Power shortages threaten as Eskom puts five projects on ice

By Justin Brown Cash-strapped Eskom has put five projects, requiring more than R54-billion in capital expenditure, on ice as a result of its funding shortfall, raising the threat of future power crises.

Cornelis van der Waal, a Frost & Sullivan energy analyst, said the project halts would reduce Eskom's spending, deepen South Africa's recession, cut opportunities in employment creation, and affect suppliers of cement, steel and other commodities.

He confirmed that the cautious spending was aimed at helping Eskom focus on its priority projects.

Only three projects, Medupi, Kusile and Ingula, which together cost about R235bn, will go ahead.

On hold are the Tubetse pumped storage project in Mpumalanga, worth R19bn; Upington's 100 megawatt concentrated solar power plant, projected at between R2bn and R6bn; and the R3bn 100MW wind farm in the Northern Cape. Also affected is the R1.8bn Majuba rail venture and CIC Energy's $3bn (R24bn) Mmamabula power project in Botswana.

"Everything is on track at Medupi, Kusile and Ingula. The government is committed to supporting these projects," said Andrew Etzinger, Eskom's spokesman.

Van der Waal said the reduced expenditure could mean that South Africans might face lower power price increases in the years ahead.

Andrew Steel, the head of Fitch Ratings' energy team in Europe, said Eskom's credit rating was expected to deteriorate over the next two years before stabilising and increasing as the revenue from tariff increases and earnings from its new power stations came through.

He said that to handle its expansion, Eskom would have to reschedule its projects.

The two key risks to Eskom's credit rating were weaker-than-expected government support and the failure to achieve more cost-reflective energy tariffs.

Steel said Fitch had taken comfort from the fact that the government had been more supportive of Eskom over the past 18 months.

But Etzinger said the utility maintained that less demand from the effects of the recession was helping to keep stock levels up. "Eskom's spare capacity has risen from less than 5 percent to an average of 10 percent, compared with an optimum of between 15 percent and 20 percent."

Eskom could plug its funding shortfall, which stands at R161bn, by raising debt, increasing power tariffs, or further government loans or equity injections, he added.

The funding plan would take into consideration Eskom's financial position and its cash flows. The use of export credit agencies to fund the expansion could ease its debt level.

On the positive front, Van der Waal said Eskom could have been overspending on expanding, so a cutback would avoid a repeat of the 1980s, when too much generation capacity was available and power stations had to be shut.

"Eskom's cash flow position is an area that is getting specific and focused attention," Etzinger said.

The utility's concentrated solar power demonstration project has been put on hold because of funding constraints.

The project was planned to produce 100MW at a site in Upington in the Northern Cape at a cost of up to R6bn.

Earlier in the year, Eskom announced that it had halted the Tubetse pumped storage project in Mpumalanga, the wind farm in the Northern Cape and the Majuba rail venture.