2 September 2008 – In an address to the Cape Times Safmarine breakfast club, minister of public enterprises, Alec Erwin, delivered the following address to the attendees:

Alec Erwin

Minister of public
enterprises, Alec Erwin

The events of January 2008, which saw unprecedented levels of load shedding across the country, brought into sharp focus the fragile balance between electricity demand and supply, and the criticality of ensuring security of supply in an economy.

It is important to understand what led to the electricity emergency, the measures that have been put in place to deal with it, as well as the challenges we face going forward in the quest for security of supply.

A secure supply of electricity lays the foundation for more sustainable economic growth. The higher than anticipated levels of economic growth since 1994 were not matched with the same level of growth in the supply of electricity. Above average growth in electricity demand over the past 10 years, coupled with a lack of investment in generating capacity since the 1980s, has consequently led to a decline in the reserve margin from around 18% in 2001 to, at one point, alarmingly low levels of 5,6%.

This situation was worsened by an increase in unplanned generation plant outages, as power stations were stretched to run at full capacity, and at certain times, beyond design capacity. Further exacerbating the problem was coal supply and quality constraints, which led to Eskom being unable to supply sufficient power to the country.

While Eskom managed to go through the winter season without any load shedding, the situation remains serious. As we approach the summer months, traditionally the time during which Eskom enters maintenance season, the system will remain vulnerable, as a lot of plant will be out of service.

In order to ensure a secure supply of electricity going forward, interventions must occur on both the supply and demand sides.

Supply side interventions
On the supply side, the build programme is on track. Admittedly, it could have commenced earlier, but we are working around the clock to ensure the programme is delivered on time. This massive capital expansion programme aims to add 40 000MW to the system by 2026, with about 20 000MW coming from nuclear energy, as we intensify our efforts to reduce our carbon footprint and contribute to a cleaner environment.

Open Cycle Gas Turbines (OCGTs) built and commissioned in the Western Cape have been used effectively to manage demand and ensure reliable supply to the region during the recent outages at Koeberg. Medupi and Kusile, the two new baseload power stations due to come on stream in 2013 and 2014 respectively, will add a total of 9 600MW to the system. On the transmission side, 1 000km of transmission lines have been commissioned, six main substations completed and 2 800km of overhead lines planned.

For any measurable and sustainable progress, however, efforts on the generation and transmission sides must be augmented by equal efforts on the distribution side. The distribution sector is receiving urgent attention from all stakeholders, with the aim of restructuring the sector, and ensuring that it does not become a hindrance in the delivery of electricity to the country.

Eskom’s long term build programme is currently estimated to cost R1,3 trillion. A build of this magnitude will undoubtedly create a number of challenges, not only with regard to skills and balance of payments pressures, but time of the essence, and we need to deliver the build timeously. This challenge offers an unmissable opportunity for South Africa to create an industrial base to supply the expansion programme, by developing the relevant design and manufacturing capabilities to globally competitive standards, in order to supply not only the local market, but eventually, the global economy as well.

South Africa is a major raw material supplier in the form of coal and uranium, we also have manufacturing capacity, as well as significant nuclear technology capacity. With the expansion of global energy systems, supply conditions are likely to remain in favour of suppliers for some time.

For reasons of cost and security of supply, therefore, we must consider enhancing our manufacturing capacity to ensure shorter supply chains. We must grab this opportunity to transform South Africa into an advanced manufacturing economy. This is indeed the focus of the South African Power Project, headed by former Eskom CE Thulani Gcabashe.

We must be cognisant of the fact that many other countries are aware of the opportunities currently presenting themselves in the energy sector globally, and will not hesitate to get involved. If we hesitate, we may miss out on a crucial moment to advance this economy from a net buyer of equipment from to a more competitive global supplier.

Demand side management
Because of the long lead times when building new power stations, the demand side is critical in helping meet electricity needs in the short to medium term. Key solutions that are being investigated include the implementation of demand side management initiatives to reduce overall demand by 10%. The Power Conservation Programme (PCP), Demand Side Management (DSM) and co-generation form the pillars of the national demand management strategy.

Eskom has been working with its large industrial customers to reduce their energy consumption. While we appreciate the positive response from this sector, these customers should not be expected to bear the burden of reducing South Africa’s energy demand by themselves. PCP will draw all South Africans into this important effort, and should provide the 10% savings required to ensure network stability.

The size of the build programme poses a challenge with regard to its financing. Electricity tariffs must start to reflect the real costs of its production. We remain committed to the improvement of Eskom’s credit ratings. The recent downgrading by Moody’s is a concern, and we must avert any potential future downgrades by other ratings agencies. The health of Eskom’s balance sheet therefore remains critical as it goes into both local and international capital markets for borrowing.

The outlook
Until sufficient new plant capacity is commissioned, the electricity challenges remain a reality. The next five years are crucial in the successful execution of the build programme, as well as the restructuring of the distribution sector. In the meantime, we must intensify efforts on the demand side, as demand reduction will be the only real differentiator in the short to medium term. It is important for all South Africans to make a real effort to reduce their electricity demand, and we thank all those who have already done so.

Issued by: Department of Public Enterprises

2 September 2008