Eskom and the World Bank: partners in eco-disasters

by Mar 26, 2010All Articles

By David Hallowes

Fossil’s white knight

Eskom and the Treasury have negotiated a US$ 3.75 billion loan from the World Bank to fund the new build programme. The money isn’t in Eskom’s pocket yet. The loan still has to pass the World Bank’s Board. Justifying the loan, the World Bank argues the need for expanded electricity production following the blackouts and notes the impact of the financial crisis. It says the loan will bring financial stability to Eskom, support future economic growth, contribute to poverty alleviation, and help South Africa onto a ‘low carbon path’.

 

The money

The Board will certainly pay close attention to Nersa’s decision to grant Eskom a 24.8% tariff increase this year, and an increase of  25.8% and 25.9 % for 2011 and 2012 respectively.  . The application for a 35% annual hike over the next three years  was opposed by everyone outside government, including the ANC, business, labour and community and environmental organisations. Nevertheless, Eskom’s request is revised down from 45% and comes with warnings that it will return to Nersa for further increases if it cannot raise more capital.

 

News of the loan emerged in August 2008 just as the commodity boom turned to bust. Earlier that year, Wall Street credit ratings agencies had put Eskom on ‘negative watch’. With credit drying up on the capital markets, Finance Minister Trevor Manuel had already given the utility a R60 billion ‘subordinated loan’ – effectively a capital injection. But the ratings agencies were looking for a steep increase in the price of electricity to support funding for the expansion. Eskom applied to Nersa for a 60% hike but was granted 27%. Moody’s then downgraded Eskom’s credit rating by four notches so raising the cost of capital on international finance markets. News of the loan was fed to the media the next day with the Bank cast as saviour.

 

This was something of a turn around. South Africa had previously avoided borrowing from the Bank, regarding it in the Bank’s own words as an “unwelcome suitor”.[1] This reflected the Bank’s reputation in Africa because of its record of dictating policy to indebted countries. Nevertheless, government took World Bank advice to voluntarily adopt neo-liberal policies precisely on the rationale that doing so was the only way to avoid a debt trap and the consequent dictation of policy. There was, so they say, no alternative.

 

There is now apparently no alternative to taking the loan. In making it, the Bank required Treasury guarantees. The rating agencies also wanted “unconditional and irrevocable” guarantees before reconsidering Eskom’s ratings.[2] Treasury obliged. Manuel’s 2009 Budget provided for R176 billion of loan guarantees for Eskom. The risk was now shifted to the public purse but a cavernous funding gap remained. From the first announcement of the new build in 2004, the five year capital expenditure has risen from R87 billion to R385 billion. The cost of the two big power stations at the centre of the programme – Medupi and Kusile – was put at R160 billion in 2007. It is now estimated at R264 billion and we have not heard the end of the price escalations. The tariff application is calculated to close the gap but it will still be some R40 billion short between now and 2013.[3]

 

In February 2009, Bank president Robert Zoellick used Eskom loan as an example of scaled up assistance to African countries affected by the financial crisis. This was part of the Bank’s efforts to reposition itself as the friend-in-need to Southern countries. The Bank, it seems, is having a good crisis. Whether South Africa will do so well is questionable. In taking on the debt, the Treasury is making a double bet: that future economic growth, and the continuous expansion of the energy system, will more than cover repayments; and that the volatile Rand will hold its value. Otherwise the debt becomes a trap as it did for many Southern economies in the 1980s. The odds on the first bet look long. The stupendous sums of money thrown at the world’s banks may restore the bubble boom for a while but do not address the causes of an economic depression that is still developing. Further, ‘green shoots’ are liable to be strangled as oil supplies tighten during this decade. Demand growth will be met by cruel price spikes. The second bet then looks even worse. In the short term, dollar weakness reduces the purchasing power of the loans. In the longer term, debt repayments will escalate if the Rand crashes as it has done repeatedly since 1994.

 

Alleviating poverty

Cost recovery is integral to the World Bank’s view of sustainability. It claims that ‘access to modern energy’ is critical to its core mission of fighting poverty and best provided by the private sector. Commercial terms are necessary to attract private investment which in turn “sharpens cost-consciousness and enforces payment discipline” according to a Bank paper put out for the World Summit on Sustainable Development and titled ‘A brighter future? Energy in Africa’s development‘. It gets around the problem of how people without money will pay market rates by ignoring it. Its actual projects have nothing to do with supplying local people but are overwhelmingly about getting the resources out to the global markets.

 

‘Cost reflective pricing’ was similarly made a core principle of South Africa’s Electricity Pricing Policy. Although the electrification programme connected many millions of people to the grid, many cannot afford the electricity. By 2002, about 10 million people had experienced periodic electricity cut-offs.[4] New connections now come with pre-paid meters and, in poor areas, local research shows that most people run out of electricity every month.[5] Eskom proposes that the 50kWh free basic electricity supply to poor households be expanded to 70kWh. This is scarcely adequate but it also misses the point. FBE is means tested and, as successive community representatives testified to Nersa, many who do not qualify will be pushed into poverty by a doubling of their bills if the 35% tariff increase is granted.

 

The new build, however, has little to do with household demand. It is primarily designed to supply power to large energy intensive industries and mines who consume over 60% of power. Indeed, the 36 members of the Intensive Energy Users Group consume 40%. While the cost to households is relatively high and higher still for poor people on ‘pre-paid’ systems, the cost to industry is the lowest in the world. The very biggest users are the metal smelters supplied under long term ‘power purchase agreements’ at cut rates and probably below the cost of production. These customers are altogether exempt from the tariff increase rises. Their rather significant share of the cost of the new build is thus transferred to all other consumers.

 

Low carbon

Globally, the Bank has claimed a leading position on funding sustainable development and addressing climate change in particular. Amongst other things, it manages the Global Environment Facility (GEF) in partnership with the United Nations Environment Programme (UNEP) and the UN Development Programme (UNDP) and is a key player in developing the global carbon market. This is rather remarkable. In the 1980s, the US instructed the Bank to invest in oil, coal and gas extraction to expand the supply to Northern markets and undermine OPEC’s control of prices. It has never let go of this agenda but has, in partnership with big coal and power corporations, promoted the oxymoron of ‘clean coal’.

 

In 2000, it initiated the Extractive Industries Review in response to mounting criticism from civil society organisations that its lending to oil, gas and mining projects contradicted its stated mission of alleviating poverty. The Review came back with the wrong answer. It found that poverty alleviation was neither the goal nor the outcome of the Bank’s lending and recommended phasing out funding for oil and coal and focusing on sustainable energy. The Bank ignored it and increased lending. In 2008, on Janet Redman’s analysis, “the Bank’s funding for oil, gas, and coal projects is up 94 percent … over 2007, reaching $3 billion”.[6]

 

The Bank now touts the loan as helping South Africa onto a low carbon growth path. This fits with the Bank’s view of sustainable development and with the image it must cultivate to retain its position as the world’s leading broker of climate funding. The use to which the loan will be put also fits with the Bank’s actual practice which is starkly at odds with the image. There is nothing ‘low carbon’ about Eskom’s new build. It expands generating capacity from 40MW to 59MW by 2018 and is based on carbon intensive coal fired power centred on the two new giant coal fired power stations – Medupi and Kusile. Less than 7% of the loan is slated for a wind farm and the new build will actually increase the proportion of coal fired electricity from 94% to 95%.

 

Table xx: Eskom’s new build

 

Technology

Name and location

MWatts

Peaking Plant

OCGT

Ankerlig,

Atlantis, Cape Town.

2,080

Gourikwa,

Mossel Bay, Western Cape.

Pumped storage

Ingula,

Van Reenen, KZN / Free State.

1,352

Tubatse,

Limpopo / Mpumalanga.

1,500

Wind

Sere

100

Total

 

5,032

Coal fired base plant

Expansion

Arnot

300

Return to service of

mothballed plant

 

Camden,

Ermelo, Mpumalanga

1,520

 

Grootvlei,

Balfour, Mpumalanga

1,170

Komati,

Middelburg / Bethal, Mpumalanga

955

New coal

Medupi,

Lephalale, Limpopo

4,764

Kusile,

Witbank, Mpumalanga

4,800

Total

 

13,509

Source: Eskom CEO Jacob Maroga: Presentation to the Media, 23 January 2009.

Notes: Arnot and Camden were completed in 2009.  Sere and Kusile are both delayed for a year.  Tubatse is on indefinite hold.

Open Cycle Gas Turbines are actually run on diesel and consume enormous quantities.  Pumped storage dams consume more energy than they generate and rely on off-peak base load.

 

South Africa is one of the most carbon intensive economies in the world. CO2 emissions for 2004 were estimated at 440 million tonnes with Eskom accounting for over 40% of that. In the year to March 2008, Eskom burnt over 125 million tonnes (mt) of coal and emitted 223.6 mt of CO2 according to its 2008 Annual Report. That excludes its unreported methane emissions estimated to be equivalent to 49,874 of CO2. Last year Eskom was talking of coal demand increasing to 374 million tonnes a year by 2018 which would imply about 670 million tonnes of CO2. That projection assumed that it would build a third new coal fired plant.[7] It has reluctantly concluded that it cannot afford it but says that the equivalent capacity will have to be built by private Independent Power Producers.

 

Greenhouse gases aside, Eskom’s is a major league polluter of local environments. The table below shows that its emissions of sulphur dioxide and nitrogen oxides have also increased in line with production. Only particulate emissions have been in any way mitigated and that only at some plants.

 

Eskom’s sulphur, nitrogen and particulate emissions.

 

2008

2004

2000

Sulphur dioxide (tonnes)

1,950,000

1,779,000

1,505,000

Nitrogen oxides (tonnes)

984,000

797,000

674,000

Particulates  (tonnes)

50,840

59,170

66,080

Adapted from Eskom Annual Report 2008

 

Eskom has not installed sulphur scrubbers on any of its power stations. Medupi was planned without scrubbers on the rationale that there is a “relative lack of pollution” in the Lephalale area as compared with Emalahleni (formerly Witbank) where Kusile is being built.[8] In fact, ambient SO2 standards are already being exceeded in the Lephalale area and Eskom’s existing Matimba power station is the main source of emissions. Miners and power workers in Marapong village are most directly affected. Nevertheless, in 2007 the Minister of Environmental Affairs granted Eskom permission to go ahead with its plan to build Medupi without scrubbers.

 

The World Bank’s clean coal agenda comes apart without scrubbers and Eskom has accordingly committed to retrofitting Medupi starting in 2018. That gives Eskom six years unmitigated pollution. There’s a catch, however. Scrubbers are water intensive and Lephalale is dry. Water Affairs promises to deliver the water but has not concluded feasibility studies for Medupi’s consumption even without the scrubbers. Come 2018, Eskom may well say that installing scrubbers is not feasible.

 

Supplying the coal for power sector expansion will require 40 new mines. The streams and rivers around Emalahleni are already ruined by acid mine drainage.[9] Sulphate salts are so thick on the water of the Brugspruit where it flows through the heavily populated township of Maguqa that the stream looks like it has been snowed over. Bringing Eskom’s mothballed plants back to service has driven mining development into the Mpumalanga Lake District where it threatens the source of three major river catchments – the Vaal, the Usuthu and the Komati.

 

Against the deal

Eskom may assume that a favourable decision by the World Bank Board is a mere formality. But the first news of the loan drew sharp criticism and opposition to it has since grown. It combines several strands in the justice movement: South Africans appalled by the social and environmental costs, Africans who argue that South Africa has already accumulated a ‘climate debt’ to the rest of the continent and see escalating carbon emissions as a threat to survival, and international and local groups opposed both to the World Bank’s fossil agenda and to its use of debt to dictate policy in the South in the interests of global capital. The decision will not pass without a fight.

 

This article is based on a paper prepared for groundWork: The World Bank and Eskom: Banking on Climate Destruction. The full paper is available at www.groundwork.org.za

 



[1] World Bank (IBRD, IFC and MIGA), Country Partnership Strategy for the Republic of South Africa for the period 2008 – 2012, December 12, 2007. p.44.

[2] Terence Creamer, S&P’s scrutinises Eskom guarantee detail before making ratings call, Engineering News, February 13, 2009.

[3] Eskom’s figures show it R14.1 billion short in 2011/12 and 7.8 billion short in 2012/13. But this assumes that a private investor will put R20 billion into Kusile. The private sector response to this has been derisive.

[4] David McDonald, 2002. The bell tolls for thee: Cost-recovery, cut-offs and the affordability of municipal services in South Africa. HSRC. Note that the use of pre-paid meters has the consequence of removing people from statistics on cut-offs.

[5] Jackie Dugard 2008, Power to the people? A rights based analysis of South Africa’s electricity services, in David McDonald (ed) Electric Capitalism, Earthscan.

[6] Janet Redman, Dirty is the New Clean: A Critique of the World Bank’s Strategic Framework for Development and Climate Change, report for Friends of the Earth, OilChange International, Campagna per la Riforma della Banca Mondiale and Institute for Policy Studies, October 2008. p.2.

[7] Martin Creamer, Decision on another new coal power station needed this year – Eskom, Engineering News, 5 February 2009.

[8] Eskom CEO Jacob Maroga quoted by Engineering News, July 27, 2007. The comment echoes the notorious internal memo circulated by World Bank official Lawrence Summers, in which he argued that poor countries were under-polluted and “the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable …”

[9] Mine workings expose mineral rocks to oxygen which reacts with chemical elements in the rocks. Chemical and mineral salts then leach into water which seeps through mine workings. This contaminated water is known as acid mine drainage.

 

 

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