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Cablegate: Sag Prepares Electricity Summit As Way Out Of

VZCZCXRO9318
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0982/01 1300853
ZNR UUUUU ZZH
R 090853Z MAY 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4405
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 0206
RUEHBJ/AMEMBASSY BEIJING 0802
RUEHBY/AMEMBASSY CANBERRA 0675
RUEHLO/AMEMBASSY LONDON 1517
RUEHMO/AMEMBASSY MOSCOW 0804
RUEHOT/AMEMBASSY OTTAWA 0634
RUEHFR/AMEMBASSY PARIS 1356
RUEHSG/AMEMBASSY SANTIAGO 0195
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 03 PRETORIA 000982

SENSITIVE
SIPDIS

DEPT FOR AF/S, EEB/ESC AND CBA
STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DOE FOR SPERL AND PERSON
DOC FOR ITA/DIEMOND

E.O. 12958: N/A
TAGS: ENRG EPET EMIN EINV SF
SUBJECT: SAG PREPARES ELECTRICITY SUMMIT AS WAY OUT OF
POWER WOES

REF: A. PRETORIA 906

B. PRETORIA 758
C. PRETORIA 565
D. PRETORIA 315 AND PREVIOUS

1. (SBU) Summary. There are big hopes for the South
African Government/ANC-convened electricity summit of
stake-holders on May 16. Hoped-for outcomes include
high-level leadership and consensus on the way forward out of
the power crisis, including consensus on power tariffs and
the use of load-shedding. A business-oriented think tank
hosted a round-table of key players who placed great stock in
the electricity summit, having identified leadership as a key
gap that contributed to the emergency. However, details on
the summit are still sketchy. End Summary.

2. (SBU) The center-right, business-oriented Center for
Development and Enterprise convened stake-holders to a
round-table on May 5 on the electricity crisis (How did we
get here and how do we put things right?). Attendance
included senior actors of key organizations such as the state
power company Eskom, the state power regulator (NERSA), the
Presidency, the Chamber of Mines, labor, and business.
Although there were a number of government representatives,
the Department of Public Enterprises, which represents the
government as sole share-holder in Eskom, was a no-show.
(Public Enterprises Minister Alec Erwin was vigorously bashed
in absentia, even more than Eskom, whose CEO was gamely in
attendance.) The chair of the National Electricity Response
Team, Department of Minerals and Energy Deputy Director
General Nelisiwe Magubane, attended the morning session, but
was strangely silent. Ironically, the power went out for a
few minutes during the comments of the Economic Advisor at
the Presidency, who voiced views of the government.

------------------------------------------
How Did We Get Here? - Need for Leadership
------------------------------------------

3. (SBU) University of Cape Town Professor Anton Eberhard
provided context for the power crisis by summarizing the
ultimate causes as:

-- Insufficient capacity stemming from the moratorium on
Eskom new build from before 2001 to 2004, while the SAG
unsuccessfully sought to establish a framework to secure
independent power producers (IPPs).
-- Inability of Eskom to keep its generators working due to
equipment and maintenance failures, exacerbated by skills
shortages and management negligence in maintaining coal
stockpiles at power stations.
-- Unreliable networks, in particular looming problems with
electricity distribution.

Eberhard summarized the bogus causes trotted out for the
power crisis as:

-- Demand was higher than expected. (Rather, forecasts quite
accurately identified shortfalls beginning in 2007.)
-- Planning was inadequate. (There were lots of good plans,
including the SAG White Paper of 1998.)
-- Regulated prices prevented Eskom from investing in new
plant. (Eskom had good cash flow; the problem was it did not
have a green light from the government.)
-- Insufficient coal, poor roads, growth in coal exports
caused the coal problem. (While true, these factors were
Qcaused the coal problem. (While true, these factors were
peripheral. The issue was failures in stock-piling and
contracting.)
-- The private sector is not interested in investing. (The
government has failed in implementing its intent to establish
a competitive market. There are 40 IPPs elsewhere in
Africa, in tougher investment environments.)


PRETORIA 00000982 002 OF 003


Eberhard identified key failures in contracting and
leadership as under-lying the power crisis. Weakness in
contracting, as well as non-performance by some small Black
Economic Empowerment (BEE) contractors, contributed mightily
to failures in maintaining coal stock-piles and in securing
IPPs. In addition, he noted that South Africa is one of the
most energy intensive countries in the world.

4. (SBU) Other participants elaborated on other contributing
factors to the power crisis, emphasizing a failure of
leadership. Business Leadership SA official Michael Spicer
feared that there were too many processes and committees, as
South Africans habitually fall back on process. He saw a
risk that process could overwhelm substance. Chamber of
Mines Economist Roger Baxter, who participates in most of the
plethora of relevant committees, echoed the need for
high-level leadership. He said many of the decisions made in
the White Paper of 1998 were not implemented, including
establishment of rationalized regional electricity
distribution (RED) entities. Many participants stressed the
centrality of pricing to getting things right. National
Union of Mineworkers official (and former Eskom Board member)
Frans Baleni and others asked where was the Eskom board?
Shouldn't they be out there leading and communicating with
stake-holders and customers? There was consensus questioning
of the role and mandate of the Eskom board and the Department
of Public Enterprises as share-holder and owner for the
government. There was also consensus criticism of the
aluminum smelters which import bauxite, are electricity
intensive, but are not employment intensive. The failure to
negotiate a contract with U.S. firm AES for a peaking
gas-fired IPP was noted as emblematic of a failure with
respect to both contracting and engaging the private sector.

5. (SBU) Eskom CEO Jacob Maroga bravely attended the whole
day's conference and defended Eskom's approaches. He
admitted that coal was a big problem, but stated that the
stock-pile issue could not be solely attributed to Black
Economic Empowerment (BEE) contracting. Maroga said some
coal-fired plants possessed inadequate dedicated coal, so
there was a commensurate need for coal transport and adequate
road maintenance. He admitted the criticality of regaining
appropriate reserve margin, caused by the delay in the new
build program and deficiencies in plant performance. Maroga
noted that the utilization of current plant installed
capacity or load factor had reached 70 percent, compared to
optimum and historical 50 percent. He noted that the more
costly to operate peaking plants were running at 50 percent,
compared to planned 6 percent. This contributed to the fuel
funding crisis, which was driving the request for a tariff
increase. Maroga admitted that there had been delays in
procurement which contributed to the delay in new base load.
He acknowledged the help of U.S. firm Black & Veatch in
construction management of the new big coal-fired plants
Qconstruction management of the new big coal-fired plants
under construction. Maroga also noted that current plant
availability was only 86 percent, compared to target 90
percent. (Note: Post has heard availability estimates at
times as low as 75 percent. End Note.) Finally, Maroga also
noted that Eskom was suffering worsening coal quality due to
mining economics and geology.

--------------------------------------------- ---
How Do We Put Things Right? - Electricity Summit
--------------------------------------------- ---

6. (SBU) Professor Eberhard stated that the way forward
should include restoring coal stock-piles, improving
generation reliability, securing new build capacity, pursuing
cogeneration, securing IPPs, and improving energy efficiency
and demand-side-management (DSM). Eberhard emphasized that
the cost of the power crisis is higher than acknowledged,
noting that the cost of unserved energy is much greater than
the contracting cost of securing capacity. He asked, "will

PRETORIA 00000982 003 OF 003


the lights stay on?" Eberhard said it depended on Eskom
restoring an acceptable reserve margin, keeping its "kit"
working, and maintaining reliable networks. He said Eskom
was in fact moving forward on these targets.

7. (SBU) Presidential Advisor Neva Makgetla expressed the
government point of view. Makgetla described the
government's extensive modeling of electricity supply and
demand, emphasizing the need to reduce energy intensity,
improve energy efficiency, and bring new capacity on board.
She criticized load-shedding as a crude and
counter-productive tool. Makgetla supported moving to
economic pricing with incentives for metering and reducing
demand, but she stressed the need to cushion the poor from
extreme jumps in prices.

8. (SBU) A number of participants lauded the decision of the
goverment and ANC National Economic Committee to convene
stake-holders to a high-level electricity crisis summit on
May 16. This is seen as the opportunity to get engagement
and commitment from the highest levels of government on the
way forward, including tariff structure and use of
load-shedding. Makgetla stated that the government was
holding a number of meetings to prepare for the summit.
Business Unity SA (BUSA) official Bobby Godsell hoped that
the goverment could clarify Eskom's mandate between security
of supply, competitive pricing, access to the poor, and other
issues.

9. (SBU) The UK Ambassador stressed that any solution would
have to be South Africa-specific and inherently political.
He cautioned that too much emphasis on privatization could
build political opposition. He said that the UK experience
in liberalization and unbundling was instructive, but could
not be applied directly in South Africa. He applauded the
electricity summit as an opportunity to have a national
debate and reach a national consensus on next steps.

10. (U) The local Engineering News reported on May 9 that
the agenda for the national electricity/energy summit on May
16 is likely to be finalized at a special Presidential
joint-working group on May 12. According to the article, the
summit - which was initially called for by the ruling ANC -
will be convened by the National Economic Development and
Labor Council (NEDLAC). NEDLAC Executive Director Herbert
Mkhize noted that Eskom's application for a 60 percent
increase would occupy center stage. However, he admitted
that the regulator NERSA will not be invited as it would
create a conflict of interest for the body, which has to
deliberate on the pricing issue a few days later. In
addition, the role of the state utility Eskom still had to be
finalized. Mkhize suggested the government - as Eskom's sole
shareholder - will likely speak on behalf of the power
company, but emphasized that Eskom executives would be in
attendance.

11. (SBU) COMMENT: The decision to convene a high-level
electricity summit on May 16 is welcome and over-due, but
details on program and participants are still sketchy.
Stake-holders are hopeful for clear decisions on the way
QStake-holders are hopeful for clear decisions on the way
forward. The government has unfortunately lacked the
capacity to get it right so far with respect to IPPs and
realistic tariffs, thereby letting the country drift to its
current power conundrum. Whether it can make an about-face,
grapple with the political exigencies, and provide clear
leadership going forward will have huge consequences for the
investment environment and economic growth.
BALL

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