Eskom Presentation to the Select Committee on Labour and Public

Enterprises

1) Eskom Electrification Programme

2) Eskom Capacity Expansion Programme

3) Update on the Labour Unrest

22 June 2011

Eskom’s Electrification Programme

Background/Introduction

3

National Electrification Fund Allocation Principles

4

National Electrification Fund Process for Allocation of Funding to Provinces

5

Medium Term expenditure Framework Allocation

6

Electrification –

There have been two distinct eras of installation: pre-2000 and post-2000

Number of annual grid connections

Thousand

Cost per connection

R '000

1994

12.413.4

8.79.0

6.06.15.24.14.55.05.96.37.0

8.1

1995

8.7

20092008200720062005200420032002200120001999199819971996

8.6

Self-funded and managed programme•

Eskom

exceeded the government's target of 1.75M connections between 1994 and 2000

•

Connection every 30 seconds, pole every 10 seconds, 200M cable every minute

•

Connection costs steadily came down

Government funded programme•

The numbers of annual connections by Eskom

have dropped, partly due to–

Increased investment in infrastructure–

The stringent processes that need to be followed

Total investment from 1991 – 2011 to date: R7.5 bn

7

12.4 11.8

2010 2011

8

Electrification –

schools and clinics

Close to 400 clinics electrified since 1991

More than 11 000 schools electrified since 1991

The improvement of local infrastructure through strong impact projects is a key corporate social investment priority for Eskom

Estimated National Backlog and % of Electrified homes in Eskom’s

Areas of Supply

PROVINCE TOTAL NUMBER OF HOUSEHOLDS BACKLOG (without growth) ELECTRIFIED

HOUSEHOLDS (%) no growth

EASTERN CAPE 1,683,420 609,986 69.7

FREE STATE 834,337 129,201 84.6

GAUTENG 3,185,858 455,452 86.1

KWAZULU NATAL 2,439,751 683,590 76.1

MPUMALANGA 889,958 155,915 82.6

NORTHERN CAPE 276,265 34,915 87.7

LIMPOPO 1,264,792 228,248 82,0

NORTH WEST 923,954 123,318 86.7

WESTERN CAPE 1,355,952 79,502 94.9

TOTAL 12,860,165 2,500,127 83,38

9

Thank You

Update on Eskom’s Capital Expansion Programme

11

12

The future

•

In line with the Policy Adjusted IRP 2010 South Africa needs to create ~45 600MW of new electricity capacity by 2030 – more than doubling the current requirements

•

This assumes decommissioning of 10 000MW of existing capacity

•

There will be two periods in the next 20 years when the risk of supply interruptions significantly increases in South Africa

•

from 2011-2013, and then again …

•

from 2018-2024

•

South Africa needs to take urgent action in 2011 in order to ensure security of supply for the country for the next 20 years

~ 17 120MW of new capacity (5 222MW installed and commissioned )

~ 4 700km of required transmission network (3 268km installed)

Eskom

capacity expansion programme

13

Commissions of new stations

First Unit Last Unit

Medupi 2012 2015 Kusile 2014 2018 Ingula 2014 2014

Medupi is the first coal-generating plant in Africa to use supercritical power generation technology

Return-to-service (RTS) New coal Peaking & renewablesMpumalanga

refurbishment Transmission

Komati (1 000 MW)

Camden (1 520 MW)

Grootvlei (1 200 MW)

Medupi (4 764 MW)

Kusile (4 800 MW)

Ankerlig (1 338.3MW)

Gourikwa (746 MW)

Ingula (1 352 MW)

Sere (100 MW)

Arnot capacity increase (300 MW)

Matla refurbishment

Kriel refurbishment

Duvha refurbishment

765kV projects

Central projects

Northern projects

Cape projects

3 720 MW 9 564 MW 3 536.3 MW 300 MW ~ 4 700 km

Build progress to date

To date, a large amount of construction work has been completed, adding ~5 221.8 MW, ~3 268 km of transmission network, and ~17 670 MVA of sub-station transformers

14

Km lineTransmission

MVAsSubstations

MW of capacityMegawatts

23,7

15

In addition, we plan to spend more than R10bn over each of the next 6 years to strengthen, refurbish and expand our Distribution network. The municipalities constitute 41% of our sales and need to maintain their own networks.

42.4%

20.6%

36.7% 88.7% 52.0%

98.9

21.4

121.0

24.0 28.8

R billion spent and to be spent on the capacity expansion programme (excluding borrowing costs capitalised)

% of estimated total cost spent as at 31 March 2011

Significant progress in build programme

– began in 2005 with completion in 2017/18

42.4%

20.6%

36.7%

98.9

21.4

121.0

R billion spent and to be spent on the capacity expansion programme (excluding borrowing costs capitalised)

% of estimated total cost spent as at 31 March 2011

Current planned capacity expansion plan

16

Project 11/12 FY 12/13 FY 13/14 FY 14/15 FY 15/16 FY 16/17 FY 17/18 FY 18/19 FY Total

Grootvlei

(return to service) 200 200

Komati

(return to service) 225 400 625

Arnot

capacity upgrade (coal fired) 30 30

Medupi

(coal fired) 794 1 588 1 588 794 4 764

Kusile

(coal fired) 800 800 800 800 1 600 4 800

Ingula

(pumped storage) 338 1 014 1 352

Sere wind farm (renewable) 100 100

TOTAL 455 1 194 2 026 3 402 1 594 800 800 1 600 11 871

| 17

Cape corridor

Southern Grid 765kV

East Grid 765kV

Medupiintegration

Ingula

integration

Key Transmission projects

Fully commissionedOctober 2017

Construction activitiesstarted

Constructionactivities started

1st unit commissionedDecember 2012

Fully commissionedLate 2015/Mid 2016

Constructionactivities started

1st Unit commissioned January 2014

•Execution partner:

•Coal supply

•Boiler

•Turbine

•Enabling Civils

•Main Civils

•Generator transformers

Execution partner:

Coal supply

Boiler

Turbine

Enabling Civils

Road works

Civil works

Infrastructure B&E Quanza

Dam construction

•Medupi Power Station Kusile Power Station Ingula Power Station

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172006

Main Civils

Generator transformers

October 207Fully commissioned December 2018October 207

Focus is now on Medupi, Kusile, and Ingula -

the first units will come on line between 2012 and 2014

Concor -WBHOEdwin-Silver Rock

2018

Fully commissioned September 2014

1st

unit commissionedDecember 2014

18

Medupi

Financial & Economic Impact

Project Schedule

Project Summary►

Greenfields Project –

Lephalale (Limpopo Province)

►

6 Unit Coal Fired Power Station

►

Planned capacity 4,764MW

►

Projected project cost to

completion ~R98.900 bn (excl. IDC)

►

Estimated 95% impact on

Lephalale town GDP

►

Construction commenced March

2007

►

First Unit planned to be

commissioned December 2012

►

Subsequent Units at 6 to 9 month intervals thereafter

►

Last Unit planned for

commissioning late 2015, mid

2016

Kusile

Financial & Economic Impact

Project Summary►

Greenfields Project –

Delmas (Mpumalanga Province)

►

6 Unit Coal Fired Power Station

►

Planned capacity 4,800MW

►

Projected project cost to completion ~R121,000 bn (excl. IDC)

►

Estimated 25% impact on Delmas

town GDP

►

Construction commenced Mid 2008

►

First Unit planned to be

commissioned December 2014

►

Subsequent Units 2 & 3 at 12 month intervals and Units 4, 5 & 6 at 8 months thereafter

►

Last Unit planned for

commissioning during December 2018

Ingula

Financial & Economic Impact

Project Schedule

Project Summary►

Greenfields Project –

Ladysmith (KwaZulu Natal Province)

►

4 Unit pumped storage power station

►

Planned capacity 1,352MW

►

Projected project cost to

completion ~R21.377 bn (excl. IDC)

►

Estimated 7% impact on

Ladysmith town GDP

►

Construction commenced Mid 2006

►

First Unit planned to be

commissioned January 2014

►

Subsequent Units at 3 month

intervals thereafter

►

Last Unit planned for

commissioning during September 2014

Build programme overview

Project Schedule

19

►

Refurbishment and return to service of previously moth-balled coal fired power stations in Mpumalanga.

-

Camden (8 units –

total 1,600MW)

-

Komati (9 units –

1,000MW)

-

Grootvlei (6 units –

1,200MW)

Return to Service

Financial & Economic Impact

Project Schedule

Projects Summary

►

Projected RTS cost to completion ~R23.477 bn (excl. IDC)

►

All 8 units at Camden power plant are now in commercial operation

►

3 units, each rated at 125MW, have been commissioned at Komati power station. Last unit (unit 1) planned for handover May 2012.

►

4 units, each rated at 200MW (total 800MW) have been commissioned at Grootvlei. Last unit (unit 6) planned to be completed end March 2011

Mpumalanga & Other

Projects Summary - Mpumalanga►

Major refurbishments of existing and operational power stations, i.e.

Duvha, Matla & Kriel.

►

Arnot capacity increase (300MW).

►

Majuba Rail infrastructure for coal supply for the operational Majuba Power Station. CO planned for August 2014.

►

Camden Rail infrastructure for coal supply for the operation Camden

power station.

►

Tutuka Brine Project to reduce

amount of brine in water.

►

Projected Mpumalanga Projects cost to completion ~ R12.950 bn (excl. IDC)

Transmission

Project Summary►

Transformers –

20 600 MVAs:

•765kv (Planned: 12,000 MVAs)

•Cape Grid (Planned: 1,500 MVAs)

•Northern Grid (Planned: 3,500 MVAs)

•Central Grid (Planned: 3,600 MVAs)

►

Transmission Lines –

3,977.5 Km:

•765kv (Planned:1,689.9 km)

•Northern Grid (Planned: 1,253.6 km)

•Cape Grid (Planned: 621 km)

•Central Grid (Planned: 413 km)

Project Schedule (Projected completion dates)

►

765kv: December 2013

►

Northern Grid: June 2015

►

Central Grid: Mar 2015

►

Cape Grid: Aug 2016

Other Projects (not part of original)

►

100 MW Greenfields pilot Wind Farm (Sere) project on the West Coast. CO planned for October 2013.

►

100 MW Concentrated Solar Power (CSP) pilot plant project.

CO planned for December 2015.

Financial & Economic Impact►

Projected Transmission cost to

completion ~R27.800 bn (excl. IDC)

Build programme overview

20

| 21

The capital expansion programme will have significant impact on local industry, skills, jobs, infrastructure and regional development

Infrastructure

Development of roads and railways

Jobs

~40 000 jobs created, directly and indirectly

Local content

>50% of local content directly benefiting the SA economy

Regional development

Spend and invest-

ment in local areas

Local skills development

Rapid growth in SA’s skills pool

11 22 33 44 55

1 Based on GDP in 2008

SOURCE: Eskom Enterprises division and Medupi project, STATS-SA

| 22

%%

Composition of Composition of total project total project spendspend

58%58%42%42%

56%56%44%44%

74%74%

26%26%

A large share of the Medupi, Kusile and Ingula spend will go to the local economy, thereby also benefitting local construction companies

11

SOURCE: Medupi, Kusile, and Ingula project management

MedupiMedupi

KusileKusile

IngulaIngula

Main civils (MPS-JV):84% of contract (~2,5bn)

are spent locally

Main civils (KCW-JV):65% of contract (~2,9bn)

are spent locally

Main civils (Grinaker-LTA):100% of contract (~0,3bn)

are spent locally

Examples from Medupi, Kusile, and IngulaExamples from Medupi, Kusile, and Ingula

Main civilsMain civils

Main civilsMain civils

Access roads packageAccess roads package

ForeignForeign LocalLocal

ForeignForeignLocalLocal

ForeignForeign

LocalLocal

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▪

Brand new fabrication facility built

in Nigel –

Boiler Membrane Wall Workshop–

Two new CNC Benders commissioned–

New welding training centre–

CNC header drilling machine

▪

Training facilities in Pretoria and in Wadeville

Many skills are being developed as local content requirements kick-start whole new industries in SA

90% of major orders placed on Mechanical equipment

New fabrication and training facilities established

Air Cooled Condenser (ACC)

Major pumps

Heaters

LP outer casing Unit 6

Feedwater tank

Heaters Drain recovery pumps

Equipment

>55%

100%

>80%

>45%

>90%

>20%

Local content

22

SOURCE: Medupi project management

| 24

Medupi would Medupi would ……

The programme will fuel demand for relevant graduates and artisans and will grow the wide required skill base

… rapidly grow South Africa’s supply of engineers, artisans, R&D and project management experts

… consume 43% of a year’s relevant

university graduation (engine-

ering, project planning, etc.)

… deploy 48% of a year’s output

of artisans

… develop a wide range of additional skills through ASGI-SA commitments

22

SOURCE: Eskom Enterprises division and Medupi project

| 25

Across Medupi, Kusile, and Ingula new employment opportunities will touch the lives of ~160 000 people

On site constructionSupporting project staffCoal mine expansionTransmission expansionCrocodile River expansionOngoing operations

Subtotal

DIRECT

INDIRECTSocial services + local business

8 3002 2002 1002 7003 000

700

~19 000

Total employed

1 700

20 700x family multiplier (4/family)

x 4

People directly impactedby Medupi, Kusile & Ingula

~160 000

7 200

600

~12 000

1 700

13 700

4 100

100

~4 500

1 100

5 600

Medupi Kusile Ingula

33

2 000200

2 000 300

SOURCE: Eskom Enterprises division and Medupi project

Other projects such as 765kV and RTS provide

~ 11 000 direct employment opportunities during

construction and a further ~1 700 during operation

| 26

Medupi, Kusile and Ingula will support local and national infrastructure

Example

Roads Richards Bay to Lephalale and Lephalale bypass 22 km of new roads reinforcing of 3 bridges: >R500bn, 500 jobs

Ongoing roads maintenance Maintenance of local access roads: > R100m p.a.

Trains 3 x 38 wagon train per day for limestone, 2 x 12 tank carriers per year of oil maintenance or rail lines: 100 jobs

Catering and workforce supply

Food, laundry, maintenance security supplied to workforce: >R2bn, 1 000 jobs

Local transport Additional buses at peak, increased taxis: ~500 jobs

Vehicle maintenance 1 000+

extra vehicles maintained locally: 50 jobs

Water Benefit from Crocodile River diversion pipeline from Kendal

Sanitation Sewerage plant upgrade: R50m

Social facilities 7 schools impacted, increased policing, recruitment centre, fire, social club, ICT centre. Ongoing work with stakeholder forums

Hotels Hotels to expand significantly

Freight forwarding Richards Bay facility: R90m, 150 jobs

Housing 3 300 houses and accommodation units to be built by Eskom and suppliers: ~R4bn

National infrastructure

Local infrastructure

Area of impact

44

SOURCE: Eskom Enterprises division and Medupi project

| 27

Other businesses and infrastructure created:•

Catering•

Laundry•

Building companies•

House maintenance•

Hotels•

Entertainment•

Training facilities•

Security•

Schools / education•

Policing•

Churches•

Medical care•

Banks & financial services

Impact on local town’s GDP from each project

Lephalale (Medupi)

Delmas (Kusile)

Ladysmith (Ingula)

95%

25%

7%

Typical local businesses and infrastructure created

Shops

TransportSchools

Civil infrastructure

Each project will measurably impact the local towns through local spend & investment

55

SOURCE: Eskom Enterprises division and Medupi project

Expansion programme challenges -

since inception

The market

The market within which Eskom is operating is extremely tight, with significant demands on supplier capacity and basic commodities being a feature since

2005

Contracting and risk sharing

New thinking on contracting and risk sharing has become essential based on the following:•Global demand for new plant is high•The supplier market is global and limited•Supplier market experiencing shortages of material, components and engineering capacity•Fixed price or construction commitments cannot be secured•Increased demand for power plants leading to significant escalation in prices•Seller’s market, not a buyer’s market•Contract and risk-sharing profiles fundamentally changed

Timeline

Given the reserve margin, the Eskom programme is working with very tight timelines28

Expansion programme challenges -

since inception

Funding

Eskom clearly found itself in a very challenging funding environment. Until October 2010, Eskom did not have a full funding plan to complete the capacity expansion programme; it now has one

Safety

Despite the importance of executing projects on a tight schedule

and within a tight budget, it is Eskom’s firm belief that safety is the most important objective of all. The inherent risky nature of major construction activities requires constant management and leadership

Skills development

•The build programme is used to contribute to skills development and facilitate manufacturing capability in South Africa•Skills remain a significant factor for Eskom. The competition for skills is fierce, both internationally and locally

Local communities

The new build impact on local communities is massive –

housing, education, safety, health services and social impacts

29

•

The new build programme is significant by any measure. Cost increases are understood and taken into account, lessons have been learnt and implemented for future projects and across existing projects.

•

Good progress has been made, but many serious risks will need to

be carefully managed in the future. Strong mitigating measures have been put in place to manage these risks.

•

The global financial crisis has affected all sectors of the economy, Eskom included. This led to a review of the build program taking into account:

•

Financial contractions of the markets,

•

Resultant re-prioritisation of certain capacity projects and

•

Delaying the execution of some of the projects at certain times since 2005; full go ahead on Kusile was given in October 2010

•

Macro-economic factors have negatively impacted the build programme:

•

CPA, and

•

Cost of cover and other market forces

In conclusion, since 2005 until today

30

Update on Labour Unrest

Kusile and Medupi

Power Station Projects

Introduction

•

During April & May 2011 operations at Medupi & Kusile were disrupted after labour protests by contract staff led to the damage of vehicles and property.

•

Valuable lessons were learnt and labour agreements with contractors have subsequently been reviewed.

•

Although minor delays on construction, there is no threat on the delivery of both Medupi & Kusile, operations are back on track and projects are working very hard to make up the lost time.

Background Project Labour Agreement

•

Eskom’s New Build projects are governed by the Project Labour Agreement (PLA) signed by the contractors, Employers’

organisations and the six recognised Industry Trade Unions.

•

The PLA makes provision for the use of expatriate labour and the

approval process for such use. No expatriate labour may be mobilised to the project without prior approval by Eskom. A key element for this is the consultation by contractors with organised labour on the use of expatriate labour.

•

Furthermore, contractors are required to show that recruitment drives have been held within South Africa and that a shortage of skilled resources is proven. In addition, contractors need to implement skills transfer programmes between foreign craft and local labour.

•

The area where there is currently a challenge on supply of local

labour is the supply of suitable skilled welders for both the boiler and turbine contracts at both Medupi and Kusile.

Background: Kusile Power Station

LABOUR UNREST

Site activities were disrupted on several occasions during the

period starting at 18 –

19 April 2011 and 4 –

6 May 2011.

Two events of significance preceded work disruption:

1. Demand by the Roshcon (contractor) employees that the

Contractor’s Management accept a memorandum, detailing four

demands, with the Eskom Project General Manager as a witness.

2. The application of the “no work no pay”

principle detailed in the Kusile PLA by the Kusile Civil Works Joint Venture contracts’

management.

On 6 May 2011, all construction activities were brought to a halt due to protest action that erupted into acts of destruction of offices, motor vehicles

and plant.

Background: Medupi Power Station

LABOUR UNREST

Site activities ceased and project employees were

evacuated from site following the violent protest by contractors’

workers that took place on Tuesday, 10

May 2011.

The claims made are such that these aforementioned

trades are not scarce in South Africa and such

opportunities were supposed to have been

given to fellow South Africans.

This event was subsequent to a grievance regarding expatriates employed on

site. There was a series of engagements regarding the dissatisfaction by some of the contractor employees around the Thai welders, riggers and pipe fitters.

Kusile: Resolution & Way forward (Current State)

•

The root cause is attributed to a failure by Contractors and Labour to effectively and consistently apply and comply to the Project Labour Agreement.

•

Although the PLA provides for engagement and dispute resolution,

this is not always adhered to by either party.

•

Implementation and management of the PLA will be closely monitored going forward.

•

Clear requirements has been set of what is expected from Contractors prior to their return to site.

•

Over 2000 KCWJV contractors have been terminated, recruitment and employment of contractor employees (including those terminated) has commenced.

Medupi: Resolution & Way forward (Current State)

•The industrial action was as a result of Hitachi’s subcontractor Murray and Roberts Project employee’s having a grievance in respect of expatriate artisans at the Medupi Project. The employees had demanded that all expatriate artisans on the Medupi Project should be removed from the Project.

•The Medupi response team and SAPS were immediately deployed to the site. All the contractors on site were advised to evacuate their personnel

from Site. This was duly complied with.

•To better manage such an occurrence going into the future a Joint Operation Centre ("JOC") has been formed. In addition there have been continuous engagements and workshops with contractors to ensure that the requisite emergency measures are able to be deployed effectively.

•Murray and Roberts Projects have obtained an interdict against their employees who embarked on the industrial action. They have also engaged with organised labour on the incident and their mobilisation plans in respect of expatriate artisans.

•Agreements have been entered into with employees who embarked on

the unprotected action and re-inductions have taken place and employees are back at work.

Thank You