble bed technology.

Pebble Bed Modular Reactor (Pty) Limited of South Africa has been developing the pebble bed technology in parallel with the Institute of Nuclear and New Energy Technology of Tsinghua University and Chinergy Company Limited of China.

The latter’s pebble bed concept is based on a 10 MW (thermal) research reactor which first went critical in Beijing in December 2000 and achieved full power operation in January 2003.

Turning to renewables

South Africa has been relatively slow off the starting blocks with renewables, but there are plans to build a wind farm with an initial capacity of 100 MW by March 2010, and later expanded to 200 MW.

The government has also unveiled plans to have IPPs on board to supply 400 MW of wind power in the next three years. Last March, Eskom secured a €100 million ($143 million) loan from French development agency Agence Franàƒ§aise de Développement to help finance a wind farm near the town of Koekenaap, east of Vredendal in the Western Cape that will be operational in early 2010.

With the advent of higher electricity prices and a greater presence of IPPs on the South African power scene, a hitherto conservative electricity sector could be on the brink of major change. Especially if nuclear power and renewables expand, as is widely seen to be probable.

And, with Eskom proposing carbon credits and taxes in line with international standards, there could be a major impact all manner of other innovation à‚— even ‘peripherals’ such as micro-combined heat and power technology. It’s a case of watch this space.

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