Weighing the merits of Medupi and Kusile is a ticklish business

As Eskom’s multibillion-rand expansion project to meet South Africa’s rising electricity demands steadily forges ahead, the project – and particularly its new Medupi and Kusile coal-fired power stations – has run into a barrage of criticism and opposition over power-generation type choices, delays, escalating costs, planning, funding issues, environmental concerns and more. In short, its overall feasibility, viability and future sustainability is being questioned.

According to Eskom, the construction of the Medupi, Kusile and Ingula projects are on schedule and within budget, while meeting all quality requirements.

But just how viable is Eskom’s expansion project in the longer term?

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

“The tariff will rise to pay for these investments, but coal generation is still the cheapest large-scale power-generation option in South Africa if we exclude environmental externalities,” he says.

Medupi, Kusile and Ingula would be the last power stations Eskom would build on its own, as going it alone is not sustainable in the longer term, according to Eskom’s business manager, Andrew Etzinger.

Medupi and Kusile are seen as the core to Eskom’s immediate plans to provide enough electricity to prevent any 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 would be required. This in itself already places a question mark behind the sustainability of the power utility’s plans.

Recently, Eskom’s chief commercial officer Dan Marokane announced that security of the coal supplies it requires for its existing and new power stations over the long term would be a problem, and that an “optimal balance between coal exports and domestic energy security” had to be found.

Eskom sources most of its coal for its existing power stations from Mpumalanga coal mines, but says there is not enough coal to supply it under a 60-year life-of-station scenario.

Marokane said risks to coal supply have increased because of delays in developing major new long-term sources.

Anglo American chief executive officer Cynthia Carroll said her company would be the first to assist Eskom with its coal needs, adding that more than 70% of the thermal coal it mined in South Africa was already being sold into the domestic market.

Eskom accused the coal mining industry of supplying it with poor-quality coal. But these claims were disputed in a strongly worded statement released by Bheki Sibiya, CEO of the Chamber of Mines.

While coal currently accounts for 90% of South Africa’s electricity generation, it will be cut to a contribution of only 48% by 2030, according to the government’s future vision in its draft electricity Integrated Resource Plan (IRP) released late last year, after many delays.

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

But coal will still account for almost half of all electricity generation.

According to Mpho Makwana, Eskom’s acting chairperson at the time, writing in Eskom’s 2010 annual report, the power utility “is a leader in sustainability reporting – focusing transparently on reporting our financial, technical, environmental and social impact performance”.

“Eskom is also a trendsetter in this regard – as reflected in the deep respect we show for our value of innovation.

“In 1990, we were applying the principles of managing our business in terms of the triple bottom line – committed to maximise the economic, environmental and social returns of our business,” he said, adding that the utility would continue working with partners and stakeholders to control its impacts on ecosystems and seek opportunities to contribute to the South African biodiversity strategy.

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

“Given that our sector is long-term in nature and that many decisions have implications for decades, it is vital that we take robust and responsible decisions,” it says, adding that sustainability at Eskom refers to “providing affordable energy and related services through the integration and consideration of economic development, environmental quality and social equity into business practices in order to continually improve performance and underpin development.” This covers all relevant elements, assesses the practicality of implementation and includes issues such as technology development and deployment, quality, risk, safety and skills development, says Eskom.

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

Medupi will be a coal-fired, dry-cooling, flue gas desulphurisation (FGD) station.

Timing is critical in respect of construction, as Eskom wants the first of Medupi’s six units to be functional by the middle of next year, with final completion scheduled for 2015. Medupi will be the world’s third largest coal-fired power station.

Eskom says it will be a new-generation super critical plant, meaning it will operate with greater efficiency than the older power stations, using less water and coal – thus contributing to an improved environmental performance.

Its location at Lephalale in Limpopo is near the large coal reserves north of the Waterberg off which it will feed, requiring 14 million tonnes per annum of coal to eventually fire the six units, producing an additional 4 764 megawatts of electricity for the national grid.

But environmentalists differ strongly over the environmental aspects, saying that at full capacity, the Medupi plant will emit more CO2 than 115 countries combined, and will destroy the sensitive water system in Mpumalanga as a result of new coal mines going into production.

The Centre for Global Development says Medupi will eventually emit up to 29 million tonnes of CO2 per year, adding to the 452 million tonnes of CO2 South Africa is already emitting per year, according to the International Energy Agency.

Other environmental researchers put the figure slightly lower at 25 million tonnes.

South Africa currently is responsible for 40% of all Africa’s emissions.

According to BankTrack – a global network of civil society organisations and individuals tracking the operations of the private financial sector and its social and environmental effects – Medupi will be extremely water-hungry, using up extremely scarce water supplies, with coal mining operations further impacting negatively on water sources.

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 Bank and other financial institutions – including multilateral developments banks, export credit agencies and investment funds – not to fund Eskom’s coal-fired projects.

And that is Eskom’s Achilles’ heel: Its expansion budget is R385 billion for the emergency increase in electricity supply required by 2013. That figure will go up to one trillion rand by 2026, by which time Eskom hopes to have doubled its capacity to 80 000MW. 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 the South African government – its only shareholder.

The power utility itself says that one of its greatest challenges is funding uncertainty. But Eskom adds that despite the global recession, it has successfully managed to negotiate and secure “most of the fundamental contracts”.

In the interim, the United States government-funded Import-Export 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 CO2 emissions – making Kusile one of the largest greenhouse gas-emitting power plants in the world.

Officially, Kusile’s initial price tag of R80bn to R100bn had already escalated to R124.42bn by May last year, with Eskom denying industry speculation that this has shot up to R175bn.

Industry sources say Treasury officials were calling for the scrapping of the project, as paying penalties of R30bn 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 Import-Export Bank not to fund the Kusile project.

Environmental groups recently nearly stopped the Bank from funding a project in India, save for US government intervention at the last moment.

The Kusile Power Station, located at Emalahleni, Mpumalanga, will be a coal-fired, dry-cooling and FGD plant producing an output of 4 800MW, with a targeted completion date of 2017.

Despite possible cancelling of the project hanging over its head as one of Eskom’s possible future scenarios, construction is already entering 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.

However, the uncertainty around the funding of Kusile already delayed the release of the government’s draft electricity IRP released late last year.

Industry sources and environmental groups conclude it has 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,” says Prof. Eberhard.

“Eskom has contracted engineering project management companies to assist it, but it has still battled to contain costs and ensure timely construction.

“Construction at both Medupi and Kusile 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,” he adds.

But Prof. Eberhard does not think Kusile will be cancelled, and says the government has decided to proceed with it.

Neither does he think the fact that the government plans to reduce reliance on coal by almost half by 2030 may render these two coal stations to become white elephants, adding that older Eskom coal-fired power stations will instead be decommissioned at the end of their useful life.

But for now, Eskom’s capacity expansion programme seems to remain a tricky and often controversial project. 

Stef Terblanche