New build programme

Eskom is embarking on a very large infrastructure expansion programme which has a board-approved budget of R343 billion up to 2013 and is expected to grow to more than a trillion rand by 2026. Additional power stations and major power lines are being constructed in line with our plan to deliver an additional 16 304MW in generation capacity by 2017. Ultimately, Eskom will double its capacity to about
80 000MW by 2026.

This massive build programme has been designed such that it adequately responds to the challenge of electricity availability and reliability. It has also been aligned with government’s target of 6% GDP growth between 2010 and 2014.

I am pleased to report that the Eskom build programme is on track to deliver the additional infrastructure as planned. We have made excellent progress during the past financial year, and have indeed achieved what we set out to do in this regard. Ankerlig and Gourikwa power stations – the two new open-cycle gas turbine stations located in the Western Cape – were officially opened. The National Energy Regulator of South Africa (Nersa) granted Eskom the licence to build the first new coal-fired power station in more than 20 years.

Hitachi Power Africa was awarded a R20 billion contract for boilers, and Alstom S&E was awarded a R13 billion contract for turbines for Medupi power station. We also awarded contracts worth some R31,5 billion for the “Bravo Project”, a coal-fired power station to be built by 2017 – R18,5 billion to Hitachi Power Africa for boilers and R13 billion to Alstom S&E for turbines.

Work is well underway on the return to service of the three previously mothballed power stations – Camden, Komati, and Grootvlei. The construction of Ingula pumped storage scheme is also progressing well. We are also on track with several of our transmission projects.

For the reporting year, capital expenditure of R24,7 billion was incurred. This was R218 million above the target for the year – a confirmation that the accelerated programme is on track.

I must pay special tribute to the Eskom team for ensuring that this all important programme of building new capacity remains on track notwithstanding all the adversities brought about by an inadequate reserve margin.

Financial sustainability

Eskom’s massive capacity expansion programme will take the organisation into a new and exciting, but also very challenging, phase in its history. Funding the programme is one such challenge which will test the organisation’s financial sustainability. The financial health of the organisation has come under pressure given the increase in primary energy costs and the need to reduce consumption through demand-side management and power-conservation projects.

The profit for the year for the Eskom group was R974 million (2007: R6 476 million) after taking into account the fair value loss on embedded derivatives of R143 million (2007: fair value gain of
R4 305 million).

The profit for the year for the company was R1 333 million (2007: R6 030 million) after taking into account the fair value loss on embedded derivatives of R149 million (2007: fair value gain of
R4 131 million).

Primary energy costs (mainly coal and diesel) increased from R13 040 million in 2007 to R18 314 million in 2008, while the growth in sales only amounted to 2,9%. This was mainly due to an increase in coal price and the extended use of the opencycle gas turbines due to the reduced reserve margin in October 2007 and the early months of 2008.

The higher primary energy cost that Eskom incurred in 2006/7 and 2007/8, together with projections for the 2008/9 financial year prompted the organisation to approach Nersa with the view to re-open tariff discussions. It was clear that Eskom, in the absence of any decisive action, was on a financially unsustainable path. During the financial year, Standard and Poor’s (credit rating agency) placed Eskom on “credit watch” with negative implications, reinforcing the need to secure our financial health.

Going forward, Eskom will require significant contributions from all sources of capital namely price increases, funding support from government, and borrowings from both the local and international market.

On 18 June 2008, Nersa announced a decision to increase the average price by 27,5% in 2008/9, including the previous decision of 14,2% in December 2007, ie an additional increase of 13,3%. It is notable from the decision that the regulator indicated that a mechanism would be developed to take into account unforeseen changes in primary energy costs and other costs. Furthermore, the regulator gave a projection of the price path of between 20% and 25% per annum for the next multiyear price determination assuming that the current economic climate continues to prevail and Eskom’s capital expenditure remains as currently stated.

This decision by Nersa is of deep significance for it constitutes a paradigm shift and signals a completely new, improved tariff path into the future. The power industry is now on a path to financial sustainability.

The South African government, which is the sole shareholder of Eskom, has announced its intention to support Eskom initially with a R60 billion subordinated loan to be drawn down in tranches in the next five years. Pressure in the global credit markets is an additional challenge for Eskom’s funding opportunities. Alternative funding sources are continually being pursued in order to maximise funding options.

Internal efficiencies

As part of ensuring the long-term financial sustainability of the organisation, we have put in place a programme to maximise internal efficiencies. Two years ago, we commenced the procurement and supply chain strategic sourcing initiative with the aim of securing the supply of goods and services for the organisation in the most optimal manner. I am pleased to report a R3,1 billion savings achieved this year against a target of R1,5 billion. This brings the total inception-to-date savings to R3,9 billion against the overall savings target of R7,8 billion over the five years to 2011. We are confident that such a target will be achieved.