Power surge: South Africa’s investment boom

Of all the challenges facing Eskom's transmission network, the greatest for Mbulelo Kibido and his team is the mundane issue of land.

"Our major difficulty is acquiring the land to build our assets," he says. "People tend to put up the prices of their land, which makes it difficult for us in negotiation, especially for our long transmission lines."

Eskom is currently seeking to obtain way leaves for 1,800km of new line. It has the power to obtain property by compulsory purchase but, says Kibido: "Ideally the first step is to have an amicable agreement. This is taking into account the long term. We will need to work with property owners for us to get access to our lines in the future."

Indeed, not so long ago, it was taking three and a half years to purchase properties. "We are working very hard on this," explains Kibido, "and we have now got it down to less than three years. But it is still far too long. We are having to put that three years in our plan. So, if you need a line in 2018, then you must plan it several years earlier to allow for the land acquisition and the construction. Ideally, of course, we would like to get the whole process down to a year."

Red tape

Eskom also faces a potentially far-greater challenge, which is its break-up into separate generating and transmission entities. The Independent System and Market Operator Bill, which may become law early in 2013, would see the opening up of the generation and transmission market, though some free market advocates say that the proposed legislation does not go far enough. Eskom is seen to have all the detractions of a state-owned utility, in terms of bureaucracy, inefficiency and lack of drive, with the added problem that the state cannot afford the investment to turn the organisation around.

The business's profits continue to be squeezed. Higher coal prices, in part because South Africa's aging coal mines can make better returns exporting to India, were in no small measure responsible for the decline of R200,000 in half-year pre-tax earnings to R17.7bn ($1.99bn) this September.

The country's Department of Energy describes Eskom's situation as a "conundrum" whereby, while the country urgently needs new generation capacity, the utility needs scarce government capital to fund new projects.

The company has installed capacity of 41,000MW compared with peak winter demand of around 37,500MW. It is not enough. Five years ago, before the recession hit, power to mines and major industries was cut off and the country was exposed to rolling blackouts. Eskom reportedly paid some major power users not to use electricity at certain times. Ironically the recession has eased demand with the mothballing of energy-intensive aluminium smelters.

However, economists warn that the South African economy will be unable to grow and create badly-needed new jobs, unless it has the electricity to power new and expanding businesses.

Hardly surprisingly, the government wants to double output in the next 17 years, in a programme that includes six nuclear stations. Unfortunately, it does not have the money for this multi-billion dollar investment.

Eskom chief executive Brian Dames said in November that the 16% tariff increase the business was seeking was not going to cover the current funding shortfall. He predicted consumer prices would need to climb much higher.

If the Government cannot find the resources, argues the Department of Energy, then the shortfall can only be met by private sector funding, and the private sector will not be prepared to invest unless they can be assured of a level playing field, which would include access to and possible ownership of some of the transmission and distribution infrastructure. The future of Eskom as South Africa's vertically integrated monopoly is therefore extremely likely to be different.

Strong currents

Eskom currently owns 27,770km of power line with voltage ranging from 220kV to 765kV along with the transmission substations where these networks terminate. Kibido says that the utility is embarking on a fully funded R171bn ten-year investment programme running until 2021. This will cover generation integration projects (R27 billion), customer related projects - mostly increasing existing or installing new hook ups (R4 billion) and the lion's share going into upgrading the network's reliability (R140 billion).

Kibido explains that this last is a key target: "We want to make sure that our power corridors are 100% reliable. We have built redundancy for all of them and for all our substations. We have built double the capacity, so it allows us to do maintenance. Therefore, if we have to take out a line for maintenance, we don't have to switch off our customers. They can get their full supply while we are doing the work. It gives us flexibility to do maintenance. When we do have some breakdowns, faults on our lines or transformers, we continue the supply to our customers."

In general, he says, Eskom's transmissions lines are in very good shape. "With allied equipment, like transformers, we spend a lot of time monitoring them, maintaining them. We replace those that we find are critical, whether they are close to failing or not. We have a very good handle on our transmission structure. We monitor our transformers individually on a daily basis. We can know the condition of the oil, the paper on a real-time basis."

This kind of attention to detail should pay dividends for South Africa's future power needs, regardless of the make-up of the electricity in the future. After all, building much-needed new generating capacity to help fuel economic growth is all but useless with the necessary transmission network in place to make good use of it.