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Update: State of the Power System

Spring 2011

Mr Brian Dames Chief Executive 25 August 2011

Table of contents Introduction Review of Year To Date performance Winter events and issues Outlook for next few months Partnering to keep the lights on

In support of 2

Overview

• This is the third quarterly briefing, delivering on our promise to keep stakeholders informed and to update you regularly on the state of South Africa’s power system • We are managing a tight power system. We are on alert and will be for the next five and especially the next two years, while we build new capacity.

• Eskom has managed to keep the lights on during a tough winter, thanks to lower than expected demand, and initiatives put in place to manage a tight system . But the risks to the system in summer require even more careful management.

• Local supply interruptions, due to overloading caused by illegal connections, as well as to severe weather conditions in some areas, were challenges during this winter • Summer is maintenance season: while demand is lower, units must be taken out of service for maintenance; space must be created to adequate maintenance.

• Eskom is resolved to keep the lights on. But our resolve will be tested and we cannot do it alone. Energy efficiency is essential to ensure enough capacity to meet demand and to address the maintenance backlog and provide a reserve to protect the system.

• Our build programme is making good progress and will deliver a more robust power system for SA in future.

In support of 3

Eskom at a glance

• • • • • • • • • Strategic 100% state-owned electricity utility, strongly supported by the government Supplies approximately 95% of South Africa’s electricity and more than 40% of Africa’s electricity 41 778 employees as at 31 March 2011 Serves 2 857 industrial, 1 110 mining, 49 090 commercial, 84 393 agricultural and more than 4.5 million residential customers 27 (including 1 nuclear) operational power stations with a net maximum capacity of 41 194MW as at 31 March 2011 Total electricity sales of 224 446GWh and gross electricity revenues of R90.38bn for the year ended 31 March 2011 (R69.83bn for the year ended 31 March 2010) Infrastructure includes 395 419km of power lines and cables (all voltages) as at 31 March 2011 Committed to build 17.1GW new generation capacity expected by 31 March 2018. This includes 5.2GW already commissioned as at 31 March 2011 Baa2 (Stable)/ BBB+ (Stable) rating by Moody’s and S&P In support of

Eskom electricity sales by customer for the year ended 31 March 2011 (31 March 2010) Eskom’s net capacity mix – 31 March 2011

Pump storage 3,4% Hydro 1,5% Nuclear 4,4% Wind 0,0% Gas 5,8% Coal 84,9% 4

Table of contents

Introduction

Review of year to date performance

Winter events and issues Outlook for next few months Partnering to keep the lights on In support of 5

We took action to address the challenges we identified at the beginning of the year

What we said

Demand would be back at 2007 levels and would increase by 2% in 2011 We would improve coal handling and coal quality to reduce load losses We targeted to improve generation output by 1%-2% over three years

What we did

Demand is up 1.4% compared to 2010 Coal-related production losses were reduced by 26% for the first 5 months of the year compared to 2010

;

coal stockpiles being rebuilt after coal industry strike. Although the plant availability improved over the last four months, year to date deteriorated compared to the previous year from 91.9% to 90.6%. The Duvha unit 4 incident contributed to this deteriorating performance. A sustainable availability improvement requires execution of more planned maintenance: every opportunity for maintenance is utilised We would sign up about 400 MW of co-generation and own generation by April We needed to undertake significant maintenance during summer We would execute the demand side programme We would communicate with our stakeholders on the state of the system In support of 891MW contracted of which 376 MW from IPP’s and about 515 MW of municipal generation Critical maintenance has been prioritised , with lower than expected winter demand enabling some maintenance to be done during winter Reduced demand by 113 GWh during the first quarter Extensive programme of engagement with stakeholders 6

Winter demand has been below expectations

• • • • The peak demand and total energy sent out for 2010 was almost back to levels seen in 2007, before the recession The summer demand in 2011 was generally higher than that previously experienced. However there has been a drop in the winter load compared to that expected. The peak demand for 2011 to date was 37 064 MW at the end of May, including non Eskom generation. This is marginally higher than the 36 970 MW in peak 2010 but lower than our forecast of 37 500 MW for this winter Year to date energy growth of about 1.4% compared to this time last year, lower than forecast of 2%

Weekly Energy Production

In support of 7

Weather, strikes, pricing impacted on demand

• Demand has been below our forecasts throughout most of winter, with peak demand of 37 064 MW at the end of May, below the 37 500 MW at which demand was expected to peak during July • Strikes in the metals and mining sectors took significant load off the system during some of the coldest winter weeks • Demand from large power users was significantly below expectations: large power users reduced load in response to winter tariffs (winter peak tariffs are 3.5 times higher than summer peak tariffs while average winter average tariff is 2.5 times higher than average summer tariff) • Winter cold snaps were relatively brief • Demand patterns also reflect weaker than expected economic activity In support of 8

Coal strike impact managed

• • • • • • • Strike at coal mining members of the Chamber of Mines from 24 July to 1 August, with mines back to normal operations on 4 August 2011 Prior to the strike, Eskom increased coal deliveries to build stock.

An integrated team was set up to manage the risk during the strike.

Opportunities to source coal from non Chamber of Mines operations were maximised During the strike the road and rail conditions for coal deliveries, control room operation, and reclaim capability were tracked, monitored closely with risk mitigations in place.

1.8 days of total system stock was lost during the strike period Post strike plans are in place to recover lost deliveries In support of 9

Coal stocks being rebuilt after the strike

• • • • Coal stockpiles are around 36 days and are projected to build to 40 days by the third quarter.

To maintain stock days at projected levels a process has been implemented to source an additional 4 Mt of coal during this financial year. Due to the strike impact this has increased to 5 Mt.

Coal stockyard operating procedures are being reviewed to reduce coal handling challenges during the wet season.

There will be a continued focus on optimising processes for coal handling and coal quality management

Actual Stock days 2008 – 2011 vs Projection 2012 2007/8 2010/11 2011/12

– Jul ) (Proj: Aug- Mar)

20 15 10 5 0 50 45 40 35 30 25 24,9 35 40,3 APR 24,6 35 39,1 MAY 22,0 37 39,2 JUN 19,8 40 36,3 JUL Actual Stockdays 2008 - 2011 vs Projection 2012 46 46 45 43 42 40 19,3 AUG 18,4 17,2 SEP OCT Months 17,9 NOV 14,9 DEC 12,2 JAN

In support of

13,3 40 FEB 12,8 41 MAR

10

Success in reducing production losses

Full and Partial Load Losses: 01 April 2011 – 14 August 2011

• • • Eskom provides a 3,600 MW allowance for unplanned outages and production losses in its generation fleet, to cushion the system There was an improvement in generation performance during winter period, but some of this was eroded by the Duvha Unit 4 outage. There was an increase in production loss at the end of July and beginning of August Eskom continues to work to improve performance of generation plant.

In support of 11

Independent Power Producers

In total about 600 MW of non-Eskom generation was in production through winter.

Eskom supporting two municipalities to operate their generation plant – 515 MW signed up and about 300 MW operational in the last month. Final Medium Term Power Purchase agreement signed, bringing total to 376 MW (agreements with Sasol (240 MW), Sappi (35 MW), Ipsa (13 MW), Tangent (85 MW) and TSB Sugar (2.9 MW)) • Average cost of 76c/kwh for non-Eskom generation (53c for Eskom) indicates real price of generating electricity • Government’s Integrated Resource Plan creates framework for introducing further IPPs; Renewable Energy IPP programme has taken a major step forward with the issuing of Request for Proposals Kelvin power station In support of 12

Table of contents

Introduction Review of year to date performance

Winter events and issues

Outlook for next few months Partnering to keep the lights on In support of 13

Local outages a winter challenge

• No national load shedding, but local distribution interruptions to supply in certain regions • Severe weather Eastern Cape – snow storms, heavy winds - caused short supply interruptions in parts of KwaZulu Natal, • Majuba power station cut off by snowfall • Local outages caused mainly by overloading and illegal connections in densely urbanised areas • Protest sparked by tamper proof “split” electricity meters and perceived high tariffs Ingula in the snow • We are strengthening network infrastructure, investing about R10 billion a year in Eskom’s distribution network • Working with stakeholders in Gauteng: Joint task team with local government under the leadership of DPE • Strategy to combat illegal connections and electricity theft showing results In support of 14

Tariff structure

• Electricity tariffs moving up towards cost reflective levels, but NUS survey indicates South African tariffs remain competitive • After almost two decades of below inflation tariff increases, this winter highlighting issues around the structure of tariffs for large power users and for low income households • Time of use tariffs for large power users, intended to provide a signal to reduce load during peak hours, reduced total demand by large power users during the winter tariff months • Inclining Block Tariff (IBT), which was intended to provide relief for low income households was experienced as causing higher cost for many poor households during the high-consumption winter months • We will look at the lessons learned In support of 2011 Rank 2010 Rank

6 7 8 9 4 5 1

2 3

10 11 12 13 14 15 16 3 6 8 11 4 7 1

2 5

9 10 14 13 12 16 15

Country

Italy

Germany Spain Belgium United Kingdom Austria Netherlands Portugal Finland Sweden Poland Australia France United States South Africa Canada

Cost in US¢ per kWh

19.70 18.56 15.37 15.23 15.10 14.58 14.37 13.51 12.11

11.94 11.87 10.02 9.61 9.48 8.55 7.98

One Year % change

9.4% 24.8% 16.4% 14.9% 24.5% 7.5% 13.2% 14.5% 24.8% 17.1% 21.0% 15.7% 10.0% 2.2% 27.8% 3.1%

15

Inclining Block tariff (IBT) - Residential Customers

• Inclining Block Tariff (IBT) was introduced by NERSA in 2010 for residential • customers Designed to protect poor households from the impact of electricity price increases • Unintended consequences: • Consumers experienced high electricity cost compared to previous financial year; • Inadequate education drive on IBT and its impact on customers • Multiple dwellings per stand mean households do not benefit from lowest tariff.

Block 1 Block 2 Block 3 Block 4 Monthly level consumption Including VAT <= 50 kWh 51 – 350 kWh 351 – 600 kWh > 600 kWh In support of 2020/04/26 c/kWh 2010/11 62.4

66.7

87.0

95.5

c/kWh 2011/12 65.7

75.4

109.5

120.1

c/kWh 2012/13 69.3

85.6

137.9

151.2

16

Update on Duvha Unit 4 incident

• On 9 February 2011 Unit 4 at Duvha Power station was damaged extensively during a statutory turbine overspeed protection test. • The process for dealing with the incident runs in phases: a technical investigation, the recovery of the unit to return it to service, then concluding the insurance process and then taking follow up action based on the technical investigation report.

• A recovery project has been initiated to expedite the return to service of Unit 4. Progress has been substantial and the project is projected for completion by winter 2012 subject to engineering challenges. Timely return of the Unit as planned will reduce system constraints.

• Once the process is concluded, Eskom will be in a position to share the cause of the incident and any further remedial measures we are taking as a result.

In support of 17

Table of contents

Introduction Review of year to date performance Winter events and issues

Outlook for next few months

Partnering to keep the lights on In support of 18

Summer is maintenance season

• We do planned maintenance in summer, when demand is lower, so that maximum capacity available in winter. The maintenance season usually starts in September and ends in about mid-May, but this year some maintenance was done during winter • A colder-than-expected winter puts added pressure on the system: for every 1 degree Centigrade decrease in winter temperature, electricity demand increases by 600 - 700 MW during the evening peak

Typical winter and summer load profiles

38 000 36 000 34 000 32 000 30 000 28 000 26 000 24 000 22 000 20 000 Typical Winter Day Typical Summer Day Winter load profile is very ‘peaky’. Peak demand exists for only a few hours per day – but we have to have enough capacity in the system to meet it Peak demand at 37,000MW, compared to this year’s summer peak of 33 064 MW (and last year’s winter peak of 36,970 MW) In support of 19

MW

Summer is maintenance season

Capacity available for maintenance including Liquid-fuel Open Cycle Gas Turbines (OCGTs) Capacity available for maintenance excluding Liquid-fuel Open Cycle Gas Turbines (OCGTs) • Planned outage requirements exceed the capacity available for maintenance • As a result, liquid-fuel Open Cycle Gas Turbine (OCGT) usage and demand side management become critical • Planned outages are ranked on scope and risk, to enable prioritisation of outages within the available capacity • • Lower risk outages (inspections and interim repairs) have had to make way for high risk high pressure pipe-work replacements, low pressure turbine blade inspections and major refurbishment outages All outages that are “deferred” are monitored for increasing risk until they can be accommodated In support of

Expected system status

A

green

week indicates that demand and all reserve requirements can be met with all installed capacity (including the Open Cycle Gas Turbines).

A

yellow

week indicates that there is up to 1,000 MW shortage of meeting the demand and reserves.

There is an increased probability of requiring some emergency reserves to meet the peak demand A

orange

week indicates that there is between 1000 and 2000 MW shortage of meeting the demand and reserves. There is a high probability of requiring substantial emergency demand reserves to meet the peak • • Demand reduction or additional supply options will improve the situation for the tighter weeks as indicated in the various columns above.

The status indicated above may change if there is a change in the demand or supply from that forecast, which is dependant predominantly on weather and large customer behaviour.

In support of 21

This is Medupi

In support of 22

Our build projects are powering ahead

Kusile Medupi • With more than a year to the planned first power from Medupi, we are doing a detailed assessment of the schedule ensuring that contractors meet timelines • We are focusing systematically on supplier performance, so we can pick up and mitigate any risk factors early on; also understanding impact of labour situation on the project Bothaville line Ingula dam wall • Significant milestones reached: first generator at Medupi, dams at Ingula, Grootvlei completed, Komati three units operational • These are big projects with big risks: we are on alert In support of 23

Table of contents

Introduction Review of year to date performance Winter events and issues Outlook for next few months

Partnering to keep the lights on

In support of 24

Reserve margin since 1999

• The reserve margin is simply a snapshot of the amount of installed capacity at the time of system peak • All installed capacity is included, including peaking plant which is not intended to run for long periods of time.

• On its own, the reserve margin does not give any indication of the amount of capacity available for maintenance.

Percentage Reserve Margin % Reserve Margin

30 27.1

25 24.6

23.2

20 19.2

15.9

15 11.2

10 8.2

6.7

5.6

5 10.6

16.4

14.9

16.8

* • * In particular this year’s peak occurred before the traditional winter period. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Keeping the lights on: The next seven years

2,0

Energy Supply Gap assuming the Base Case assumptions

-2,0 -4,0

2011

-6,0 -8,0 6 -10,0 In support of

2012

9

2013

3

2014

2

2015

1

2016 2017

26

A number of levers have been identified and explored to help close the gap

Supply side levers to help close gap

•

Increase generation capacity in existing fleet

* •

Improve Eskom generation performance

•

Bring in additional co-generation and own generation

* •

Sign up municipal and other backup generators

•

Work with government to bring in renewable energy producers

In support of

Demand side levers to help close gap

•

Increase Eskom’s internal energy efficiency

•

Deliver on demand side management programme

•

Roll out of government’s 1 million solar water heating by 2014

•

Implement demand response programme

* •

Implement smart systems and load limiting technologies for residential customers

* * Subject to government approval 27

A “safety net” is required as a last resort in case further risks materialise

*

1.

2.

3.

Open cycle gas turbine use

• The OCGTs in South Africa will have to be run at higher load factors incurring significant cost

Demand response initiatives

• Incentive-based demand response programme in place already for our largest customers; achieves about 500 MW • Imminent placement of contract with aggregator to obtain nearly 500 MW from the larger commercial and smaller industrial customers. This can be ramped up to 2,000 MW in the next 3 to 6 years • Investigation into technologies for residential demand response completed

Energy Conservation Scheme

• A voluntary Energy Conservation Scheme involving the 500 largest electricity users is the preferred route. Already, 134 large customers are participating in a voluntary scheme and have saved 5% against the baseline • An ECS would provide certainty of demand (for at least 7 years from those customers that consume between 50% and 60% of the electricity) • Eskom has proposed that a mandatory scheme may be necessary as a last resort to prevent disruptive load shedding, but this would be a government decision * Subject to government approval In support of

Achieving the Energy savings target for 2011/12 could power a city for a year

1,280

G i g a w a t t h o u r s either of

Buffalo City

(1,305 GWh consumed )

Mangaung

(1,397 GWh consumed ) for

~1

year or

Sol Plaatjie

(514 GWh consumed ) for

2½

years In support of Source: Annual electricity consumption/sales as reported in the State of Cities 2006, City Energy Support Unit, Sustainable Energy Africa, 2006 29

Mass Roll-Out and Rebate Programmes

Initiative

CFL’s LED’s SWH – Low Pressure SWH – High Pressure Heat Pumps – Residential Commercial and Industrial projects

Total Year to Date 473,000

bulbs installed

20,685

bulbs installed

40,694

units installed

2,493

units installed

75

units installed

11

projects

MW

14.6

0.3

7.3

1.5

0.1

7

30 GWh

36.4

1.9 10.2

2.2

0.1

64

113

In support of 30