Message from the Eskom Chairman – Valli Moosa

In October 2004, government took the first bold step and allowed Eskom to lead this current phase of building new electricity generation capacity. While there is consensus that we started late with the programme, this decision of Cabinet was to be welcomed as undoubtedly an important scene setter for the future of the electricity industry. The decision by Eskom to continue with planning while we were prohibited from building new capacity, placed South Africa in a much stronger position to respond.

My experience as the chairman of the Eskom board for the past three years has given me comfort that the utility is well on the road to recovery. Significant progress has been made to address all the key challenges identified.

This is not an easy business environment for Eskom’s new management team. There are six key challenges that needed urgent attention – keeping the lights burning on the back of inadequate reserve margin; addressing artificially low tariffs; building new generation and transmission capacity to meet the rising demand for electricity; mobilising all South Africans to become more energy efficient; responding to climate change imperatives; and mobilising all three spheres of government.

There has been tremendous progress since the 2004 decision of Cabinet. Eskom has spent a total of R53 billion (2005/6: R10,6 billion; 2006/7: R17,7 billion; 2007/8: R24,7 billion) with a forecast spending of R46 billion for the 2008/9 financial year. Six new transmission substations have been completed and 1 026km of transmission lines constructed since 2004.

A total of 2 582MW of new power generation capacity is now on line with 1 061MW of this total installed during the 2007/8 financial year. To date, the board has approved projects to the value of R260 billion with 16 304MW of new generation and other capacity committed.

Towards the end of 2005, the board approved an investment to build what is today the first two new power stations conceptualised, built and commissioned by the democratic South Africa – Gourikwa and Ankerlig open-cycle gas turbine stations.

The last time Eskom built and commissioned an OCGT plant was in 1976, and so the utility started this project having lost all of its institutional memory in this regard. Construction at both sites started in January 2006, and the construction teams had to deal with one of the biggest floods seen in the Western Cape in a very long time.

The total duration of the project from concept to completion was two years and nine months. The construction time was 17 months, with 13 months between turning the first sod to synchronising the first machine. Both plants were ready to supply power for the winter of 2007. This is world class performance by any measure.

The board investment decision on Medupi power station, a new 4 788MW coal-fired base load power station located in Lephalale, was taken on 5 December 2005. This was 14 months after the Cabinet decision of 2004. In May 2007, the construction of the power station started. Work on the project is on schedule. Construction of the second 4 818MW coal-fired base load power station – “Project Bravo” – began on 1 April 2008, which is 27 months after the Cabinet decision.

The return to service of the three mothballed stations – Camden, Komati, and Grootvlei – has also been proceeding exceedingly well. In March 2005, Unit 6 of Camden power station was successfully synchronised to the national power grid and for the first time in 15 years, it generated and supplied electricity. Six of the eight units at Camden went into commercial operation between then and March 2008, adding some 1 250MW to the system. Later this year, all of the eight units of Camden will be in commercial operation with the entire station being successfully returned to service – something that, to my knowledge, has never been done before.

The first of the six units (Unit 1) at Grootvlei went into commercial operation on 31 March 2008 and added 200MW to the system. Commercial operation for the second unit is planned for later this year, with the last unit of the station planned to be in commercial operation later in 2009. The first unit of Komati power station, on the other hand, is planned for commercial operation during 2009.

This is sterling performance, noting of course that Eskom was on virgin territory with no international comparative experience on the return to service of power stations that have been mothballed for this long.

Finally, it is my sincere wish that South Africa as a nation will also become an integral part of the solution to the challenges at hand and will work with Eskom. Let us all conserve our vital energy sources – the lifeblood of our economy.

Together, let’s build the power base for sustainable growth and development.

Message from the Eskom Chief Executive – Jacob Maroga

Power supply interruptions of the scale seen during the reporting year have been unprecedented in South Africa. Meeting an increasing national demand for electricity with a much-diminished reserve margin has undoubtedly been Eskom’s biggest challenge for this past financial year.

The convergence of a diminished reserve margin, increased unplanned generation plant outages as well as coal supply and quality constraints forced Eskom into an undesirable position of having to interrupt the supply of electricity nationally.

Between October 2007 and February 2008, emergency load shedding was implemented. In order to avoid a potential overall nationwide blackout, a national electricity emergency was declared on 24 January 2008.

Since taking office as chief executive on 1 May 2007, my team and I have dedicated a significant amount of leadership time reflecting on the challenges at hand and aligning all the resources of the organisation towards a solution. The fundamental and underlying problem is that the power system has an inadequate reserve margin which is at an all time low of around 8%. This does not compare well to our aspiration of 15%.

Since 1994, the demand for electricity has grown by about 50% on the back of robust economic growth. This welcomed growth has all but exhausted Eskom’s surplus electricity generation capacity. To us at Eskom, this has been one indicator that we watched closely and with a sense of trepidation. Monitoring the diminishing reserve margin has been an integral par t of Eskom’s operations, as it is a proxy for the long-term adequacy of the power system, including the short-term security of supply. In the absence of any investment in new generation capacity, misalignment between the demand and the available supply emerged and therefore the 2007 crunch was inevitable. The Cabinet decision of 2004 marked an important milestone where Eskom could start investing in new generation capacity.

Increasing Eskom’s reserve margin to adequate levels is central to the organisation’s ability to ensure that power supply is not impacted by technical events upstream in the supply chain. A healthy reserve margin is necessary to create a window for planned maintenance and a cushion to manage unplanned maintenance. In this way conventional and inevitable technical problems are absorbed within the system and do not degenerate to a national crisis. This margin is further required to optimise the cost of running the power system. With such an inadequate reserve, Eskom has very little choice but to run all the available power stations irrespective of the cost of running them.

Despite the low reserve margin, Eskom has commenced issuing quotations to potential customers who apply for new connections or upgrades above 100kVA. However, the period that it will take before a customer applying for a connection above 100kVA receives energy will depend on the rate at which space is created on the electrical system and the rate at which applications for new capacity are received.

Eskom is embarking on a very large infrastructure expansion programme which has a board-approved budget of R343 billion up to 2013 and is expected to grow to more than a trillion rand by 2026. Additional power stations and major power lines are being constructed in line with our plan to deliver an additional 16 304MW in generation capacity by 2017. Ultimately, Eskom will double its capacity to about 80 000MW by 2026.

This massive build programme has been designed such that it adequately responds to the challenge of electricity availability and reliability. It has also been aligned with government’s target of 6% GDP growth between 2010 and 2014.

I am pleased to report that the Eskom build programme is on track to deliver the additional infrastructure as planned. We have made excellent progress during the past financial year, and have indeed achieved what we set out to do in this regard. Ankerlig and Gourikwa power stations – the two new open-cycle gas turbine stations located in the Western Cape – were officially opened. The National Energy Regulator of South Africa (Nersa) granted Eskom the licence to build the first new coal-fired power station in more than 20 years.

Hitachi Power Africa was awarded a R20 billion contract for boilers, and Alstom S&E was awarded a R13 billion contract for turbines for Medupi power station. We also awarded contracts worth some R31,5 billion for the “Bravo Project”, a coal-fired power station to be built by 2017 – R18,5 billion to Hitachi Power Africa for boilers and R13 billion to Alstom S&E for turbines.

Work is well underway on the return to service of the three previously mothballed power stations – Camden, Komati, and Grootvlei. The construction of Ingula pumped storage scheme is also progressing well. We are also on track with several of our transmission projects.

For the reporting year, capital expenditure of R24,7 billion was incurred. This was R218 million above the target for the year – a confirmation that the accelerated programme is on track.

I must pay special tribute to the Eskom team for ensuring that this all important programme of building new capacity remains on track notwithstanding all the adversities brought about by an inadequate reserve margin.

Ensuring the security of supply at a time when the power system has an inadequate reserve margin will remain a key challenge for South Africa, the electricity sector, and Eskom. We accept that the load shedding activities of the magnitude seen in recent times have dented South Africa’s confidence in the power system and in Eskom. We have made the commitment to regain public confidence in the system. In this regard, all our work towards re-building trust will be based on open, honest and transparent sharing of information.

For the next five years at least, the South African power system will remain vulnerable given the low reserve margin. Plans are in place, and implementation has been accelerated. We are confident that the activities we are undertaking today – as Eskom, the energy sector, government, and the country at large – will enhance Eskom’s ability to deliver into the future.