Viability of Eskom plans

As Eskom’s multi-billion-rand expansion projects to meet South Africa’s rising electricity demands steadily forge ahead, the projects and especially its new Medupi and Kusile coal-fired power stations have generated a barrage of criticism and opposition over energy-source choices, delays, escalating costs, planning, funding issues, environmental concerns and more.

In short, the  projects’  overall feasibility, viability and future sustainability are being questioned. According to Eskom the construction of the Medupi, Kusile and Ingula projects are on schedule and within budget, and will meet all quality requirements.

How viable are expansion projects?

Professor Anton Eberhard, who leads the Management Programme  Infrastructure Reform and Regulation at the Graduate School of Business, University of Cape Town, says South Africa needs the power.

While tariffs will rise to pay for these investments, coal remains the cheapest large-scale energy option in South Africa, if environmental externalities are excluded,  he says.

Medupi, Kusile and Ingula would be the last power stations exclusively developed by Eskom. Going it alone is no longer sustainable, according to its business manager Andrew Etzinger.

Medupi and Kusile are seen as the core of Eskom’s immediate plans to provide enough electricity to prevent further rolling blackouts. In the medium term, private energy producers will be brought into the picture, while in the longer term nuclear and sustainable energy will have to form a significant part of the electricity supply capacity.

Consultants to Eskom estimate that if Medupi, Kusile and several other projects go ahead, 35 new coal mines will be required. This in itself already places a question-mark behind the sustainability of Eskom’s plans.

While coal currently accounts for 90% of South Africa’s electricity generation, it will be cut to only 48% by 2030 according to the government’s vision in its draft integrated electricity resource plan (IRP).

With the emphasis shifting significantly towards renewable energy, the role of coal will be drastically reduced, a policy that seems to be at odds with the current focus on the massive Medupi and Kusile projects.

According to Eskom’s acting chairman, Mpho Makwana, writing in the utility’s 2010 annual report, it is a leader in sustainability reporting.

In a sustainable development overview, Eskom says it has integrated sustainable development issues into decision-making for many years.

Financially sustainable

Professor Eberhard believes the new power stations will be financially sustainable, but environmentally they will increase South Africa’s CO2 emissions and make it difficult to meet the country’s offer made at the UN climate negotiations in Copenhagen to reduce its emissions as part of the global effort.

While partial funding of Eskom’s new build programme has already been approved by the World Bank, BankTrack and other environmental groups have launched a campaign targeting the World Bank and other financial institutions, including multilateral development banks, export credit agencies and investment funds not to fund Eskom’s coal-fired projects.

And that is Eskom’s Achilles heel. Eskom’s expansion budget is R385-billion for the emergency increase in electricity supply required by 2013. That figure will go up to one trillion rands by 2026 by which time Eskom hopes to have doubled its capacity to 80,000 MW. Already costs are escalating.

For its immediate programme Eskom is struggling to find the R80-billion shortfall in funding, having already introduced massive tariff hikes for consumers and having received loans from among others the World Bank and South African government, its only shareholder. Eskom itself says one of its biggest challenges is funding uncertainty. But it adds that despite the global recession, Eskom has successfully managed to negotiate and secure most of the fundamental contracts.

Meanwhile the US government-funded US Import-Export Bank (Ex-Im Bank) has delayed a decision on providing funding for the Kusile project. In November it was still contemplating aspects related to Kusile’s projected greenhouse gas emissions impact, which environmental groups say will add nearly 10% to South Africa’s total carbon dioxide emissions, making Kusile one of the largest greenhouse-gas-emitting power plants in the world.

Price tag

Officially Kusile’s initial price tag of R80-billion to R100-billion had already escalated to R124.42-billion by May last year, with Eskom denying industry speculation that it has shot up to R175-billion. Industry sources also say Treasury officials were calling for the scrapping of the project as paying penalties of R30-billion would be the cheapest option now. It has been estimated that so far Eskom has managed to secure only 11% of the required funding for Kusile to proceed.

In January the US environmental group Friends of the Earth, as well as other environmental groups and BankTrack, stepped up a campaign to pressure the US Im-Ex Bank not to fund the Kusile project. Environmental groups recently nearly stopped the Im-Ex Bank from funding a project in India. It was  saved by  US government intervention at the last moment.

The Kusile power station located at Emalahleni in Mpumalanga will also be a coal-fired, dry-cooling and FGD plant producing an output of 4,800 MW with a targeted completion date of 2017. Despite possible cancelling of the project hanging over its head as one of Eskom’s future scenarios, construction is already entering into its fourth year. Another possible scenario includes delaying the construction of Medupi and Kusile. Eskom insists though that cancelling the Kusile project is not an option at present, and neither should they be delayed because of their importance for security of supply.

Impact of uncertainty

However, the uncertainty around the funding of Kusile  delayed the release of the government’s draft integrated electricity resource plan (IRP) which was finally released late last year. And industry sources and environmental groups conclude that the uncertainty  has also already delayed the actual construction project, causing costs to rise and doubts to set in about its future viability, thus rendering the project unable to attract adequate funding.

These are not turnkey projects. Instead each power station involves about 30 to 40 different contracts. Eskom has contracted engineering project management companies to assist it, but it has still battled to contain costs and ensure timely construction, says Eberhard.

Construction at both the Medupi- and Kusile power stations has been delayed. Eskom was given the green light to build new capacity in 2004/2005. The first unit at Medupi will only be commissioned in 2012/2013. We needed this power station already in 2008, and Kusile has been delayed because of uncertainties regarding finance.

But Eberhard does not think Kusile will be cancelled and says government has decided to proceed with it. He also does not think the fact that government plans to reduce reliance on coal by almost half by 2030 may render these two coal stations to become white elephants, saying older Eskom coal-fired power stations will instead be decommissioned at the end of their useful life. But for now, Eskom’s capacity expansion seems to remain a tricky and often controversial project.

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