south africa’s power crisis: understanding its root causes

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www.gsb.uct.ac.za/mir

Prof Anton Eberhard Management Program in Infrastructure Reform and Regulation

South Africa’s Power Crisis: understanding its root causesand assessing effortsto restore supply security

Centre for Development and Enterprise Round Table5 May 2008



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1. Electricity demand was higher than expected

Electricity blackouts: dispelling bogus arguments

Eskom long term sales forecast track record

120000

170000

220000

270000

320000

370000

1990 1995 2000 2005 2010 2015

GW

h

199419951996199719981999200020012002200320042005ActualHigh 4%Low 2%

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120000

170000

220000

270000

320000

370000

1990 1995 2000 2005 2010 2015

GW

h

199419951996199719981999200020012002200320042005ActualHigh 4%Low 2%


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1. Electricity demand was higher than expected2. Planning was inadequate3. Regulated prices prevented Eskom from investing

in new plant4. Rain and wet coal5. Insufficient coal: poor roads, growth in exports, ….6. Private sector not interested in investing7. Consumers not cooperating in saving electricity

More bogus/misleading arguments


120000

170000

220000

270000

320000

370000

1990 1995 2000 2005 2010 2015

GW

h

199419951996199719981999200020012002200320042005ActualHigh 4%Low 2%

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Insufficient generating capacity– Eskom’s investment programme 4 years behind

• Moratorium from 2001-2004• New build programme has slipped

– DME contracting of IPPs unsuccessful

Electricity blackouts: ultimate causes (1)


20000

25000

30000

35000

40000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Meg

awat

ts

Peak demand Supply capacity

Reserve margin

31%

Reserve margin

7%Reserve margin

15%

Ideally need 20% reserve margin to cater for planned maintenance, unplanned outages and system stability

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Eskom unable to keep its existinggenerators working adequately


90 : 7 : 3plant availability : planned maintenance : unplanned outages

86 : 9 : 576 : 10 : 14

Negligence in coal contractingEquipment and maintenance failures


__________________________________________MW

Eskom capacity+imports 39 855Operating reserves 1 800Planned maintenance 3 715Breakdowns (e.g boiler tube ruptures, etc) 4 235Reduction in capacity (e.g. wet or insuff coal) 2 694Total capacity available for supply 27 411Expected demand 32 000

Example: 28 January 2008

Consequence: massive load-sheddingdiamond, gold and platinum mines shut down

What are root causes?Systemic management and governance failures?

Who has / will take the rap?

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Once again need to understand ultimate causes


Focus is currently ongeneration but securityof supply also threatenedby unreliable networks

The next power crisis: distribution fails

Uncertainty because of lack of progressin EDI restructuring has led to

underinvestment in human and physical capital


1. Restore coal stockpiles2. Improve generation plant availability3. Eskom’s investment programme4. Co-gen5. New IPP window6. Energy efficiency

and DSM

Government & Eskom’s response plan

Load curtailment or pre-emptive load-sheddingwhen all else fails!

Supported by electricity price increases

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Ensuring that Eskom’s kit operates satisfactorily

• New executive manager - greater urgency• Coal stocks being rebuilt at massive cost: main

reason for request for 53% real price increase• But stockpiles currently still uncomfortably low

(5-12 days) with resultant vulnerability to wet and poor quality supply

• RWE audit of plant maintenance• Contracting back of experienced staff• But many key posts remain unfilled

Have systemic management, organisational, contracting and maintenance failures been addressed adequately?


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2008 2009 2010 2011 2012 2013 2014MW

OCGTs

Medupi

Bravo

Cogen

Ingula

Wind

CamdenGrootvleiKomati

2007

3500

2000

4500

4500

3000

1300

100

IPPs ?

Energy efficiency 4000

X

7


-5

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Res

erve

mar

gin

%

Year

Eskom

Target

With imports

Reserve margins will fall

dangerously if no IPPs, cogen or

savings

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Eskom’s new build programme has slippedEskom’s project development & contracting capacity? R350 billion?


0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Res

erve

mar

gin

%

Eskom + 3600MW energy

efficiency

With imports

Eskom investing as fast as it can, but now also needs imports, IPPs, Co-Gen and DSM

Target

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With 3000 MW cogenplus 3500 MW IPPs

Vulnerable period

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IPP and Cogen prospects

• Failure of DME to procure IPP peaker is major setback– 1000MW less capacity available in vulnerable period through to 2011– Government/Eskom’s distrust & belief in private sector further prejudiced

• Yet, striking fact: 40 IPPs throughout Africa in far more challenging investment climates

• Failure is not simply a reflection of market structure and dominance of Eskom

• We have to reflect on SA’s inexperienceand weaknesses in contractingpublic-private partnerships

• Same issue now in contracting Co-gen• Interminable discussions/negotiations

on avoided cost and fair, transparentpower purchase agreements

Simplify contracts, create certainty, fast-track investmentsDisclose avoided cost and hurdle prices


Power conservation prospects

• Huge potential

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South African energy intensity compared

0.00 0.50 1.00 1.50 2.00 2.50

Russia

South Africa

China

Thailand

India

Malaysia

Poland

Brazil

Australia

United States

Mexico

Germany

kWh/GDP (constant 2000 US$)


0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1972

1974

1976

1987

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

kWh/G

DP (c

ons

tant

200

0

South African electricity intensity compared

South Africa

China

India

USA

Australia

Brazil Japan

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SA electricity sales growth vs economic growth

-4

-2

0

2

4

6

8

10

12

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Per

cent

GDPElectricityPoly. (Electricity)Poly. (GDP)


Power conservation prospects

• Huge potential• But mixed signals and poor execution• Load curtailment is disproportionately borne by

mining and large industrials • Load-shedding is least economically efficient

mechanism for dealing with power scarcities• Will market-based power rationing scheme be

introduced?• Will price increases induce necessary savings?

Price elasticity of - 0.2 ?10% price increase results in 2% demand reduction30% price increase results in 6% demand reduction

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www.gsb.uct.ac.za/mir21

0

500

1000

1500

2000

2500

3000

3500

1970 1975 1980 1985 1990 1995 2000 2005

MW

ad

ded

to

sys

tem

0

0.5

1

1.5

2

2.5

3

3.5

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4.5

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Real price level(right axis)

Capacity added each year(left axis)

Prices will rise to fund new investment

Need to develop consensus between stakeholders on desirable price path to fund Eskom investment, induce required demand response & minimise inflation impacts


Security of Supply• Security of supply standard• Integrated planning• Investment allocation & approvals• Contracting of IPPs & Cogen• Central purchasing arrangements• Distribution restructuring

Electricity pricing & funding• Prices & demand• Eskom funding (sell some power stations)

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Hybrid electricity markets need

policy, planning, regulatory and

institutional support

Regulatory & market reform

Absence of “felt leadership”Need for greater alignment, co-ordination and purposeful management of crisis

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Cost of power crisis is higher than generally acknowledged

• Lost output, reduced economic growth, less employment and income, reduced exports, increased fuel imports, increased pressure on balance of payments & current account deficit, currency depreciation, imported inflation, higher interest rates, reduced economic growth………

• Cost of unserved energy (value of lost load) is MUCH higher than marginal cost of new generation

• Resort to back-up or own-generation hugely costly in duplicate investment and higher operating costs

• Power crisis will spawn liquid fuels crisis: insufficient local refining or port or pipeline capacity


1. Restoring an acceptable reserve margin– Price increases plus an effective market-based energy

efficiency programme to reduce demand– Timely & sufficient contracting of Cogen– IPPs contracted effectively– Eskom investments on time

2. Keeping Eskom’s kit running– More robust coal contracting– 86% availability 9% planned maintenance

5% unplanned outages3. Maintaining reliable networks

– Adequate investment in human & physical capital– Certainty in distribution restructuring

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Evidence-based inquiry will develop common understanding of challenges and provide basis for sound policy proposals and action plans

Need to fix systemic failures that led to crisisPeer review and support from private sector

But also need independent review & policy reform

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Prof Anton EberhardUniversity of Cape Town

The Management Programme in Infrastructure Reform & Regulation (MIR) aims to deepen knowledge and capacity to manage the reform and regulation of the electricity, gas, telecommunications, water and transport industries in support of sustainable development.


south africa’s power crisis: understanding its root causes

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