Power supply getting tighter

2010-10-16 13:20

The risk of South Africa facing another big power shortage from next year has been highlighted in a report titled Keeping the Lights On in SA Is Not That Easy.

RBC Capital Markets analyst ­Leon Esterhuizen’s assessment – based on two reports recently published by the government looking into the short and medium term power situation in the country – is that “the power issue in South Africa has still not been addressed”.

He says: “Two years after the collapse of the power grid in 2008 the country is still drafting plans to address what is now acknowledged to be a very tight power supply situation over the next five years.”

Esterhuizen’s focus is on the likely effect of renewed power supply problems on the operations of the country’s platinum mines.

His conclusions are that current expansion plans from the big mining companies should be questioned because significant cost increases are now a given owing to higher power costs. He believes there is also a risk of possible production disruptions.

Esterhuizen notes power costs currently make up about 10% of a platinum mine’s cost base. However, assuming other costs stand still, this could rise to 25% in five years.

He says: “Of course, everything else does not stand still so the real number will be lower. Still, if the PGM (platinum group metals) industry continues going deeper on the Western Limb of the Bushveld Complex, the resultant jump in power demand due to the need for refrigeration could well see power becoming a central cost driver.”

Turning to the listed platinum companies, he says: “Juniors with good, shallow resources should continue to attract attention as ­possible takeout targets. This would include, but not be limited to, Wesizwe Platinum, Eastern Platinum and the soon-to-be-listed Royal Bafokeng Platinum.”

Esterhuizen’s reasoning is that these companies will be the least ­affected by the power issues, while their projects will incur the lowest capital costs to build and also have the lowest operating costs.

Esterhuizen’s conclusions are based on several factors. These ­include likely further delays to the Medupi and Kusile power stations, under construction by Eskom.

He says these two new coal-fired stations were previously thought to be enough to lift the supply squeeze.

However, the latest assessment is that keeping the lights on will be crucially dependent on mitigation measures designed to lower demand for power.

Esterhuizen says: “These measures essentially point to the fact that even with two new power stations coming on line, power consumption will have to be cut if the country is to stay ‘switched-on’.

“The success of maintaining enough power for industry hinges entirely on making sure the rest of South Africa cuts back.

“Mitigation effectively means forcing town councils to shut down when needed.”

Esterhuizen highlights the government report titled Medium Term Risk Mitigation Plan for Electricity in South Africa – Keeping the Lights On as the key document.

This report deals with the supply situation from 2011 to 2016. It notes: “The current electricity supply/demand situation is very tight. The latest forecasts indicate a worsening situation starting in 2011 and proceeding through to 2016.

“This situation poses a real risk of rolling blackouts similar to those experienced in 2008 and a serious threat to government’s objectives for growth and job creation.”

Esterhuizen comments that “the consequence of any such shortfall will negatively affect not only the production output and cost profile of the PGM and gold-mining industry in South Africa but also economic development and investor confidence in the region.”

He points out that even with successful risk-mitigation policies there is still going to be a power supply shortfall in 2012 and 2013.

“Therefore, even in a near-best case scenario, the risk mitigation policies that will impinge supply and increase cost profiles will be further compounded by disruptions to energy supply,” he notes.

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