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Cablegate: Doom and Gloom in the Electricity Sector - Business

VZCZCXRO6227
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0132/01 0181523
ZNR UUUUU ZZH
R 181523Z JAN 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3229
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0721
RUEHRL/AMEMBASSY BERLIN 0575
RUEHBY/AMEMBASSY CANBERRA 0598
RUEHLO/AMEMBASSY LONDON 1388
RUEHMO/AMEMBASSY MOSCOW 0721
RUEHOT/AMEMBASSY OTTAWA 0551
RUEHFR/AMEMBASSY PARIS 1251

UNCLAS SECTION 01 OF 03 PRETORIA 000132

SIPDIS

SIPDIS
SENSITVE

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DEPT FOR AF/S, ISN, EEB/ESC AND CBA
DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, L.PARKER

E.O. 12958: N/A
TAGS: ENRG EPET SENV EINV BEXP SF
SUBJECT: DOOM AND GLOOM IN THE ELECTRICITY SECTOR - BUSINESS
COMPLAINS

REF: A) 07 Pretoria 4082

B) 07 Pretoria 3078
C) 07 Pretoria 2814

1. (SBU) SUMMARY: The local media is abuzz with complaints from
businesses and consumers about increasing electricity load-shedding
and unplanned outages. State power company Eskom and the government
offer no quick "silver bullet" solutions, and are asking consumers
to bear up and conserve energy, waiting for new projects to come on
line over the next 4-7 years. Eskom admits that the timing of
mega-projects like aluminum smelters is at risk. The problem is
likely to get worse before it gets better - given that Eskom faces
its own skills shortages as it grapples with deferred maintenance
and new build. Electricity shortages will likely have a negative
impact on growth and investment, especially in energy intensive
sectors, which have in the past been a prime source of foreign
investment. Other consequences include pressure to end all
electricity exports and likelihood for the government to make a
decision on new nuclear power build by mid 2007. End Summary.

-------------------
Load-Shedding Angst
-------------------

2. (SBU) Consumers, businesses, residents, and motorists are in an
uproar about state electricity supplier Eskom's increasing
load-shedding and unannounced rolling black-outs. According to
press reports, Business Unity South Africa (Busa) seeks urgent
meetings with Eskom and the government and called for a "transparent
plan" to deal with the country's growing power supply problems,
citing the particular negative impact on business and small and
medium-sized enterprises. Busa called for better planning and
appropriate incentives for all energy users to increase energy
efficiency. Economic officers hear increasing complaints from small
businesses about the costs of unplanned outages. Larger businesses
and institutions are increasingly investing in generators, which
have become a booming business, but it is more difficult for small
businesses to finance back-up power sources.

3. (U) Meanwhile, South Africa's Public Protector has launched a
preliminary investigation into Eskom's rolling power cuts, noting
the "devastating" effect on public and private service delivery.
The agency sent a letter to Eskom on January 16, requesting detailed
information on the reasons behind and measures taken to deal with
load-shedding, including steps it intended to take to "compensate
those that have suffered damages and/or inconvenience as a result of
load-shedding."

----------------------------------------
Negative Impact on Investment and Growth
----------------------------------------

4. (U) Econometrix Economist Dr. Azar Jammine was quoted in the
press warning that power shortages would inhibit foreign investment
and prevent the government from reaching its targeted six percent
yearly economic growth from 2010 onwards. Minister of Minerals and
Energy Buyelwa Sonjica, responding in a number of interviews,
countered that "there is no need to panic about future investments."
Sonjica did, however, concede that the country had an "acute
Q Sonjica did, however, concede that the country had an "acute
problem" with electricity supply in light of strong demand growth.
Foreign investment has typically been strong in energy intensive
sectors, because South Africa has been perceived in the past as
possessing cheap and available electricity.

5. (SBU) Eskom has been quoted widely that its reserve margin is
dwindling as it copes with planned and unplanned maintenance. The
margin is so tight that, according to press reports, planned
maintenance at the Koeberg nuclear power plant was postponed for one
week due to the load-shedding Eskom predicts 4-7 more years of
load-shedding until significant new coal- and gas-fired projects
come on line. In a January 16 meeting with Energy Officer, Eskom
Executive Assistant to the Managing Director Calvin Theko predicted
significant load-shedding for the next four years until the first
unit at the Medupi coal-fired plant comes on line. He lamented that
Eskom's headquarters at Megawatt Park in Johannesburg is itself not
immune to the disruptions and inconvenience of power outages. Theko

PRETORIA 00000132 002 OF 003


insisted that South Africa would be able to provide adequate
electricity to the 2010 FIFA World Cup. An Eskom maintenance
training manager told Energy Officer that Eskom faces severe skills
deficits in maintenance training and staff.

6. (U) As quoted widely on January 17 in the business press, Eskom
said it would not take on any new mega-projects until 2012, pending
commissioning of the first unit at Medupi. Finance Director Bongani
Nquababa said this would exclude any projects "1,000 MW-plus", and
could affect the timing of the massive aluminum smelter Rio Tinto
Alcan planned to build at Coega in the Eastern Cape. A Rio Tinto
Alcan spokesperson expressed confidence that the project would move
forward. The company had negotiated a long-term electricity supply
contract with Eskom in 2007 that included compensation for
shortfalls in electricity supply. The 735,000 ton, 1,350 MW, $3.25
billion aluminum smelter project has been delayed since its
conception by Pechiney, as it was acquired first by Alcan, then
Alcan was in turn acquired by Rio Tinto.

-------------------
Eskom's Way Forward
-------------------


7. (SBU) Short-term, Eskom is approaching the Treasury for balance
sheet support as it seeks to fund its five-year, $ 25 billion
capital investment program and in light of credit rating agencies
raising concern about Eskom's deteriorating debt-to-equity ratios.
Standard & Poors has threatened to lower Eskom's investment grade
BBB- credit rating if it does not secure additional capital from its
principal shareholder, the government, in the next three months.
Eskom gained approval from the regulator for a 14.2 percent tariff
increase (whittled down from the requested 18 percent). (Note:
South Africa enjoys low-cost electricity of around 2 U.S. cents per
Kwh - when available. End Note.) An AES-led consortium will soon
begin construction on two gas-fired plants totaling 1,000 MW,
ambitiously targeted for the end of 2009. Eskom is de-moth-balling
some plants and is using some peak-load plants as part of its
current base load. Eskom reportedly still exports small amounts of
power to neighbors, including Namibia, Botswana, and Zimbabwe, but
these amounts have been steadily declining. The sustainability of
these power exports is now under question as local commentators have
called on Eskom "to come clean" about these exports during a time of
growing domestic power shortages.

8. (SBU) Longer term, Eskom ambitiously plans to build up to 20,000
MW of nuclear power stations, out of a planned doubling of current
capacity from about 40,000 MW to 80,000 MW by 2025. Westinghouse
and Areva of France are competing for the first tranche of 3,500 MW
and the larger fleet of as many as 14-18 power plants. Preliminary
bids are due January 31 and more detailed bids will be submitted
March 31. Eskom and the government are expected to make technical
and political reviews in advance of Eskom's board meeting in June.
The government anticipates that some of the new nuclear build would
comprise new Pebble Bed Modular Reactor technology (where
Qcomprise new Pebble Bed Modular Reactor technology (where
Westinghouse is also a partner). Westinghouse is pitching its
strength in localization as a key component of its fleet approach.
One consequence of the growing power shortage is that Eskom will be
under intense pressure to award the nuclear contract without delay.
Embassy therefore expects the award to be made to Westinghouse or
Areva by mid-2008. In addition, the government has announced that
up to thirty percent of new electricity generation capacity would be
available to Independent Power Producers (IPP), like the AES
project, which represents the first significant greenfield IPP.


-------
COMMENT
-------

9. (SBU) The media is full of stories complaining about
load-shedding and its costs and inconveniences, adding additional
angst to the regular topics of crime and traffic congestion.
Residential and business security features, such as electric fences
and alarms, are compromised by the outages. Motorists grapple with
chaotic intersections where stop-lights are not functioning. Energy

PRETORIA 00000132 003 OF 003


Specialist recently did his normal 20 minute commute in quiet
Pretoria in two hours due to traffic jams associated with stop-light
outages.

10. (SBU) With Eskom's effective reserve margin now zero and given
likelihood of deferred or inadequate maintenance, the problem is
likely to get worse before it gets better. President Thabo Mbeki
made a public apology and accepted responsibility for the country's
power problems last December. Unfortunately, neither the SAG nor
Eskom has provided an immediate solution, other than bearing up
under growing power cuts for the next several years until the next
major power plants come on line.

BOST

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