South Africa admits more Medupi delays, confronts further electricity supply crunch – From African Energy
This is a View article from the African Energy newsletter, a respected source of independent analysis on the continent’s energy industries produced by Cross-border Information, a business intelligence company with a long established research focus on the politics, energy and financial sector trends of Africa and the Middle East.
The announcement by national utility Eskom that the first unit of its disaster-prone 4,764MW Medupi coal power plant is now unlikely to be commissioned until the latter half of 2014 means South Africa could face 700MW gap in its 2014 electricity supply balance. The plant’s first unit was initially expected to begin operating in April 2012. Eskom is blaming its contractors; consumers in South Africa and the region will again be concerned that they could lose out if power has to be rationed in Africa’s largest economy.
South Africa traditionally produced a power surplus and exported to its neighbours, but the balance started to swing from surplus into deficit in the mid 2000s and in 2008, the country suffered dramatic blackouts that underlined the under-invested electricity supply industry’s capacity to damage the economy.
The government and industry have few doubts about the extent of the problem. Public enterprises minister Malusi Nkanyezi Gigaba pulled no punches in April when he stressed the government’s commitment to bringing the first 800MW of power from Medupi Unit 6 of online by end-year. Gigaba told reporters that “failure to meet these deadlines will result in tough penalties being imposed on any party responsible for such delay”.
Barely three months later it seems the minister and Eskom have admitted defeat, while project costs have spiralled – to over $14bn. The innocuously titled Eskom Update on its New Build Programme delivered another blow to South Africa at a time when fears about declining mining output – an industry in which electricity can account for as much as 32% of total costs – and poor macroeconomic performance are weighing on investors’ minds. In its update Eskom said the December target for commissioning Unit 6 was “unlikely to be met”. A “more realistic” target was H2 2014. However, full commissioning was still expected in 2017.
Eskom’s announcement was followed by a cabinet shuffle that saw energy minister Elizabeth Dipuo Peters switch portfolios with transport minister Ben Martins, while Eskom’s influential finance director and head of group capital Paul O’Flaherty, who resigned in November 2012, brought forward his departure.
According to Eskom’s “most likely scenario”, the result of the Medupi delay will be a potential supply gap of about 700MW and an additional cost of up to R13.8bn ($1.4bn); this would take the total cost to R105bn, excluding interest during the construction period (that could top R30bn). Fighting talk was required from Eskom chief executive Brian Dames, who said: “The power system will remain tight, as we have said, but demand for electricity has been muted because of slower than expected economic growth, and we are working to put initiatives in place to close the gap. We remain determined to keep the lights on, with the help of all South Africans. This is being done with support from government”.
Eskom sees contractors as a major element in the problem. This time around, delays were laid firmly at the door of two of the largest contractors: Hitachi Power Africa – 25% owned by Chancellor House, a local, politically well-connected company – and France’s Alstom. Dames said: “it is now clear that the boiler and control and instrumentation issues cannot be resolved in time”. O’Flaherty told reporters: “In our view, the ability of our contractors to supervise and manage the labour is extremely poor across the board, and not one of them will dispute that issue”.
Alstom, which has already had its performance bond called, came in for particularly heavy criticism. Eskom claimed that while “some progress” had been made, “there has been continued under-performance on the control and instrumentation contract, despite active interventions by Eskom over the past year”. Dames said he had written to Hitachi Power Africa asking why Eskom should not call their performance bond on the boiler contracts.
Control and instrumentation software failed factory-acceptance tests in December and further tests on system components were failed in June. Some defects could be fixed in weeks, but Eskom now accepts the issue “will take time to resolve”. Ominously for Alstom, Dames said Eskom was exploring “alternative supplier arrangements” through its risk mitigation plan.
Progress has also been made towards addressing poor welding in the boilers. The issues relate to inadequate post-weld heat treatment, meaning that as many as 9,000 welds required retesting and about 1,000 would require significant work. Some welds were made using unqualified procedures and these will have to be replaced. Hitachi had been bullish about its work schedule: Chairman Colin Bailey stated in an April press release that “our work will be done in time for December 2013 Unit 6 start-up”. However, a pressure testing exercise was scheduled for the first boiler in June, which may be one reason for the change in rhetoric.
Alstom released a statement on 9 July defending its record while admitting that recent tests of the boiler protection system had not been “fully satisfactory”. However, the company said it still believed it would complete work at the site on time. Both Alstom and Hitachi signed written commitments to meeting the December deadline earlier in the year. Alstom commented that: “No other coal plant has ever been built on this scale. Alstom’s engineers and technicians are committed to resolving all the pending issues with utmost speed”.
The situation is heated. National Union of Metalworkers of South Africa general secretary Irvin Jim called the delays tantamount to sabotage by contractors and has called for an investigation into possible collusion to cause delays in order to increase profits. Opposition Democratic Alliance MP Natasha Michael has called for Gigaba to publish the contracts to allow parliament to “put measures in place that will avoid any further delays”.
Labour unions are another factor in the delays confronting Medupi, where strikes are estimated to have caused between eight and nine months of delay. A new labour relations partnership was signed by Eskom, employers and labour representatives at the Medupi and Kusile project sites on 12 June, to replace unpopular project labour agreements. The new agreement includes provisions for a minimum wage for all hourly paid contractor employees, standardised pay rates within and across companies, aided by a new Central Wage Bureau and a task team to facilitate training of employees and employers on site.
Medupi is a saga which needs closure, if South Africa’s electricity supply crunch is not to overwhelm forecasts for the next five years at least. A 700MW supply gap is substantially smaller than the 2.5GW-3GW gap that unexpectedly opened up in 2008; then, essential unplanned maintenance work was a factor, which Eskom now understands much better. This time, the stakeholders have plenty of warning.
But Medupi is just one project among several that need full implementation if the situation is not to get worse. For all the talk of big strategy and new projects, the devil is in the detail of schemes already on South Africa’s agenda, for implementation according to a set timetable.
AE253/5 – New push to build Medupi after strikes, delays