1. The good, the bad and the ugly truth about electricity supply by Chris Yelland CEng

2. Outline Background The capacity crisis The (knee-jerk) response The global financial crisis What are we doing, and what could we be doing? The proposed funding plan The electricity price trajectory The way forward

3. Background Since inception Eskom has been self-funding Initially a public utility, not for profit Generate electricity at least cost for the public good High growth trajectory in the 1960s and 1970s Massive expansion, high price increases Then the apartheid crunch, leading to a generation capacity surplus

4. Background (continued) The De Villiers Commission The Capital Development Fund done away with “Electricity for all” and the “social dividend” Funded by Eskom operations Eskom’s pact with government Electrification and real price reductions over many years

5. Background (continued) The energy intensive destination Mothballing of old power stations The corporatisation of Eskom Company tax, dividends and VAT But no provision for expansion And no provision for replacement of aging assets

6. The capacity crisis Underfunding of maintenance and refurbishment While demand grows unabated Aging assets pushed to the limits Government policy inhibits Eskom new build A policy flip-flop – Eskom unshackled (too late) Coal prices rise (off contract coal, high transport costs) Coal quality gets worse Unplanned plant failures Coal stockpiles run down Wet coal Pre-emptive load-shedding

7. The (knee-jerk) response Urgent need for new capacity Return to service of mothballed power stations New open cycle gas turbines in the Western Cape (2 x 1000 MW) Strengthen transmission to the Cape Madupi and Kusile coal-fired power stations (2 x 4800 MW) Ingula and Tubatse pumped water storage schemes Wind Concentrating solar plant (CSP) Coal 3 Nuclear 1 and 2

8. The global financial crisis Demand and sales are down Aluminum prices drop, and revenue drops too Coal and staff costs spiral upward Income statement shows big losses Massive liabilities on embedded derivatives The balance sheet not looking good Tariffs are too low, and credit ratings drop The international credit crunch

9. The global financial crisis (cont.) The international credit crunch Eskom cannot borrow the amounts needed Cap in hand to government The cupboard is bare No provision for capacity expansion No provision for replacement of aging assets Government has its own problems The funding plan awaited

10. Projects on hold or deferred Some deferred expenditure on Madupi power station Kusile power station delayed by at least one year Tubatse pumped water storage scheme on hold Eskom 100 MW wind farm on hold Eskom 200 MW concentrating solar plant on hold Nuclear build programme on hold Pebble bed modular reactor development on hold All independent power production on hold Industrial co-generation on hold

11. What are we doing, and what could we be doing? Supply side scorecard… Return to service8/10 Coal8/10 Hydro-electric4/10 Pumped water storage5/10 Nuclear2/10 Open cycle gas turbines8/10 Combined cycle gas turbines2/10 Underground gasification5/10 Wind0/10 PV solar0/10 Concentrating solar2/10 Industrial co-generation2/10 Independent power producers2/10 Regional power initiatives3/10

12. What are we doing, and what could we be doing? Demand side scorecard… Price increases9/10 Energy efficiency4/10 Energy rationing (ECS)5/10 Demand growth management5/10 DSM3/10 Energy management2/10 Load control and load shifting3/10 Ripple control0/10 Power factor correction2/10 Domestic time-of-use tariffs2/10 Smart meters2/10 Solar water heating1/10 Reduction of theft and non-payment1/10

13. Madupi and Kusile power stations Two 4800 MW mega projects R85-billion each (US $2,27-milion / MW ) escalating to R142-billion each (US $3,8-million / MW) Procured pre-global financial crisis Long lead-times Skills and experience issues Built in series Are these the least cost options?

14. Generation plant pricing estimates 2008 $, Million $/MW net Generation Plant – Total Plant Cost U.S. India Romania Gas turbine combined cycle plant, 140 MW $1,41 $1,17 $1,14 Gas turbine simple cycle plant, 580 MW $0,86 $0,72 $0,71 Coal-fired steam plant (sub), 300 MW net $2,73 $1,69 $2,92 Coal-fired steam plant (sub), 500 MW net $2,29 $1,44 $2,53 Coal-fired steam plant (super), 800 MW net $1,96 $1,29 $2,25 Wind farm, 1 MW x 100 = 100 MW $1,63$1,76 $1,66 PV solar array, ground mounted, $/kW (AC) $8,93 $7,84 $8,20 Source: World Bank, Energy Sector Management Assistance Program (ESMAP) report, August 2008

15. Independent power producers The South African Independent Power Producers Association (SAIPPA) says: IPPs can deliver base-load coal-fired power at: US$2-million per MW all in with a 3-year lead-time (after PPA and regulatory hurdles) compared to Eskom Medupi at US$3,2-million / MW with a 7-year lead time

16. Advantages brought by IPPs New capital New skills Short lead times Lower capital costs Lower operating and maintenance costs Good cost controls Good risk management Benchmarking and competition

17. Inhibiting factors for IPPs Politics and ideology Bureaucratic hurdles Uncertain policy environment Uncertain regulatory environment Unlevel playing fields No independent power purchasing agency No independent system operator No energy market

18. Funding of new build R385-billion expenditure over next 5 years, funded by: Tariff increases: 4x or 5x increase over 5 years Government loan: R60-billion (quasi equity) Government guarantees: R187-billion Shortfall: R30-billion (project finance?) Equity: NIL Finance minister Pravin Gordhan indicated recently: “There is no new money [from government for Eskom]”

19. Price trajectory going forward 2008/9 2009/10 2010/11 2011/12 2012/13 1,27 x 1,31 x 1,45 x 1,45 x 1,45 = 5,08 1,27 x 1,31 x 1,35 x 1,35 x 1,35 = 4,09 1,27 x 1,31 x 1,25 x 1,25 x 1,25 = 3,25 i.e. price increase of 5 x over 5 years Or price increase of 4 x over 5 years Or price increase of 3 x over 5 years

20. National average price trajectory 45% p.a. 35% p.a. 25% p.a. 2008: R0,25/kWh R0,25/kWh R0,25/kWh 2009: R0,33/kWh R0,33/kWh R0,33/kWh 2010: R0,48/kWh R0,45/kWh R0,41/kWh 2011: R0,69/kWh R0,60/kWh R0,52/kWh 2012: R1,00/kWh R0,81/kWh R0,65/kWh

21. Typical middle class domestic user Based on consumption of 1500 kWh per month 45% p.a 35% p.a. 25% p.a 2008:R800 R800 R800 2009:R1048 R1048 R1048 2010:R1520 R1415 R1423 2011:R2203 R1910 R1790 2012:R3185 R2578 R2254

22. Impact of price increases Effect on inflation Effect on aluminum producers Effect on other energy intensive industry Effect on general industry Effect on commerce Effect on agriculture Effect on residential users Effect on the poor Effect on the economy

23. Price trajectory after 2012 Eskom says The five years to 2012 are “catch-up” to the right levels Thereafter it expects normal inflationary increases But there are significant EXTRA costs ahead... not just normal growth and cost patterns: Carbon taxes Nuclear energy Renewable energy Replacement of aging plant

24. The way forward Need for visionary leadership A national energy Integrated Resource Plan (IRP) Unbundle Eskom generation Public offering(s) to raise capital Introduce IPPs and industrial co-generation Create an independent system operator Create an independent power procurement agency Rationalise the electricity distribution sector Introduce an energy trading market Expand the regional power grid Encourage regional power initiatives Address the supply and demand side score-card

25. Conclusion Will electricity be the oxygen of the economy? or Will electricity supply inhibit the economy?