Update on the Eskom-led New Build Programme

Meeting report

Update on the Eskom-led New Build Programme
Mr Paul O’Flaherty, Eskom’s Chief Financial Officer, said that historically electricity demand and GDP were very much intertwined.  Eskom was one of the top 20 power generators in the world, producing 95% of the electricity used in South Africa and 45% of the total power generated in Africa.  It was noted that Eskom was vertically integrated with 4,8million customers across the residential, mining, industrial, commercial, and agricultural sectors.

Post-1994 many skills had been lost and Eskom was now attempting to build back local skill sets through investment in a skills academy and other training facilities. Eskom desired to become a world-renowned Engineering Procurement and Construction Management (EPCM) company.  In total, expenditure of R323bn was involved across all of Eskom’s capital programmes.  There was a peak work force of 40 000 and more than 50% of the total spend was local on the current large power projects being built across the country.

Eskom had compared itself to other international companies through a construction excellence conference held earlier in the year, where Eskom had invited all groups currently in the process of building coal-fired power stations. The conference had resulted in 60% of all global companies currently in development being present and had led to a very interesting discussion of best practices.

Since 2006-07 project execution skills had been rapidly developed.  Previously outside partners were hired to complete projects, as South Africa had simply lacked the skills. Eskom was launching a project academy and an artisan programme and had opened up a welding school earlier in the year.  Eskom benchmarked itself against companies like Royal Dutch Shell, Exxon, and e-on. Outside of Eskom’s build programme there were really poor safety statistics across the sector.

Currently any new project Eskom started had to have a financial close design in place from the outset. This was different to previous execution methods but a necessary change, to ensure the financial viability of projects. This included the Medupi rail project and SERE wind project among others, where Eskom had ring-fenced funding, identified who they were going to contract, and a build programme all in advance of commencement.

With the 2005 big build programme, there had been a return to service of previously mothballed stations. It was noted that South Africa was the only country in the world that had de-mothballed stations. In the last two years Eskom had set up solar panels to power its administration buildings, and were continuing to roll out a significant transmission programme with 2 339km already built, and a further 3 350km of power lines were in development. This would result in overall capacity expansion.

Mr Poobie Govender, Senior Manager, Project Development, Eskom, stated that the Medupi power station in Limpopo would generate 4 764MW and the cost of completion was R91.2bn.  The operation date for the first unit, Unit 6, would be in 2013.  Kusile in Mpumalanga, near the existing Camden power station, had already committed to 36% of the total spend, with an operational date of 2015. Ingula power station, which was an underground pump ground scheme, where most of the work would be conducted 50-100m underground, had an operational date of 2014.

Komati which was already built, had been mothballed in the 70’s and 80’s, and had three units left to complete at a cost of R88bn. The operational date was March 2013.  In addition, there were a large number of transmission projects under construction, including the 765KV grid project which would take power from the north part of the country to the Cape area to strengthen transmission. It was noted that one of the amazing things about the transmission programme was that it had expanded very rapidly although there was often a struggle with land owners to complete construction, as even a single land owner could compromise an entire project.

The SERE wind project and the Concentrated Solar Power (CPS) plant were still in development.  CPS would have a generating capacity of 100MW, a total estimated cost of R7.8bn and a targeted operation date of 2017. A total of 69 other projects were also in development at a rough estimated cost of R40bn, including land purchases (see slide 11).

Mr O’Flaherty said that when Eskom started closing contracts in 2005 on the new build projects, the supplier market was experiencing shortages of material, components and engineering skills, and Eskom was still operating within tight timelines.  It was noted that the boiler contractor was struggling in both South Africa and Europe.  Eskom was not a contractor but an ECPM, as such contracts were awarded to contractors while Eskom managed costs and put together an integrated schedule for contractors to perform against.

The build programme was being used to contribute to skills development and facilitate manufacturing capability in South Africa.  Skills remained a significant factor for Eskom, as the competition for skills was fierce both internationally and domestically.
In regard to funding, until October 2010 Eskom did not have a funding plan in place but had since worked closely with National Treasury and the Department of Public Enterprises, implementing a R300 bn funding plan.  Prior to 2010 a moratorium had been placed on Kusile, as there had been no certainty of funding, but Eskom had started placing contracts again in 2011.
Despite the importance of executing projects on a tight schedule and within a tight budget, an emphasis was placed on safety as being the number one priority on project sites.

Contractor performance was also noted as being a major challenge. Despite employing some world-class companies, this did not mean that deadlines were always met.

Eskom’s focus was on the Medupi, Kusile and Ingula power stations where the first units would begin to come on line in 2013-14.  A significant milestone had been reached at Medupi, where the hydro pressure test on one of the unit boilers had been completed.  A few leaks had been found and mended and the boiler at Medupi 6 could shortly be put into service. The first unit at Kusile was destined for 2014.

At Medupi, the boiler units were spaced six to eight months apart, and at Kusile from eight to 12 months apart. This was a result of the funding solution, as an additional R200 bn would have been required if Kusile was set at six-month intervals.  In terms of context, the biggest power project in the world was the Three Gorges Project in China.  Kusile and Medupi would be the fourth and fifth largest coal fired power stations in the world upon completion, with an investment of four times as much as the Gautrain.

At Medupi, Eskom had awarded 34 contract packages.  Interface management was Eskom’s responsibility, but on the boilers a virtual design had been handed out to contractors who had then came back with the real design. It had taken until very recently to finally sign off on the boiler design, and the first three units at Medupi were all different, as were the first two at Kusile.  There were 46 packages awarded at Kusile and 27 packages awarded at Ingula (see slide 18).  The large number of contracts was why commercial management was fundamental to the projects’ success.  Since 2005 the build programme had added 5 756 MW, 4 164km of transmission lines, and 20 195 MVA substations (slide 19) with significant new delivery right up to 2018/19 (slide 20).

In terms of costs, both Medupi and Kusile had been placed in the transmission portfolio; cost and execution consisted of a number of major activities, including the clearing and removal of earth to make it solid, so that a civil foundation could be built to place boilers and turbines on site.

Komati, which had been mothballed, faced a lot of challenges in its return to service (RTS) as plants were not built to be mothballed and one day brought back to life.

Costs at Medupi were R91,2bn, with the base cost originally around R60bn, on top of which there were unforeseen costs for labour and steel as a result of delays and additional time requirements. However the figures excluded interest payments.

The sources of the R300bn funding plan were noted (see slide 23), with 77.6% or R232.7bn currently secured
In terms of the Integrated Resource Plan (IRP), there was no funding plan beyond Kusile, so that once Eskom received its allocation from its method resource plan, it would have to structure new funding plans. Implementation of new projects would not begin without a financial plan in place.

Eskom has always had a strong socio-economic development plan in terms of the big build programme (see slide 28) and had insisted on skills development and local hiring.  At Medupi, 58% of the total project spend was local, with 84% of the main civils spent locally.  At Kusile, these percentages were 55% and 65% respectively, with Ingula at 74% and 100% of the access roads package contracted locally.

There had also been a need to build new fabrication facilities for steel, and the boiler industry in South Africa had had to be rebuilt from scratch.

Amazingly, Eskom employed more than 70% of South Africa’s engineers, consumed 43% of university graduates from engineering, project planning and other relevant disciplines, and 48% of all artisans (see slide 30). Thus Eskom was a major contributor to growing skills, yet there remained a desperate lack of contract management skills.  Eskom continued to train people to the benefit of the whole country, not only in its own interests.

Job creation was also strongly influenced by the new build programme with a peak workforce at Medupi of 19 000, at Kusile of 12 000, and 4 500 at Ingula.   A further 11 000 jobs over and above the new build projects, had been created by other opportunities like the 765kV and the Return-to-Service (RTS) programme, with a total direct impact on 160 000 lives.

The projects had also led to a surge in local infrastructure being built (see slide 32), which included hotels, housing, water, and local transport. It was impossible to please everybody but it was noted that this was part of the nature of being a state-owned company.

Twenty-month delays at Medupi were the result of a lack of civil access, where the geotechnical investigation of the site had not been done properly.  Another factor had been delays caused by the boiler contractor due to steel modifications. There had been a significant number of logistical issues, where pieces of the boilers were arriving on site that were not in order or were out of place.  It had been a minor miracle that the hydro test had been performed this year. There were still 11 more boilers to go before the projects became fully operational.

Mr Govender stated that the way forward would be detailed in the Integrated Resource Plan (IRP) and would outline what the next generation would hold, past the current new build programme. There was a six-step process on how new generation could be implemented in the country where the Minister of Energy, relying on feasibility studies, would eventually decide who built what.  The capacity for coal and gas still required the arrival of new Independent Power Producers (IPPs). The obligation to supply power nationally was with the Department of Energy (DOE).

DOE had implemented the first round of bids for renewables targeting 3 750MW to be procured in five rounds (slide 45). This had already yielded 1 400MW broken down into 650MW of wind, 1 500MW of Concentrated Solar Power (CSP) and Solar panels (PV-photovoltaic) 650MW.

Any new nuclear builds were most likely to happen in the Western and Eastern Cape.  The Waterberg coal field was the next most unexploited area, which extended into Botswana and could support up to ten new coal-fired power stations. In terms of renewables there was tremendous wind energy potential in South Africa with 20 available sites predominating in the Northern and Western Capes.  Solar generation was possible in the Northern and Western Capes, as well as Limpopo.

The SADC region was rich in gas and hydro (see slide 46), with the DRC’s Grand Inga Dam project totalling 20 000 MW of hydro power; Mozambique exported 5 000MW to South Africa from hydro, gas and coal sources. The East transmission corridor (eastco) which connected Tanzania to South Africa, still needed to be built. The Western transmission corridor (westco) had the potential of bringing hydro energy through Angola from the DRC, and other sources throughout the SADC region.

Mr O’Flaherty noted every effort had been made to grow skills. In conclusion the new build programme was significant by any measure and lessons had been learnt and implemented for future projects. Good progress was being made but serious risks, including contractor performance, would need to be more carefully managed. The global financial crisis had affected all sectors of the economy with macroeconomic factors causing delays which had led to cost escalation. Times lines that were based on the integrated schedule meant that decisions were required now on the allocations of the Integrated Resource Plan 2010 for future builds.

Discussion
Mr K Moloto (ANC) asked about the challenges and delays at the Medupi site, saying that it was difficult to accept that Eskom could move into a site without first doing proper geotechnical work and without knowing the soil conditions on a massive project of this nature.  On the issue of boilers, if Eskom had agreed from the outset about the design and the configuration of the boiler, there should not be ongoing modifications.  If there were delays, had penalties been imposed on Hitachi, because these were major issues for the country?
Had the Department of Public Enterprises, as Eskom’s shareholder, engaged with the Department of Energy in terms of project timelines, as the current impression was that there was no interaction?

Cost differentials on slide 38 had shown the cost for Kusile, but what was the total cost -- with interest -- that South Africans should know about?  Lastly what was the life span of the mines supplying coal to the new power stations?  Was Eskom sure the supply was fully secured for the life of the power stations?

Mr E Lucas (IFP) noted the importance of communication between Eskom and the committee. He then elaborated by saying that it was very concerning that soil conditions weren’t properly investigated prior to the start of building. He was very interested in the use of solar power for Eskom buildings and he wished to know what the different prices were for producing solar, wind and coal power as a point of reference. There was also a hope that the experience from building these plants would carry over into future projects. It was noted that people from Poland were once brought in on a past project and no skills had been passed on to local people. It was emphasised that skills must be passed on to future generations.

Mr S Radebe (ANC), noting the severe power outages in India, said that at least in South Africa there had been progress on power production and transmission and 40 000 jobs had been created around the country. He wished to know what would be done in terms of sustainability, what was going to happen and where these skills were being employed.

He asked what plans Eskom had for road maintenance and conversion to rail transport for trucks transporting coal to the Medupi power station. These transport issues required that challenges be foreseen in advance so that the sustainability of energy and jobs could be ensured.

Mr S Mayathula (ANC) asked if Eskom had bursaries. He then asked for greater details on the macroeconomic challenges facing the energy sector so that the committee could pick those up and deal with them.

Mr J Smalle (DA) said that pressure remained on the national energy supply and that there were 4 000MWs in backlogged power that should have been reallocated by now.  What impact would this have across society and what sort of reserve margin would be acceptable to the consumer to ensure service provision?  With regard to bringing in new IPPs in the future, he expressed the need to demand a purchase agreement, and power offset regulations. He was weary of white elephants and stated there was a need to make provisions against the failures of new IPPs.

With 107 separate subcontractors, how could Eskom ensure safety, what penalties were in place, and what did one stop a contract for?  Of the contractors, how many were operating behind schedule?  What was the percentage?  Would running a more efficient electricity programme make a renewed nuclear programme unnecessary?  Could the required 9 600MWs of new power be sourced from other sources?

On the recommissioning of mothballed stations, he asked what the consequences were for carbon emissions. He noted the transmission network backlog on the national grid and asked how much effort was being put into resolving this problem.  Then he asked why different boilers were used in a single substation.  How much was being spent on the refurbishment of substations, given that some were at an advanced age?

What were the estimated costs for a future build programme to produce the required 9 600MWs?

Mr L Greyling (ID) said he had visited the Medupi site during the parliamentary recess period and emphasised that Eskom should have expanded the entry road before building the project, as there were frequent traffic jams.  It had been said that Hitachi had sub-contracted out work for building boilers to different firms with different specifications and thus section joints had not fitted together when they had arrived on site.  What penalties would be imposed for this delay that had put a strain on the national economy?  How could one calculate the penalties when they had such a severe impact on the whole country?

It was noted that Medupi was meant to be a super critical power station and now it was subcritical because the kind of coal that was accessible to the plant was of an insufficient calorific value.  Would this then mean that the coal would have to be washed, adding cost to the consumer?  He related information from a media source that the cost of power to the consumer from Medupi would be 97cents per Kw hour and wished to know if this was true.  If so, it was worrying, as it put pressure on the future of the energy plan moving forward, if wind was found to be cheaper than coal.

It was emphasised that Mpumalanga was running out of coal, and the need to build a rail line to the plant was something that should have been actioned years ago. He asked if the coal would then be transported by trucks, and what effect would that have on the electricity price in the future.

Mr Greyling’s point was that South Africa was under strain now but would be further strained in 2017. The National Development Plan had said that nuclear power was not affordable, so a separate resource plan was needed to tap into regional gas supplies. Was Eskom looking at what infrastructure could be brought online in this regard across the region?

He went on to discuss the Concentrated Solar Power plant, stating that it had been on the table for ten years and was a condition of the World Bank loan on CSP. Therefore it was necessary to see what potential impact it could have on energy generation in South Africa.

The Chairman said there was a need to have an IRP update as part of committee oversight work. Down the line, there was a need to discuss the base load in our supply, and who were the most reliable energy carriers.

Ms B Ferguson (COPE) wished to know who was accountable for power projects when things went wrong and what the implications for citizens were.  She expressed concern over the lack of skills, most of which were external, and asked how far behind South Africa was in this regard. What was the impact of these new build projects on road transportation and greenhouse emissions?

Mr Smalle asked what the exit strategy for Lephalale was when Eskom left, and what the impact on smaller businesses’ cash flow would be.  He expressed confusion over the Northern Grid project which would become operational in 2015, as power stations would be operational before the grid was online.

The chairman asked why there was a marked difference between Delmas -- home to Kusile -- and Ladysmith in KZN -- home to the Ingula project -- despite the similar size of investments. This was linked to Mr Smalle’s comments regarding a domino effect on investment attraction.  Would there be more permanent investment past the new build era?  Was Eskom working beyond their scope and were they working with other state-owned enterprises to facilitate sustainability?  Was there a supply and localisation plan in place?

It was noted that historically there had been an oversupply of power in South Africa but that the challenge had been one of access.  To what extent did Eskom maintain oversupply when it knew that there were economic growth perspectives?  Where did the oversupply come into effect?  A definition of primary energy was asked for as well, and the Chairperson wished to know why Eskom wanted to be one of the top EPCMs globally. To what extent was Eskom taking the Integrated Resource Plan onboard?  He noted a huge potential for increased energy trade with Mozambique and wondered why this had not been developed further.

Mr Moloto emphasised that slide 46 on electricity potential in the SADC region should have included the 300MW Lake Turkana wind farm green energy project in Kenya, as it was Africa’s first utility-scale wind farm and thus a source of pride.

The chairman mentioned a recent news article that claimed that in six years there would be a shortage of 40 million tonnes in the coal supply for Mpumalanga power stations, although there were coal reserves of 70bn tonnes between Limpopo and Botswana. He asked for clarification on the matter.

Responses
Mr O’Flaherty said that in regard to geotechnical work, it had been done but not to an adequate level. Responsibility for the detailed design of boilers was Hitachi’s.  Penalties were attributed through the contract, which could be up to 15% of contracted fees, and which Eskom reserved the right to charge.  Nevertheless, Eskom would be linked to Hitachi until 2018/19.  Within the contract a performance guarantee from Japan, over and above penalties, was also enforceable. While it was not impossible to remove a contractor from site, it was necessary to understand the ramifications of doing so. Eskom had been to Japan and had visited with the Japanese ambassador in South Africa to discuss the matter in detail and had been satisfied with the results of this communication.

Timelines had been engaged upon with the Department of Public Enterprises and the Department of Energy, but decisions were needed very soon on coal and nuclear build programmes if they were going to come online in time to meet demand.  Although it was nearly time to submit a tariff application to the National Energy Regulator of South Africa (NERSA), it was difficult to do so for projects post-Kusile when those projects were still to be decided upon.  
Mr O’Flaherty assured the Committee that currently the tariff rate was 60 cents per Kwh, but Medupi would be much less. Total finance charges, including interest payments, would be R25bn from start to finish on Medupi, and R40bn for Kusile.  It was emphasised that Eskom was funding these stations with debt and very little equity. The funding was secured with set terms, including 10% annual interest. In terms of coal supply, Eskom was secured at Grootvlei for the life of mine.  As yet there was no signed supply contract for Kusile with Anglo-American, but it was in the process of negotiation.

Mr Govender continued by detailing prices at present for coal, wind and solar power on levelled cost terms. Coal was in the range of 70-80 cents per Kwh, while onshore wind was marginally more expensive at between 90 and 110 cents per Kwh. Concentrated Solar Power (CSP) came in at R2.50 to R3 per Kwh, which was two and half times to three times the baseline for coal.

Mr O’Flaherty said that Eskom was managing contractors well. He went on to say that one could be one’s own construction company, or one could award another company a ‘lump-sum turn-key’ contract, but this left no ability to influence local skills development, so Eskom had decided that the only way to move forward was in an Engineering Procurement and Construction Management (EPCM) manner, to create sustainability. There was a good database in place for contractors, but skills’ training was still way off the mark.  In the project management space, Eskom was short of 1 000 people, while welding skills were in short supply globally. Eskom was doing its utmost to develop this area.

Mr Govender next spoke on gas strategies, observing that gas was important in South Africa’s energy mix and had a lead time of 2-3 years for development of new sources. Gas was sourced abroad at a price that was commercially viable and Eskom was currently pursuing two options.  One was a gas field in West Africa, which could be a viable source of gas to support power generation in the Western and Eastern Capes. The other was shale gas, which had been a notable market changer in America but was still a way off in terms of environmental policy support.

Mr O’Flaherty said Eskom was working on a game plan for the post start-up period when work force numbers traditionally declined.  Currently there were 4 500 people employed with the civil contractor and 5 400 people were working with Hitachi on site, but over time they would also be demobilised.  Eskom was engaging with shareholders and its own bargaining units to try and do detailed work and studies to facilitate sustainability.

Mr Govender said an atlas was being developed to show the potential for solar radiation of greater than 2 500 watts per metre squared across South Africa.  This would later become a full wind and solar atlas so that new renewable energy projects could eventually be rolled out.

Mr O’Flaherty said in Lephalale in Limpopo, the roads were in disarray because of construction. A road-to-rail programme was being rolled out, converting road to rail solutions.

The tariff in the Multi Year Price Determination (MYPD2) budget announcement had increased Eskom’s levy by 0,5cents, effectively taking away from Eskom the ability to deal with roads.  Road repairs were thus the responsibility of the national roads authority.  With regard to boiler refits, Camden had been completed and Komati was being finished presently.  Commercially it made sense from a levelled cost perspective to conform to a similar technical design.

Eskom had a number of bursaries on offer and information was readily available on Eskom’s website.

Referring to Independent Power Producers (IPPs) and backup plan, Eskom had to ensure it incurred costs only for which it received a tariff.  If IPPs did not come on board, in theory there were some options, including the extension of the life of a power station.  This was relevant only when based on demand growth, which Eskom was currently not experiencing, as it was selling electricity at levels seen in 2007; and sales were down three percent.

In relation to economic growth and stranded assets, Mr O’Flaherty believed as a country there was a need to keep adding power to the grid, which should come as an annual commitment of continually adding 1 000-1 500MW to the grid, rather than the current stop-start stop start method of power construction.

Eskom was completely accountable for the safety of workers on site.  Previously there had been a late performance from a civil contractor at Medupi.  At Kusile, although they employed the same boiler contractor and there had been a few minor design issues, problems had not occurred there. The next big performance issue was that of the turbine contractor, but to date Eskom had not seen anything to indicate they could not deliver.

There was a stated need to do more maintenance on current power stations, but it was simply not possible to replace nuclear power through improved efficiency.

In terms of greenhouse gas emissions, it had been stated by Eskom’s president that the country would grow to a certain extent and then reduce emissions. The return to service of mothballed plants was part of that growth strategy.

From Eskom’s perspective, R10bn per annum was currently spent on upgrading the transmission network but Eskom was not accountable for the backlog that sat within the municipal footprint. He said Eskom was aiming to implement N-1 reliability, which meant that if a line went down on one’s left, one had another on one’s right so that there was stable power transmission across the country at all times.

On boiler design, Mr Govender could not explain why the design had not been uniform, although different designs were sometimes required because of atmospheric conditions, but at one site the design should be the same.

Currently in the Waterberg, Eskom was aware of the huge potential of coal in that region and was looking at how to exploit this resource, but first there was a need to understand how much of the land was privately and publicly owned. This would allow for a redistribution of mining wealth to the country.

Mr O’Flaherty said Eskom was already stockpiling coal at Medupi and noted that a study had been undertaken by the Council of Geosciences on the coal supply that should be presented to the committee. This would give a clear indication where coal was running out, but this did not mean that there was not enough coal for Medupi.  He believed there had to be a percentage of the overall coal supply secured for Eskom to ensure supply at a stable cost to consumers.

Mr Govender said that in response to Mr Greyling’s inquiry on CSP, development time was taking longer than expected but Eskom wanted to make sure that in three years from the time it was handed over, transmission servitudes had been done, funding secured, and that all contracts had been closed up. This was in contrast to previous operating methods, but was necessary as part of the World Bank procurement programme.  The estimated target for operation was 2017.
Mr O’Flaherty said Eskom had to operate based on what it was comfortable with from an integrated process basis.  However Eskom had a long way to go in ensuring contractors were managed properly and executed their tasks on schedule.

Regarding an exit strategy for the towns where the new build projects were ongoing -- Ladysmith, Lephalale, and Delmas -- there simply was not one in place yet.  

The chairman stepped in, saying that not only Eskom, but Eskom in concert with other role players needed to come together on a plan for the post-new build period.

Mr Govender said that the Northern Grid was built up and commissioned in pieces, so that power could be evacuated and the timing matched the power station units coming on line.

Mr O’Flaherty continued by saying that for the next five years there was a high level of certainty for the coal supply and that the deficit of 40 million tonnes was over the line, and part of that was that Eskom had yet to sign a provision agreement with Anglo-American.

The differences in the GDP growth at Lephalale when compared to the already established town of Delmas, was that since it had started as a much smaller and more remote place it had been necessary to build a lot of new infrastructure. This accounted for the difference.

Primary energy was defined as Eskom’s cost to manufacture power and run power stations.

Mr Govender spoke about the 2012 coal-fired power station builders conference, saying that the criteria used in getting the participants together was that each participant had to have coal-fired power projects being built that were at least 500MW. Groups from Europe, Asia, and America took part.
Mr O’Flaherty said that Eskom aimed for 65% of local spending and the goal of becoming an EPCM was not to work globally, but to be world class.

Mr Govender, speaking on the retrofit and return to service of previously mothballed power stations, said that a lot of the work that was done was reusing older technology but then improving it in terms of efficiency.

On the 5 000MW from Mozambique, it was noted that it came from a couple of different sources, coal and hydro facilities, using the flow of the Zambezi River.   It was remarked that SASOL used part of the gas supply from Mozambique for its own internal power, which accounted for 260MW being used in South Africa.

Mr O’Flaherty concluded his remarks by stating that Eskom currently reported a debt load of R150bn to be grown to R350bn with 10% annual interest or R35bn per year. This would be paid back over a ten year period.
The meeting was adjourned.