A key intervention aimed at alleviating South Africa’s electricity supply con- straints is the aggressive investment and capacity expansion programme by State-owned power utility Eskom.
Since its initial inception, the programme has evolved in both scale and structure to reflect South Africa’s changing electricity demand environment and Eskom’s funding capacity.
Originally valued at R84-billion, based on a gross domestic product (GDP) growth rate of 4%, the programme was later recalibrated in line with the country’s 6% growth ambition, increasing the value to R97-billion over five years. In March 2007, the value of the programme was further increased to R150-billion over five years, and by early 2009, the value of the programme was reported to be some R385-billion over five years, including the generation, transmission and distribution components of the project, with the bulk of expenditure being directed towards generation.
In part, the growing value of Eskom’s capital expansion programme reflects an increase in the scope of the programme, necessitated by increasing evidence of an electricity supply shortfall.
However, as the fallout from the global financial crisis continues to spread into the real economy, Eskom has been prompted to materially downscale its electricity demand estimates for the next few years, and the company no longer expects that it will have to double its capacity to 80 000 MW by 2025, but rather that it will need to increase the size of the system to somewhere between 60 000 MW and 70 000 MW by that time.
It was reported in January 2009 that the utility was expecting a 3% overall reduction in electricity demand for 2008/9, and that it was expecting demand growth in 2009/10 to be flat to marginal. Only in 2010/11 does the company expect that demand growth figures will begin to rise above 1%.
This new demand outlook is radically different from the growth projection that was hitherto underpinning Eskom’s expenditure plans, and, therefore, has a material implication for the future of the programme and its schedule.
As initially planned, in an effort to achieve a generation reserve margin of at least 15%, Eskom is continuing to pursue the construction of new baseload coal-fired capacity, in the form of the Medupi and Kusile projects, as well as the recommissioning of mothballed coal-fired capacity, through the return-to-service of the Camden, Grootvlei and Komati power stations. Further, the company is pursuing the construction of three peaking projects – the Ingula pumped-storage scheme, the doubling up of the capacity of two open- cycle gas turbine facilities, and the Sere wind project. Further, Eskom plans to bring new capacity on stream through the upgrade of its existing Arnot power station.
However, the company decided not to proceed with the possible construction of a new nuclear facility, based on economic considerations, and has also decided to delay the work schedule for the Tubatse large-scale pumped-storage scheme, based on the implication of lower peaking demand growth in response to the current economic slowdown.
Nevertheless, the utility has stressed that it will continue to pursue an aggressive planning and development schedule in 2009 for a third new-generation coal-fired power station, as well as other baseload projects. Further, it will prioritise the independent power producer (IPP) programme as part of a plan to close future supply-side gaps, while spreading the project and funding risk beyond Eskom’s balance sheet.
The decision to postpone the nuclear project based on econ- omic considerations reflects difficulties Eskom is facing in accessing finance, as well as in terms of increasing project costs. Cost increases are also evident in Eskom’s capex programme more generally. Anton Eberhard, of the University of Cape Town, estimates that the benchmark cost a few years ago for building new installed capacity for coal-fired plants was about $1 000/kW. This has now risen to above $2 500/kW, and the cost of building new nuclear capacity is now between $7 000/kW and $8 000/kW.
Initial estimates of the cost of the Medupi project were in the region of R60-billion. However, following the awarding of the major boiler, turbine and civils contracts, the most frequently quoted figure was closer to R80-billion and more recent projections have put the cost of the Medupi project at R100-billion.
Similarly, the cost of the Kusile project has escalated from initial projections of about R80-billion, to a current figure of about R111-billion.
However, Eskom has indicated that these increases are not a case of cost overruns, but are rather a function of closing the gap between initial price estimates and the real contracted prices, including expected price escalations.
Eskom contends that the key contributor to the price surge is the fact that the supplier market was overheated at the time the utility entered into its contracts, owing to a tight international equipment market and the global scarcity of engineering skills. In fact, the eventual prices tendered by the boiler, turbine and civil engineering suppliers for the Medupi and Kusile projects were on average some 30% higher than Eskom’s initial estimates, which it garnered from international consultants.
Interestingly, however, it now seems that a new shift may be under way in the power equipment sector, with indications being that the market may become more favourable towards buyers. This was evident in the awarding, in December 2008, of the civil works contract for the Kusile project to a consortium led by Stefanutti Stocks Civils. The award was tipped to go the way of the Murray & Roberts-led consortium which is undertaking a similar contract for the Medupi power station. This expectation had arisen on the back of an earlier signal from Eskom that it was seriously considering a “fleet contractor model” for its coal-fired and nuclear power station build programmes. Such an approach had already been adopted for the key boiler and turbine contracts for Medupi and Kusile, and was expected to be pursued for the nuclear programme. Eskom argued that the approach was necessary as a way of securing its status as a “buyer of choice” and to assure its position in the increasingly congested supplier queues, particularly as the project market became overheated.
The awarding of the contract to the Stefanutti Stocks Civils-led consortium is, perhaps, indi- cative of an expectation on the part of Eskom that the economic slowdown will affect suppliers, as well as power relations between buyers and suppliers in procurement programmes.
Such changes in market conditions could be positive for the revisiting of the nuclear programme. This suggestion is in line with sentiments proffered by officials of the Department of Public Enterprises, who have expressed the hope that it will be far more of a buyer’s market by the time Eskom and government are ready to re-engage with nuclear vendors.
Medupi and Kusile
A significant component of Eskom’s investment in new power generation facilities is the development of two new coal-fired power stations – Medupi and Kusile – which, together, will provide the company with 9 600 MW of new baseload capacity.
Medupi, situated near Lephalale, in South Africa’s Limpopo province, will be a six-unit power station, with the capacity to produce 4 800 MW.
The plant, which will be Eskom’s first new coal-fired power station in more than two decades, is the most advanced of Eskom’s new build projects. The first unit of the power station could be operational by mid-2012, while the remaining units are scheduled to be commissioned at nine-monthly intervals, with the last units set to be commissioned by March 2016.
Key contracts that have been awarded to date for the construction of Medupi include the turbine contract, valued at about R13,4-billion, and awarded to Alstom, and the main civil contract, valued at about R2,9-billion, and placed with the MPS joint venture (JV), comprising Murray & Roberts, Concor and Grinaker-LTA.
In addition, and somewhat controversially, the boiler contract, valued at an estimated R19,9-billion, has been awarded to a consortium comprising Hitachi Power Europe and Hitachi Power Africa, which have, in turn, awarded the boiler construction contract to Murray & Roberts. The role of Hitachi Power Africa has been questioned, owing to the company having Chancellor House as a 25% shareholder, which is said to have strong ties with the ruling African National Congress (ANC). At the time of the contract being awarded, the chairperson of Eskom’s board, Valli Moosa, was a member of the ANC’s National Executive Committee. However, in February 2009, South Africa’s Public Protector found that while Moosa had acted improperly during the awarding of the contract, his failure to “manage the conflict of interest” did not affect the choice of the Hitachi consortium as the contractor.
Medupi will be supplied with coal by Exxaro Resources, with Eskom and Exxaro having concluded an agreement in September 2008 for the supply of 14,6-million tons a year of power station coal, for 40 years, from Exarro’s Grootegeluk mine.
The Medupi project was initially expected to cost about R60-billion; however, owing primarily to high prices in the supplier market, as well as certain scope changes, and accounting requirements relating to so-called “functional interest” during construction, more recent projections put the cost of Medupi at about R100-billion.
However, Eskom is continually studying these escalations, and there might well be an opportunity to claw back some of these escalations as a result of the softening of prices for some inputs.
Similar cost increases have also been experienced at the other new coal-fired power station Eskom is currently developing, Kusile. Initially expected to cost some R80-billion, the price of Kusile has since increased to about R111-billion.
Kusile, which will be situated near Eskom’s existing Kendal power station, in Mpumalanga province, will be a six-unit mine-mouth power plant, with a gross output of about 4 800 MW.
Coal to fuel the Kusile plant is likely to be supplied by Anglo Coal South Africa, with which Eskom has signed a letter of intent for the supply of 17-million tons of coal a year over the power station’s 47-year life. Should the two companies reach a primary energy agreement, the coal will be supplied through Anglo Coal’s empowerment subsidiary, Anglo Inyosi Coal. The first coal supplies are expected to be delivered in 2011.
The first unit at Kusile will enter commercial operation in 2013, with the subsequent five units being commissioned at eight-month intervals thereafter. The last unit is expected to be in commercial operation in 2017.
The installation of FGD technology will add significantly to Kusile’s price tag, but was a condition imposed on the development when the environmental record of decision was approved by the Department of Environmental Affairs and Tourism.
As at Medupi, the turbine contract for Kusile has been awarded to Alstom, and the boiler contract to Hitachi. Unlike Medupi, however, the main civil works contract for Kusile has been awarded to a JV including Stefanutti Stocks Civils, Basil Read, Group Five Civil Engineering and WBHO Construction.
Eskom is expected to continue to pursue an aggressive planning and development schedule in 2009 for a third new-generation coal-fired power station, despite a marked slowdown in demand.
Also towards boosting its coal-fired capacity, Eskom is undertaking a project to return to service the Camden, Grootvlei and Komati power stations, which were built in the 1960s, but mothballed in the late 1980s and early 1990s as a result of excess capacity.
This project is due to be completed in 2011, at an estimated cost of R16-billion. The cost of the project is up from an originally estimated R12-billion.
Each of the three stations will have an operating life of between 15 and 20 years.
The recommissioning of the Camden power station started in 2005 and, by July 2008, all eight units of the facility had been returned to service. The station has a total generation capacity of 1 600 MW.
At Grootvlei, which has six boiler and turbine sets, each rated at a 200-MW nominal capacity, the first unit was recommissioned in March 2008. The last unit is expected to be returned to service by October 2009.
At Komati, which is expected to add 1 000 MW of capacity, the recommissioning of the first unit was delayed. However, all units are expected to be fully commercial by the end of 2010.
Arnot Upgrade Project
In addition to projects that will add new capacity, Eskom is undertaking refurbishments at a number of its existing power stations.
For example, at Arnot, the company is engaged in a R1,48-billion life-extension and capacity increase project, including the update of boilers and turbines. The aim of this project is to increase the capacity of each unit of Arnot to 400 MW by the end of 2010, which will increase the facility’s overall capacity by 300 MW. At the same time, the project will try to extend the power station’s operating life. The capacity gain from the project will almost be equivalent to an additional unit, without the equivalent cost of building a new unit.
Ingula Pumped-Storage Scheme
To boost its peaking capacity, Eskom is developing the 1 332-MW Ingula pumped-storage scheme, which will be made up of four units of 333 MW each. This project, being developed at a cost in excess of R16-billion, will entail the construction of two dams, one at the top and the other at the bottom of the escarpment, on the border of the Free State and KwaZulu-Natal provinces. The facility will use excess electricity to pump water in off-peak hours from the bottom dam to the top dam through underground tunnels, from where it will be released through the same tunnels and hydroturbines back into the bottom dam to generate electricity during peak times. The project is scheduled for completion by November 2013.
Gas Turbine Capacity
Another project aimed at increasing Eskom’s peaking generation capacity has been the construction of two new open-cycle gas turbine (OCGT) plants in the Western Cape. OCGT technology was selected for its short construction lead time, and the project, costing R3,5-billion, saw the commissioning of 1 036 MW of new peaking capacity by June 2007 – 592 MW at the Ankerlig plant, in Atlantis, and 444 MW at the Gourikwa plant, in Mossel Bay.
In a project known as Gas 1, this capacity is set to be doubled, at a cost of R4,2-billion.
At Ankerlig, five additional units, with a collective sent-out capacity of 740 MW, are being constructed, and were expected to reach commercial operation by the end of March 2009. The first of the additional units was brought into commercial operation on February 19, 2009. At Gourikwa, two additional units, with a total sent-out capacity of 296 MW, were brought into operation in November 2008.
Wind Farm Capacity
Another of the Eskom projects that is proceeding, despite the change in demand forecast, is the Sere wind project, which will see the utility developing a 100-MW wind farm in Koekenaap, near Vredendal, in the Western Cape. The plant, which will be used during periods of peak demand, will have the potential to be upgraded to a capacity of 200 MW.
The project, which is expected to be operational in early 2010, will be South Africa’s second commercial wind farm, following the launch of the first such wind farm near Darling, in the Western Cape, in May 2008.
One of the challenges of incorporating renewable power into the energy mix is that the cost of developing renewable power is significantly higher than the cost of developing capacity that uses other sources.
Eskom, in December 2008, terminated the procurement process for a proposed multibillion-rand nuclear project, dubbed Nuclear 1, after its board decided it could not make an investment decision to proceed owing to financial pressures.
The project, which would have resulted in the construction of the country’s second pressurised water reactor nuclear power plant by 2017, would have added between 3 000 MW and 3 500 MW to Eskom’s generation capacity, and could have been incorporated into a larger ‘fleet’ option, where up to 20 000 MW of new nuclear capacity could have been added to the South African supply network over a period of 20 years.
Despite the decision to halt the development of the project, the South African government has stressed that the country remains committed to its nuclear power programme, and its goal of increasing the role of nuclear power in South Africa’s energy mix. It has repeatedly emphasised that the project has been postponed, not abandoned, and that by 2012 or 2013, when Eskom’s recapitalisation programme has gained momentum, the nuclear plans will be revisited.
The Department of Minerals and Energy has indicated that the project can be put on hold without compromising security of electricity supply.
Prior to the postponement announcement, Eskom had been poring over bids submitted, on invitation, by rival nuclear vendors Areva, of France, and Toshiba’s Westinghouse, of the US, for several months.
Another component of South Africa’s nuclear strategy is the development of pebble-bed modular reactor (PBMR) technology as an option for future nuclear power generation. The project includes plans for the establishment of a demonstration plant at Koeberg, near Cape Town.
However, reports indicate that the PBMR project may be facing difficulties. In February 2009, it was reported that the project, in which Eskom and the Industrial Development Corporation hold an 85% stake, was on the brink of running out of money. The project has spent R7,5-billion since its inception in 1999, and had about R980-million left, which would last until about March 2010.
The PBMR Company, however, feels assured that it will secure additional investment during the course of the year. As part of the drive to access additional funding, the PBMR Company will shift its focus from using the modular reactor to generate electricity to building reactors that will also produce heat for industrial processes. Another potential application is the use of the reactor’s waste heat for desalination.
Research consultancy Frost & Sullivan expects that the halt in Eskom’s nuclear programme will delay the commercialisation of the PBMR by up to four years, as the shortage of funding means that Eskom is likely to focus on proven technologies. However, the demonstration plant, at Koeberg, and the pilot fuel plant, at Pelindaba, are not likely to be affected by Eskom’s conventional nuclear review, as the PBMR project is a separate process from the utility’s nuclear programme.
Tubatse Pumped-Storage Project
While the Ingula pumped-storage scheme is proceeding, development of a second pumped-storage scheme, Tubatse, has been postponed, owing to a slowdown in the growth in demand for electricity, which is expected to affect peaking demand. The planned capacity for Tubatse was 1 520 MW, and the construction cost for the project was estimated at R19-billion. Tubatse was to be constructed near Roossenekal, in Limpopo province, and the first of four 375-MW units was to have come on stream by 2014, while all four units would have been operational by early 2015.