Government statement on Eskom's World Bank loan and South Africa's long term energy objectives by Public Enterprise Minister, Barbara Hogan, March 12 2010
Introduction
Wide media coverage has been given to protests opposing Eskom's application for a loan from the World Bank. As the government of South Africa we are concerned that the issues related to the loan have not been properly understood. We are also concerned at the level of misunderstanding regarding our commitment to a transition to a low-carbon economy and our unambiguous commitment to the introduction of cleaner energy technology in the country.
Eskom, with the support of government, has applied for a US$3.75 billion project loan from the World Bank. This forms part of Eskom's long-term financing of a multi-year investment programme aimed at expanding power generation capacity by about 50 percent, from about 40 000 MW, to 80 000 MW, in order to ensure security of electricity supply required for economic growth and development.
The proposed loan has three components:
* US$ 3.05 billion for the Medupi power station, Africa's first clean coal "supercritical" 4 800 MW power station
* US$ 260 million for investments in renewable energy (100 MW wind and 100 MW concentrated solar power projects)
* US$ 485 million for investment in low-carbon energy efficiency components comprising road to rail coal transportation and power plant efficiency improvements, which will be a major step forward towards achieving our long-term low-emission plan.
Why the World Bank?
The build programme is a massive infrastructure investment programme and is to be funded from a combination of internally generated cash, debt finance and funding from government. Eskom intends to raise up to R150 billion over the next five years to fund this programme and government has already committed to support Eskom through a R60 billion subordinated loan and up to R176 billion in guarantees.
The assumption that Eskom would raise R150 billion of debt, even with the R60 billion provided by government, was optimistic there was insufficient demand in the domestic market to provide for Eskom's needs and access to finance in the international markets largely dried up.
Global market conditions were expected to remain adverse for some time ahead and there was a general risk aversion arising from the global financial crisis resulting in a re-assessment by lenders and investors of lending to institutions perceived to be a credit risk.
Therefore accessing loan finance from international agencies and other previously untapped sources, such as the World Bank, African Development Bank (AFDB) or the European Investment Bank (EIB) was seen as important to augment resources to support the build programme.
Amongst the general factors considered by government in approaching multilateral finance institutions such as the World Bank were:
* To ensure that the financing is provided at low interest rates
* Flexibility from the banks to re-finance loans in five to seven years
* Preventing the introduction of conditions that might be viewed to be encroaching into the domain of national policy, except where such requirements fit in neatly with the current policy direction of government
The loan from the World Bank is a specific investment loan (as opposed to a development policy loan), which means that the Bank will have no say in our policy-making processes, especially our macro-economic policy.
Coal as a base-load option and South Africa's commitment to climate change South Africa's demand-supply energy balance remains quite delicate. The construction of Medupi and Kusile will ensure that we have adequate base-load power to be commissioned by 2013. This is necessary so that we do not derail the country's economic growth and development objectives.
As government we have clearly demonstrated our commitment to meeting long term climate change mitigation objectives. Our commitment to renewable energy will also be reflected in the upcoming integrated resource plan two. We believe that climate change, if ignored, has the potential to undo many of the positive advances made in meeting South Africa's own development goals and Millennium Development Goals (MDGs). We are therefore committed to a long-term low emission growth path and strategy. This is in line with the Copenhagen accord and our agreement to aim to reduce our greenhouse gas emissions by 34 percent by 2020 and 42 percent by 2024, conditional on the provision of finance, technology and capacity building. In addition, in terms of our own Long Term Mitigation Scenarios (LTMS) we have agreed that our emissions will peak around 2020 to 2025, plateau for a decade and then decline in absolute terms from around 2035. It should be noted that Medupi and Kusile are included in this peak.
In addition, the Medupi and Kusile power plants have been designed by Eskom using the best proven technologies to minimise carbon emissions. These power plants are the first two in Africa to use the more-efficient "supercritical" (operate at higher steam pressures and temperatures) and "CCS-Space ready" design, which is the technology adopted by most Organisation for Economic Cooperation and Development (OECD) countries for all new power generation. In addition to using supercritical design, these power stations will be the largest dry-cooled power stations in the world, which is a further testimony to the sustainable infrastructure development policies of South Africa.
South Africa is fully committed to renewable energy as a significant element of the energy mix. Time will be needed to ramp up these investments. Both concentrated solar power and wind technologies are expected to make a significant contribution to the government's target of 10,000 GWh (about 1,667 MW equivalent) from renewable energy sources by 2013. With the help of investors, including the World Bank's Clean Technology Fund (CTF), we are increasing our investment in this area. South Africa has submitted a portfolio of projects to the CTF that include a concentrated solar power project, wind power developments, the development of the solar water heating industry and interventions to reduce emissions in the industrial sector.
In addition, other fiscal and policy measures, including the introduction of a renewable energy feed in tariffs (REFIT) tariff for the renewable sector, the introduction of a 2c/kw hour levy on electricity generated from non renewable sources, many energy demand side management interventions such as the roll out of Compact Fluorescent Lighting (CFL) lighting and the electric motor retrofit subsidy are also facilitating low carbon development, including supporting the creation of a new economic sector and private sector investment.
The Integrated Resource Plan (IRP)
As part of our commitment to reducing our carbon footprint, the Department of Energy's IRP two aims to look at the ideal energy mix for our country. It is the department's intention to promulgate IRP two after June 2010, to define the power portfolio beyond 2013. IRP two will be responsive to energy security, climate change, financing considerations and it will also pronounce the technology for the base-load power station that will be used post-Medupi and Kusile.
The inter-ministerial committee on energy is intensively engaged in trying to find sustainable solutions to these and other matters. In that regard, two of the working groups of the International Marketing Council (IMC) are focused solely on renewable energy and the Integrated Resource Plan (IRP) respectively.
We remain seriously committed to stakeholder consultation on the IRP two before it is promulgated. As government we understand that issues of energy are uppermost on the minds of South Africans, and that we need to work together with all the relevant stakeholders on this matter. We must therefore continue to engage in constructive and intensive dialogue on the IRP two and on the future of electricity supply for our country.
Special Pricing Agreements
Concerns have also been raised recently about Eskom's Special Pricing Agreements. Eskom currently has less than five special contracts with two customers, and they are currently in discussions about these. All other customers (including the large industrial customers) supplied by Eskom are on standard retail tariffs and subject to the tariff increases as approved by the National Energy Regulator of South Africa (Nersa).
Conclusion
As a country we cannot afford not to have secure supply of electricity. The damage this would do to our economy is too grave to consider. We therefore call on everyone, all stakeholders, to work with us in ensuring that we are able to meet this objective, for the benefit of our economy.
South Africa and the Southern African Development Community (SADC) region are experiencing an energy deficit that may constrain current and future economic growth. Medupi and Kusile power stations are critical in addressing this deficit, together with energy projects that can delivered by the private producers. The building of Medupi and Kusile are important in meeting these current developmental needs of the country and the region. Ensuring that we burn coal in an efficient manner meets the aspiration to ensure that development is sustainable.
We are in a transition phase to a low emission path. Our commitment to developing electricity supply in the short-term is not just a sound investment in meeting the needs of South African citizens and business; it is also a statement of confidence in the economic outlook of the wider Southern African region, its people, and its prospects. All of these initiatives will ensure that South Africa will be able to meet the commitments as tabled at Copenhagen.
Thank you.
Statement issued by the Department of Public Enterprise, March 12 2010
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