New build programme on track

There has been tremendous progress since the 2004 decision of Cabinet. Eskom has spent a total of R53 billion (2005/6: R10,6 billion; 2006/7: R17,7 billion; 2007/8: R24,7 billion) with a forecast spending of R46 billion for the 2008/9 financial year. Six new transmission substations have been completed and
1 026km of transmission lines constructed since 2004. A total of 2 582MW of new power generation capacity is now on line with 1 061MW of this total installed during the 2007/8 financial year. To date, the board has approved projects to the value of R260 billion with 16 304MW of new generation and other capacity committed.

Towards the end of 2005, the board approved an investment to build what is today the first two new power stations conceptualised, built and commissioned by the democratic South Africa – Gourikwa and Ankerlig open-cycle gas turbine stations. The last time Eskom built and commissioned an OCGT plant was in 1976, and so the utility started this project having lost all of its institutional memory in this regard. Construction at both sites started in January 2006, and the construction teams had to deal with one of the biggest floods seen in the Western Cape in a very long time.

The total duration of the project from concept to completion was two years and nine months. The construction time was 17 months, with 13 months between turning the first sod to synchronising the first machine. Both plants were ready to supply power for the winter of 2007. This is world class performance by any measure.

The board investment decision on Medupi power station, a new 4 788MW coal-fired base load power station located in Lephalale, was taken on 5 December 2005. This was 14 months after the Cabinet decision of 2004. In May 2007, the construction of the power station star ted. Work on the project is on schedule. Construction of the second 4 818MW coal-fired base load power station – “Project Bravo” – began on 1 April 2008, which is 27 months after the Cabinet decision.

The return to service of the three mothballed stations – Camden, Komati, and Grootvlei – has also been proceeding exceedingly well. In March 2005, Unit 6 of Camden power station was successfully synchronised to the national power grid and for the first time in 15 years, it generated and supplied electricity. Six of the eight units at Camden went into commercial operation between then and March 2008, adding some 1 250MW to the system. Later this year, all of the eight units of Camden will be in commercial operation with the entire station being successfully returned to service – something that, to my knowledge, has never been done before.

The first of the six units (Unit 1) at Grootvlei went into commercial operation on 31 March 2008 and added 200MW to the system. Commercial operation for the second unit is planned for later this year, with the last unit of the station planned to be in commercial operation later in 2009. The first unit of Komati power station, on the other hand, is planned for commercial operation during 2009.

This is sterling performance, noting of course that Eskom was on virgin territory with no international comparative experience on the return to service of power stations that have been mothballed for this long.

The regulatory environment

The price of electricity in South Africa is unsustainably low and does not reflect the true cost of producing, transporting and distributing electricity. Between January 1998 and March 2007, the real price of electricity declined by 12%¹.

Given the low reserve margin and the pressing need to invest significantly in new electricity generation capacity, South Africa has to move decisively toward economic prices . For several years prior to my appointment to the board, Eskom made this point consistently.

During the past financial year, the debate on the future tariff path took a new turn. For the first time ever, Nedlac hosted a stakeholder summit to deliberate on Eskom’s second application for a further tariff increase for 2008/9. Representatives of civil society, organised labour, business and government, worked together and agreed on a common submission to Nersa. It was agreed at the summit that the new price proposals must be done in a manner that protects the poor and ensures that they still have access to affordable electricity.

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 will 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 MYPD 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 tariff path into the future. The power industry is now on a path to financial sustainability.

I end my term at Eskom satisfied that the building blocks for overcoming the challenges ahead are now in place.

1 When compared with CPIX as an inflation index.