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The Chamber believes the fundamental reason for the power shortage and the rapid escalation in the price of electricity is the failure of Eskom to adjust its thinking to the new challenges facing the country and the failure to take advantage of new opportunities for quick and cost-effective relief.

The proposed increases are unaffordable and will have a devastating effect on the economy and small business in particular.

In this presentation we will attempt to explain what is wrong and what measures can be taken to improve the situation and limit future tariff increases.

We have grave concerns about the management of Eskom. We believe that maintenance was neglected in the good years to improve the bottom line and we are now paying the price for this in an expensive catch-up operation.

We have been shocked by evidence of the mismanagement of coal supplies and how this has lead to higher coal costs. There is also ample evidence of extravagance and wastage while the average Eskom salary is now about R500 000 a year.

There has been an exodus of skills and Eskom now has to import technicians to perform highly skilled procedures. One example is that many former Eskom staff are now working off shore and have to be brought back at great cost to service equipment and the high voltage lines which are tended from helicopters.

Further evidence of poor management can be seen in the escalating costs of the new power stations which Eskom is building and which are now well behind schedule and over budget.

Eskom Financial are cause for concern. We believe it is fundamentally wrong for Eskom to generate profits for its sole shareholder, the Government. Eskom, as a utility company, should operate on a non-profit basis in the interests of the country and the Government should be content with its VAT income from electricity sales. Given the massive increases in tariffs, VAT on electricity must be the Government’s fastest growing source of revenue!

At present Eskom is keeping the lights on by cutting or rationing supplies to major industrial customers such as the mines and though buy-back schemes.

We submit that this is the wrong strategy. The mines and industries are the economic back-bone of this country and should, in fact, receive preferential treatment. It would make more sense to ration electricity supplies to domestic consumers.

This would be politically unpopular but the reality is that it is domestic consumers who create the peak-hour demand problems in the mornings and especially in the evenings when the electric stoves are switched on and, in winter, the under floor heating and other space heating equipment.

Those domestic consumers who use a lot of electricity are in a position to reduce power consumption by using solar water heaters and LPG for cooking and heating. They can also finance the change to alternative heat sources.

Rationing power supplies to domestic consumers is not an attack on the economic backbone of the country!

Other measures which can be used to curb peak-hour demand are old fashioned ripple control and compulsory load limiters. They may not be popular but we are dealing with a crisis and hard decisions have to be made and implemented.

We stress that peaking power provided by the open cycle gas turbines run on one of the most expensive fuels available, imported diesel, is by far the most expensive electricity produced in South Africa. Electricity from the Ankerlig peaking plant costs R2.47 a unit – this is about ten times the cost of power leaving the present power stations and five times the average selling price of Eskom power.

Surely an attack on high electricity prices must start at these wasteful open cycle plants designed to provide only peaking power but now run for extended periods.

Eskom’s failure to understand this and introduce measures to curb peak demand while lowering generation costs for peaking power are an important part of the high cost problem. We find this deeply disturbing because there are solutions that can be quickly implemented.

One solution is the use of big marine engines fuelled by natural gas. These reciprocating engines achieve a thermal efficiency of close to 50 per cent and they can be throttled up or down at will and with little loss of efficiency. In terms of thermal efficiency they are about a one third improvement on most existing Eskom Power stations. Combined cycle gas turbine plants are even better with thermal efficiency ratings of 60 per cent and more.

We would point out that SASOL, a company built on coal, has decided to use gas and these marine engines to meet much of its own power needs. It is also able to use the waste heat for industrial purposes. This is the kind of thinking that should be coming from Eskom.

Unfortunately Eskom is set in its ways and its thinking is stuck in the era of coal and nuclear power.

The second institutional problem is the municipalities which reticulate electricity in the towns and cities. The sale of electricity has proved to be a good source of revenue and some municipalities have abused the situation by simply passing on Eskom tariff increases. We know that Eskom tariffs have increased dramatically but the increase in distribution costs incurred by municipalities should be in line with inflation and not Eskom tariffs. In percentage terms, municipal tariff increases should therefore be lower than Eskom tariffs increases. This has not always been the case and some municipalities have exploited the situation while under investing in their electricity infrastructure.

In terms of the Constitution, the reticulation of electricity is a municipal competence but this should not give municipalities licence to exploit the situation. When Nersa approves Eskom tariff increases it should publish guidelines for municipal tariff increases. If the guidelines are clear and well publicised there will be considerable ratepayer and resident pressure on councils to ensure that only justifiable tariff increases are implemented.

We would like to see more industries and industrial areas supplied directly by Eskom. If the municipal “middle man” is eliminated tariffs should be more reasonable and an important input cost reduced.

The threat of by-passing the municipalities would also encourage councils to moderate their tariff increases. 

To ensure more affordable tariffs for the future we need a new approach to electricity generation in South Africa. We have to come to terms with the reality that natural gas now provides a cheaper and cleaner source of energy than coal. The big utility companies in the US are building gas power stations in preference to either coal or Nuclear. The following table

Comparing the costs…

US Department of Energy figures for the different methods making electricity for new plant in the US in 2017. Costs are in US dollar per MegaWatt hour.

                                Capacity        Capital costs        Cost per MWh  

Conventional coal        85%              65.8                     99.6                          

Gas combined cycle     87%              17.5                     65.5                          

Nuclear                          90%               88.8                     112.7                             

Wind  (on shore)          34%               83.9                     97                          

Solar PV                         25%               144.9                  156.9                       

Biomass                        83%                56.8                    120.2                        

The table gives the estimated “levelised costs” of electricity from new power sources coming on stream in 2017. The figures include capital costs, capacity as well as the necessary transmission investments and other associated costs. The capacity factor is the percentage of time when the plants are generating.  (full table attached)

The Economist recently described Nuclear power as “A dream that failed” because costs were simply too high. The industry also has a bad record of cost overruns and construction delays. The third nuclear problem is that most of the costs are incurred before any power is generated. This means huge debts and massive amounts of foreign exchange leaving the country. The United Kingdom has done the arithmetic and concluded that Nuclear Power is no longer a viable option.

The problem with coal is the massive logistical operations of mining and transporting the coal to power stations and then disposing of the ash after combustion. These are cost that will continue to rise year on year as wages and transport costs go up. In addition coal-fired power stations consume vast quantities of precious inland water while pollution problems and acid rain are well documented. Finally our coal reserves have been over-estimated and this could lead to shortages and increased costs.

The major change in the economics of power generation has resulted from a dramatic fall in the price of natural gas following the discovery of vast shale gas reserves.

During the last two years there have been massive, world class discoveries of natural gas off the coast of Mozambique and Tanzania. We already have a gas pipeline from Mozambique and we should be thinking about expanding it to feed new power stations.

Off the Cape West Coast we have the Ibhubesi gas field with enough proven reserves to run a large power station for 20 years. Further north there is the Kudu field and geologists are confident they will find further substantial quantities of gas.

In spite of this Eskom has resisted all suggestions of power stations fuelled by gas from the West Coast or imported compressed natural gas. It has rejected offers to convert the Ankerlig open cycle peaking plant to an efficient combined cycle gas turbine power station.

Even more shocking is that the 2010 Integrated Resources Plan sees gas as unimportant and makes little provision for its use in power generation in the near future. By contrast the National Development Plan produced by Minister Trevor Manuel and Cyril Ramaphosa does see gas as important and a more affordable alternative to Nuclear power.

We cannot understand how Eskom and the Department of Minerals and Energy can virtually ignore the fall in the price of gas and the abundance of this resource off our own and neighbouring shores.

In view of the National Development Plan support for natural gas, the major reduction in the price of gas since the advent of shale gas and the discovery of the massive East African gas field, the 2010 IRP is clearly out of date and should be discarded or completely revised to bring it into line with the National Development Plan.

Gas has 13 big advantages in comparison to either coal or nuclear power plants.

• Firstly a new gas power station can be built in two to three years and our need for new generation capacity is urgent. Coal and Nuclear plants take between 10 and 12 years from approval to first power.
• Secondly, gas power stations have small footprints and none of the logistical problems associated with the transport and storage of coal or the removal of ash. The fuel is supplied by pipeline so there is little or no disruption to traffic or other activities. They are unlikely to encounter much opposition from residents.
• Thirdly, they are relatively clean, their emissions are less than half those of a coal-fired power station and they can earn carbon credits while reducing any future carbon tax burden.
• Fourthly, gas power stations can be built at the coast. This reduces dependence on long and vulnerable power transmission lines from the coal fields in the north. This also reduces transmission costs and the associated power losses making for a more efficient grid.
• Fifthly, capital costs are lower because the generating plants are modular with the turbines or reciprocating engines produced in quantity by the aircraft and marine industries which also provide back-up and spares.
• Lower up-front costs mean smaller loans to finance new power stations, less interest to pay and the shorter build period (about two years) means less escalation and better control of costs during construction.
• While capital costs may be lower, the cost of gas fuel makes for higher operating costs but these costs will be paid by the actual users of the power and we do not have the situation where present consumers are, in effect, subsidising future users.
• The eighth advantage is that gas power stations provide the foundation for a viable gas industry. This means gas for use in existing industries as a primary fuel for process heat. This, in turn, puts industry in a position to choose the most efficient energy source for its purposes while it reduces the burden on the electricity grid.
• The ninth advantage is the flexibility of gas power stations. This makes for a more efficient grid and there is less wastage as gas power stations can be “switched off” at night or at other times when demand is low. They are ideal for use in combination with renewable power sources such as wind and solar.
• Gas power stations can be built in industrial areas where they could find customers for their waste heat.
• The eleventh advantage is that Gas power stations use very little water, a vital factor in this water-scarce country.
• The purchase of gas from neighbouring countries will boost the economy of the whole SADEC region and South Africa will benefit from this economic stimulation. This is a better result than an investment in Nuclear power which would see large sums of foreign exchange leaving this country for distant shores.
• The lucky 13th reason is that it is an ideal way to bring more independent power producers with experience of the new technology onto the grid. They will finance their own projects and all we have to do is open the door and invite them in.

It does not take a rocket scientist to understand the case for gas.

In fact, the 1998 White Paper on Energy Policy, provided for IPP’s to generate 30 per cent of the country’s electricity. The recommendations of this paper have not been implemented, but it was used to justify a Government decision to reject an earlier Eskom request to construct a new power station. A former State President has apologised for this decision.

Other recommendations such as the separation of the management of the national grid from the power stations have also not been implemented but legislation to make this possible, the Independent System and Market Operator Establishment Bill, was published for public comment in May, 2011. It has yet to be debated in Parliament.

Finally we believe that there is a need to diversify away from coal as the primary source of energy for the electricity industry. We believe that economic prospects and energy security will be enhanced if we can achieve a mix of energy sources – one third of power from coal, one third from gas and the final third from a mixture of solar, wind, hydroelectricity and, hopefully, geothermal power.

 Unless we do so and introduce competition into the electricity industry tariffs will continue to rise at an unacceptable rate. The result will be that South Africa as a country will become less competitive in the global market with negative consequences for the whole economy and rising unemployment.