[DEBATE] : (Fwd) Eskom power cuts

[Patrick Bond]

(Finally some sense dawns at Megawatt Park: "Earlier on Thursday, Eskom 
said it interrupted supplies to aluminium smelters late on Wednesday, 
the SABC reported." And nonsense from Anton Eberhard on the need to 
privatise electricity generation.)

Power cuts expected
22 May 2008, 19:45

Power cuts could be expected between 5pm and 10pm on Thursday due to 
technical problems at power stations, Eskom announced.

"About 16 percent of Eskom's installed capacity is currently not 
available due to planned maintenance, unplanned outages, and load losses."

The power utility said any additional technical problems that may arise 
during the Thursday evening peak period would compel Eskom to introduce 
emergency power cuts.

"Emergency load shedding remains a measure of last resort after Eskom 
has utilised all available resources, including gas-fired and 
hydroelectric generating plant, and after existing demand market 
participation agreements with large industrial customers have been 
utilised."

Eskom said in the event of power cuts on Thursday night, it would cut 
off areas according to its previously drawn-up schedules available at 
www.eskom.co.za.

"Eskom is appealing to all South Africans to intensify their drive to 
save electricity during tonight's [Thursday's] peak period."

The power utility said all consumers were urged to continue treating 
connections as live and recommend that during the cuts all appliances be 
switched off, rather than being left to come back on immediately when 
power was restored.

Earlier on Thursday, Eskom said it interrupted supplies to aluminium 
smelters late on Wednesday, the SABC reported.

The utility said this occurred as colder weather boosted demand and six 
power plants required repairs.

The utility's demand side general manager of Eskom Andrew Etzinger told 
the public broadcaster of Eskom's installed capacity of 40,274 
megawatts, 6156 megawatts was out of service.

This left 34,118 megawatts available and Etzinger said they expected 
the, demand to peak at 33,567.

Six coal-fired plants had generator units out of service because of 
breakdowns, including boiler-tube leaks, and scheduled maintenance work. 
-Sapa

***

Business Day
22 May 2008
On the private road back to power supply security
Anton Eberhard

IT IS now inevitable that the private sector will have an expanded role 
in restoring electricity supply security in SA. This may seem a 
surprising assertion, given Public Enterprises Minister Alec Erwin’s 
recommitment in Parliament last week to the “vanguard role of 
state-owned enterprises (SOEs) in powering a developmental state”.

Yet serious initiatives to secure increased private investment in 
electricity generation have already begun. Eskom is running three 
separate processes to contract private power.

Erwin does not, of course, rule out private participation. He talks of 
the advantages of SOEs accessing private capital markets and also of 
entering into partnerships with local and global companies that can 
provide access to new strategic technologies. Yet he remains deeply 
committed to building a developmental portfolio of SOEs in areas such as 
network infrastructure (electricity, freight transport and broadband) in 
order to pursue public and strategic objectives.

Eskom remains one of the government’s foremost champions in achieving 
this vision. Yet, as Allister Sparks argued on these pages a few weeks 
ago, Eskom’s failure to keep the lights on reveals the limits of the 
developmental state. Eskom used to be regarded as SA’s premier SOE. 
Since 1994, Eskom has provided electricity to more than 3,5-million new 
households. In 2001, the Financial Times of London named Eskom “Power 
Company of the Year”. In 2004, it received the Markinor Sunday Times 
award for SA’s “most admired brand”. Such awards are now inconceivable.

Yet many within the African National Congress and the government still 
hold a deep antipathy to the role of the private sector in 
infrastructure. In part this stems from an old ideological stance around 
the role of the state. But it is also informed by unfortunate 
experiences with private sector participation. The strategic equity sale 
of part of Telkom resulted in neither improved services nor lower costs. 
This was not surprising given the fact that the government did little to 
mitigate the market power of this new private monopolist. Yet the 
enduring memory of many in government is that we were screwed by the 
private sector.

Some government ministers still believe that the power crisis is a 
result of the private sector not investing in 2001 -04, when a 
competitive market was being designed. A more recent example is the 
collapse of negotiations with a private investor to build 1000MW of 
peaking plant. In December 2003, the cabinet mandated the minerals and 
energy department to run a competitive tender for independent power 
producers (IPPs). Five years later, the process is in disarray, in part 
because the preferred bidder demanded changes that were so far from the 
original tender that even the project’s senior lenders walked away 
because of the risk of legal challenges to the legitimacy of the process.

But the ultimate lesson from these examples is not the futility of 
private sector investment in infrastructure — too many successful 
international examples could be cited. Rather, it is the importance of 
state institutions learning how to contract the private sector more 
effectively. The department’s IPP bid process was excruciatingly slow 
and complex. Thousands of pages of clarifications were issued along the 
way to bidders. Key issues remained unresolved for long periods. No 
reserve bidder was retained. It is sobering to note that even if the 
department had reached financial closure, the plant would only have come 
on line in 2010, seven years after the process started. A similar tender 
in Jordan, also for an open-cycle gas-turbine plant, commenced later and 
the same bidder, AES, is already producing power. Across Africa, there 
are more than 40 IPPs, many of them in countries with investment 
climates much more challenging than ours.

Prior to the recent tender, there was no way for the private sector to 
enter the South African power market. The government had abandoned plans 
for a power exchange where private generators could sell electricity and 
there was no contracting framework for IPPs. With Eskom’s average 
electricity price less than half the price of new power, no consumer 
would contract directly with IPPs. The only way for IPPs to enter the 
market would be to sign a long-term power purchase agreement with Eskom 
who would then average out prices for consumers.

And that is what will now happen, not because of any ideological shift, 
but rather because there is no alternative. Eskom is quietly getting on 
with the process of contracting private generators. It is doing so 
because it understands that even if it restores its coal stockpiles and 
gets its existing generators to operate more reliably, and even if the 
price of electricity rises to more economic levels and consumers save 
electricity, and even if its own investment programme in new generation 
capacity delivers on schedule, we will still be short of power over the 
next five to seven years. As one Eskom executive put it, Eskom’s “big 
coal, big nuclear and big networks” investment strategy will take time 
to materialise; multibillion-rand base-load power plants take years to 
plan and build.

In the meantime, the private sector can potentially offer smaller, more 
flexible and quicker solutions in the form of IPPs and industrial 
co-generation plants (using waste combustible materials and heat to also 
generate electricity, which can be fed back into the grid).

Crucial to the success of these programmes will be a robust, transparent 
and fair contracting framework. Eskom staff are starting to learn 
valuable lessons in negotiating with potential private suppliers. They 
have also engaged experienced international legal and financial 
transaction advisers. It will be critical that contracts are as clear 
and as simple as possible so certainty is provided and investment 
decisions are made as soon as possible. It is encouraging that, in its 
medium-term power purchase programme, Eskom appears to have revealed its 
avoided cost and has indicated it is willing to contract at prices of 
between 65c/kWh and 105c/kWh between 2009 and 2013, falling 
progressively from 2014 to an eventual level of 35c/kWh in 2018. These 
prices are very much higher than its current sub-economic tariffs.

But the current procedures for contracting the private sector also 
create potential contradictions. In effect, Eskom will be acting as a 
single-buyer of power produced by IPPs, while at the same time also 
investing in its own generation plant. Ideally the planning, 
contracting, system operation and transmission functions of Eskom should 
be in a separate and independent institution, but major restructuring 
will be unwise and is unlikely in the midst of a power crisis. 
Nevertheless, careful thought should be given to an institutional design 
and governance mechanism that gives the regulator, investors and 
consumers confidence that Eskom is procuring and contracting 
transparently and fairly.

Even if state-owned utilities such as Eskom (and also Transnet and 
Infraco) remain strategic instruments to realise government policies, 
their difficulties in delivering reliable and appropriately priced 
infrastructure services reveal the limits of the developmental state and 
hence the imperative to also facilitate private sector participation. 
Therein lies the core challenge for the government. We shall be able to 
provide reliable and competitively priced electricity (and transport and 
telecommunications) only to the extent that the government learns to 
contract the private sector effectively, or introduces private 
competition where that is possible.

# Eberhard is a professor at UCT’s Graduate School of Business. This is 
the final article in a series assessing progress towards restoring power 
supply security.