Eskom's New Build Programme and Tough Choices Ahead: The Future Rests on One Good Decision

By Saliem Fakir · 2 Sep 2009

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Picture: Pittaya
Picture: Pittaya

Eskom released its 2008/2009 financial results last week showing a record loss of R9.7bn – the highest in its history. About R7bn more was spent on coal than the previous year, raising questions about Eskom’s dependence on coal as a source of power.

Eskom is forced to chart stormy waters like a beleaguered ship. Its ‘New Build’ programme won’t come cheap. It already has a funding gap of R80bn for new coal-fired power stations. The only way to resolve this is to hike tariffs, but there will be a lot of political resistance to this.

Compared to other OECD countries our electricity is very cheap. In OECD countries you will pay between US8c-US9c per kilowatt-hour (kWh) compared to South Africa’s US3c/kWh. OECD countries are also far more efficient in using their energy. If you factor in that they get more value for money than we do.

If there were ever a time for tough decisions then it would be now. Resolving South Africa’s electricity supply problems are key to unlocking the country’s economic potential – and one can’t see the energy solution in isolation of other developmental goals either.

The energy complex is at the heart of everything we want to do in the future. Getting the energy mix right and using the energy complex to drive the right developmental outcomes should not be underestimated.

But how we make that investment trade-off will have to take into account a number of important other strategic choices that go beyond the supply of electricity.

These include improving our energy mix to ensure better energy security, reduce our carbon emissions as well as use the energy complex to drive new types of industrial development -- primarily in the area of clean-energy.

In the past, these three goals did not exist as a nexus of issues that need to be part of the debate of how we expand the energy complex’s fixed investments. Nevertheless, all demand high levels of capital investment in order to ensure future benefit.

The government’s intention is to grow the economy anywhere between 4-6% per annum. To support that mission we need to double our electricity supply from 40 giga watts (GW) to 80GW.

The New Build programme – if we include nuclear power – will most likely cost anywhere between R1.6 - R1.8 trillion over a ten-year period or more. A 20 GW nuclear plant development programme alone will cost about R1.3 trillion and then if we add the current allocation for coal-fired power stations (about R400bn) the numbers just climb up.

As we have experienced with the development of the Medupi power station in Limpopo province, where cost overruns have been in the range of 30%, we can expect a similar situation with new coal and nuclear-fired power stations and this challenge is not unique to South Africa.

The French nuclear energy developer, Areva, which built the Finnish nuclear plant has already exceeded cost overruns by US$2bn more than the projected US$4bn, with an added snag - the plant’s completion has been delayed by three years.

Eskom’s New Build programme will require that costs be covered in two ways: firstly, consumers will have to pay more and secondly, the economy’s GDP/unit of energy used will have to improve significantly.

For the latter to happen, consumers will have to pay more for their electricity. Even energy efficiency measures of the scale needed to avoid the building of one or two more coal-fired power stations will require heavy upfront investments.

The upside though is that we won’t have to build a new power station and will most likely save more in the end as a result of having to avoid the costs of building and running such a plant.

Theoretically the benefits of energy efficiency are high and achievable, but because we will have to rely on humans to behave well and do so quickly, the practicality of getting there in time may be somewhat of a challenge. It must be done though or old habits will never change.

Eskom’s attempt to get much higher tariffs out of the national electricity regulator NERSA did not pay off. It got a fraction of the 80% or so hike it wanted. It got about 31.3%. The New Build programme is currently being capitalised from an already depleted state coffer and some borrowing from overseas.

Then there is also a fine juggling act to be completed: how to decide on the trade-offs between nuclear, coal, renewables and energy efficiency. For a robust energy management system, the proportion of the mix has to take into account resource availability, future generation price, fuel volatility and deepening our industrial and manufacturing base.

Base-load has to be the ladder upon which we build the rest. Base-load and intermittent power (renewables) should be seen as complementary rather than as against each other. However, base-load investments should not be an end in themselves and crowd out other options. So the question is, how much of this first before there is some stability?

And then also how much of the base-load is just sufficient that it does not forfeit other options that will strengthen supply and introduce more efficient ways of using a growing scarce resource.

Coal and nuclear energy should be avoided if we can. Renewables, though, won’t solve the problem. They help solve the climate problem, provide opportunities for decentralised power and autonomy and may in the long-term reduce the overall energy mix’s vulnerability to fuel price volatility. But the base-load challenge is always the snag.

Fuel price volatility is already an issue for Eskom. Poor planning around the management of coal logistics and higher coal costs, in general, have ensured Eskom’s books for the 2008/2009 period are in the red.

Coal is one of those commodities, like oil, where the price is likely to go up rather than down in the future.  And the state has little room to intervene on price because all coal production in South Africa is in private hands.

Most countries, which are pushing renewables have long invested in their base-load capacity and therefore can afford to push the renewables agenda because it drives new investment and the home base is used to reach economies of scale that help build an export market for their renewable technologies.

Countries like China and India are investing huge amounts in coal, nuclear and renewables all at the same time. Their economies are growing so fast that they can sustain the fixed investment costs and China is in the envious position of sitting on huge piles of cash in her sovereign wealth funds.

South Africa does not have that luxury. It has to have secure base-load capacity to provide the necessary electricity security to build for itself a new phase: the clean-energy base. It will have to do much more in the clean-energy space than current pithy efforts.  South Africa is in a bind: our economy has the potential to grow faster, but state coffers are shrinking, our national debt is growing and our budget deficit is about seven percent.

The state’s ability to accumulate more tax is also limited because you need to widen the tax base and for that you need to employ more people, increase the number of firms involved in the economy and you need to export more.

Any solution we look at in terms of the energy mix will require very tough trade-offs and some very good strategic choices. The gap to squander and take big risks is too narrow.

The problem with large new build programmes is that once you have gone down one path it is very hard to pull back.

There could not be a better time to test the nerve than now. It is one of those situations - they only come once - if you make the wrong call you will be sure that everything that follows can be traced back to that one single decision.

We’ve already had a taste of it - the decision ten years ago not to go ahead with the New Build programme. That delay led to load shedding and other unpleasant consequences for the economy.

Decision-makers have to walk in heavy boots these days and the longer they leave the decision the heavier the weight of the boots – who would want to be in their skin?

Fakir is an independent writer based in Cape Town.

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Rory Short
4 Sep

Renewable Energy

The climate reality is that humankind's world wide addiction to fossil fuels, unless it is curbed drastically, is going to see human life off this planet. Viewed against that unpleasant reality I think South Africans have no option but to go for a new build program based on renewables in totality. To resort to fossil fuels for the new build program is to commit to self funded collective suicide. There is however no guarantee that the climate reality created by other nations will not still lead to our collective destruction but if we do not make sure that we are not contributing to our mutual destruction there is very little that we can do to encourage others to curb their use of fossil fuels.

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