After Tariff Rise, Eskom Continues Power Projects

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Researched by Industrial Info Resources (Sugar Land, Texas)--Although no power-load shedding has occurred in South Africa for some weeks, public anger has continued erupting regarding the payment of annual performance bonuses to the top management of state-owned power utility Eskom. The management of Eskom is thought to be largely responsible for the power supply chaos in the first quarter of the year. To help calm this public-relations disaster, Jacob Maroga, CEO of Eskom, has said that he will not take the $200,000 bonus that had been approved by the board of directors. The five other members of the utility's executive committee have agreed to accept a 50% reduction in the bonuses granted to them.

The National Energy Regulator of South Africa has allowed Eskom to increase tariffs 13.3% for the coming year. This follows last year's rise in tariffs of 14.2%, but is far below the 60% rise that Eskom originally requested. The increase in tariffs is motivated by Eskom's desire to maintain a strong international credit rating as the company pursues capital-expenditure plans to create new power plants through 2020. A government subsidy of $7.4 million is also under consideration.

The tariff increase means that the consumer price of power in South Africa is no longer the lowest in the world. However, with the power price approaching true market levels, it will be more feasible for independent power producers to launch projects.

Feasibility is at the root of the problem facing CIC Energy's (TSX :ELC) (Nassau, Bahamas) Mmamabula energy project in Botswana, which was originally estimated as a $5 billion to $6 billion project. Some analysts estimate that the cost of the project will be around $16 billion, although CIC says its estimate stands at around $9.4 billion with further rises expected. The project is to consist of constructing two power plants, each generating over 2,000 megawatts (MW) of power, and developing coal mines to use as fuel feeds for the plants. This price escalation has caused Eskom and the government of Botswana, which would receive 75% and 25% respectively of the plant's power output, to withdraw funding from the project.

This withdrawal of funds caused CIC to miss the previously extended June 17 deadline to secure boiler and turbine equipment manufacturing slots in Germany, failing to pay a reservation fee of $65 million. Botswana and Eskom still hope to see the project proceed, as completion of the plant would assist in meeting regional power shortfalls. The most likely solution is to downsize at least the first phase of the project and still deliver some power by the projected date of 2013. Downsizing could also broaden the pool of available contractors in the resource-hungry power industry.

In the tightening market conditions, Eskom insists that its plans for the future are viable. The deadline for decisions on an ambitious nuclear-power program has been extended. Eskom is due to make a final decision on a $750 million investment for a large-scale solar/thermal demonstration plant that will provide power to South Africa's national grid. The company is also in the planning process of a 100-MW wind-energy project. Eskom is targeting a 6% improvement in generating efficiency with the application of supercritical and clean coal technologies. Currently, 88% of the country's power has a coal feed, with a target to reduce this to 70% by 2025.

Contracts for national power development plans continue to be awarded. The latest was a $500 million contract awarded by Alstom (EPA:ALO) (Paris, France) to SPX Corporation's (NYSE:SPW) (Charlotte, North Carolina) South African subsidiary DBT Technologies to supply Balcke Durr feedwater heaters for six coal-fired boilers at Eskom's planned 4,788-MW Medupi power station in the north of the country, due to start operations in 2011. SPX will also supply feedwater heaters and air-cooled condensers for Eskom's 4,740-MW Project Bravo in the Mpumalanga province east of Johannesburg. The air-cooled condensers are designed to minimize the plant's water usage. For related item see March 14, 2008 -- Alstom Signs $2 Billion Contract for Mega-Coal-Fired South African Power Station as Supply Shakeout Continues.

SPX is also expanding its local manufacturing facility in Nigel, established in 1970, by 100,000 square feet this year.

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