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Oct 11, 2011

Power supply security to hinge on growth outlook as Eskom warns of Medupi delay

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The head of State-owned power utility Eskom finally acknowledged on Tuesday that the first unit of the 4 800 MW Medupi power station, which is being developed at a cost of some R125-billion in the Limpopo province, might not be introduced by the end of 2012 as currently scheduled.

Observers agreed that any delay to the Medupi programme could raise the spectre of supply disruptions, owing to South Africa's tight supply/demand balance. But those canvassed by Engineering News Online also stressed that much would depend on the outlook for economic growth, which would, in turn, dictate the pace of power sales growth in 2012.

Slower-than-anticipated growth in 2010 and 2011 had helped sustain Eskom’s reserve margin and had been material to ensuring that Eskom did not need to resort to rotational load shedding, which had caused severe economic harm in 2008 and had led to the closure of many of the country's mines on safety concerns.

Eskom CEO Brian Dames told lawmakers that the schedule was being negatively affected by the underperformance of the boiler contracts. These contracts were awarded to a consortium comprising Hitachi Power Africa and Hitachi Power Europe, but controversially also included Chancellor House, which is directly associated with the governing African National Congress.

Together, the boiler contracts for the Medupi and Kusile power stations were valued at R38.5-billion and represented the largest single contract ever awarded by Eskom.

Dames told Parliament’s Portfolio Committee on Public Enterprises that Eskom was working closely with Hitachi to put in place remedial measures to mitigate delays. Eskom had also received confirmation from the Japanese parent company that it should meet its commitments under the contract.

“With a year to go, we are concerned that the performance of some contractors could put the schedule at risk,” Dames said.

The utility had initiated a detailed assessment of the timelines for the first unit, or 'Unit Six', to determine whether the project could indeed be synchronised to the grid in late 2012, as outlined in the current schedule. An expert review team had been assembled to assess the schedule and a detailed update on the Medupi timelines would be provided when Eskom released its interim financial results on November 23.

Hitherto, Eskom and Dames had insisted that the first 800 MW unit would be commissioned before the end of 2012, despite several contractors, including JSE-listed construction group Murray & Roberts, warning of delays, scope changes and contract variations.

But the recently promulgated Integrated Resource Plan 2010 (IRP2010), covering the period 2010 to 2030, took a more conservative view, indicating that the first Medupi unit would be commissioned only during 2013.

Should the commissioning of the first unit be delayed it would not be the first significant schedule change, with Eskom initially anticipating the first Medupi unit being synchronised in early 2012, before changing that date to June 2012 and then to September 2012. Most recently, it published a revised date in its annual report indicating the unit would be commissioned by the end of next year.

POSSIBLE IMPACT?

Frost & Sullivan energy sector consulting manager Marc Goldstein said that the delay had the potential to cause disruptions, but added that much would hinge on the outlook for economic growth.

He noted that year-on-year electricity growth levels had been lower than anticipated and well below the levels anticipated in the IRP2010, which had been premised on yearly economic growth of 4.5%.

During Eskom’s financial year to March 31, 2011, sales expanded at a lower-than-expected rate of 2.7% to 224 446 GWh – the State utility had been expecting growth of 4.2% and sales of around 227 000 GWh as South Africa’s economy recovered from its 2009 recession.

Manufacturing Circle chairperson Stewart Jennings, whose fellow members were directly affected by the 2008 shortages, but  were currently more concerned about the margin impact of surging power prices, said any threat of new supply disruptions would be bad for manufacturers and future job-generating investment.

Jennings said reliability of power supply was essential, but that the immediate threat of disruptions had been lowered by the low economic growth rates.

“But we have to get this economy growing at rates better than 4%. If we do that, I think Eskom will be in trouble,” he added.

That said, the more pressing concern for manufacturers was the impact rising power prices, as well as other administered prices, were having on margins, particularly in a context where the strong currency was offering little relief.

The Manufacturing Circle was finalising a paper on the impact of power prices and hoped to petition the National Energy Regulator of South Africa before year-end on the need to put in place mechanisms to moderate the price path.

Edited by: Creamer Media Reporter
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