South Africa - Third Electricity Supply Commission (ESCOM) Power Project

R E S T R I C T E D CIRCULATING COPY TO BE RETURNED TO REPORTS DESK R e pa r t N a. TO-295b This report was prepared for us within the Banlk It may not be published nor may it be quoted as represnting the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL REPORT POWER EXPANSION PROGRAM ELECTRICITY SUPPLY COMMISSION (ESCOM) SOUTH AFRICA November 16, 1961 Department of Technical Operations  CURRENCY EQUIVALENTS U.S. $1 = South African Rand 0. 714  TABLE OF CONTENTS Page SUMMARY i I. INTRODUCTION 1 II. THE BORROWER 1 III. THE PCTER MARKET 3 IV. ThE ESCOM EXPAMSION PROGRAM 4 V. THE PROJECT 5 Komati Power Station 5 Highveld Powier Station 5 Transmission Lines and Substations 5 Estimated Cost of Project 6 Expenditure Schedule for Bank Loan 6 VI. FINANCIAL ASPECTS 7 Electric Power Legislation 7 Present Financial Position 8 Past Earnings 9 Future Finances 11 VII. CONICLUSIONS 12  APPRAISAL REPORT POMER EXPA1SION PROGRAM ELECTRICITY SUPPLY COPMGSSION (ESCOI:) - SOUTH AFRICA SYIARY i. The Government of South Africa has asked the Bank to finance a part of the foreign exchange costs of the power exDansion program of the Electricity Supply Commission (ESCOM) for the period 1960-64. The estimated cost of the program during this period is approximately $274 million equivalent, and the requested Bank loan would finance 44i million of the total foreign exchange component of $63 million. Most of uhe projects in the expansion program have been started and are in various stages of construction. All are scheduled to be completed and in operation by about August 1964. ii. The proposed loan would be used to meet foreign exchange requirements during the period between July 1, 1961 and about December 1962 for purchases of generating equinment totalling 870 Mi of new capacity in thermal plants and of 314 miles of high voltage transmission lines, with their associated sub- stations for the ESCON grid serving the Cape Northern-Rand and Orange Free State-Eastern Transvaal areas. iii. ESCOV, which would be the Borrower, is an autonomous, Government-owned corporation with a history of successful operation. The Bank has made two -orevious loans to ESCO14, one in 1951 and another in 1953, each for $30 million, with which to carry out expansions of its facilities. Both loans have been fully disbursed and the work satisfactorily concluded. ESCOM's undertakings have a capacity of about three and a half million kdlowatts which is about 65, of the total installed capacity in South Africa. It provides about three- fourths of the electrical energy used in the country. iv. The economic justification of the project is well established. The ESCOM grid serves the principal gold mining areas of South Africa and extensive industrial developments. The projected capacity of the grid will be fully absorbed within about a year (by 1965) after completion of the present ex- pansion program. Coal is both cheap and plentiful and is within easy access of IJSCCM's plants. v. While the accounting principles under which ESCOM is operated differ substantially from those usually found in other well operated utilities, the agency has been so administered as to have established for itself a sound fi- nancial position with a satisfactory record of earnings. vi. The project is suitable for a Bank loan of $14 million equivalent with a term of ten years, including a two year grace period.  APPRAISAL REPORT PO',Ar_R sXPANSION PROGRAM ELECTRICITY SUPPLY COQIN-SSION (ESCOV) - SOUTH AFRICA I. IVITRODUCTION 1. The Government of South Africa has requested the Bank to consider a loan of $14 million equivalent to assist in financing the foreign exchange requirements of the power expansion program being projected during the period 1960-64 by the Electricity Supply Commission (ESCOM). The proposed loan would be used to meet part of the foreign exchange requirements of a new 750 ZJ thermal power station, the expansion from 360 K4 to 480 K4 of an existing thermal plant and the addition of approximately 314 circuit miles of 275 kv transmission lines, with their associated step-down substations. 2. In January 1951 a loan (41 SA) of $30 million was made to assist in financing power plants, transmission lines, switchgear, transformers and associ- ated electrical equipment of the 1950-55 ESCOV expansion program. This was followed by loan (78 SA) in August 1953, also for $30 mi'llion, which helped finance an additional phase of the ESCOM program up to 1958. The proceeds of this loan were used for the purchase of turbo-alternators, boilers, trans- formers, switchgear, building material, transmission line material and sub- station equipment. Both loans have been fully disbursed and the work satisfactorily concluded. 3. The expansion program of ESCOM for the five year period 1960-64 inclusive, is estimated to cost R195.8 million ($274.1 million) of which R109.3 million ($153.0 million) would be used for thermal power plants and R86.5 million ($l21,1 million) for transmission lines, substations and distri- bution. The greater portion of this expendiLure is required for the exnansion of the Cane Northern-Rand and Orange Free State-Eastern Trarnsvaal interconnected system. This system is made up of three of the seven electrical undertakings for which ESCOM is responsible. 4. The loan would be used to assist in meeting the foreign exchange requirements for the expansion of the above electrical system from July 1, 1961 until the end of 1962. The estimated total foreign exchange required in this period for expansion of the system is estimated to be the equivalent of about $14 million. 5. This appraisal report is based on information supplied by ESCOMi to a Bank mission which visited South Africa from March 15 to April 15, 1961. II. THE BORR0TT,R 6. The Electricity Supply Commission (ESCOIC) was established by authority of the 1922 Electricity Act of South Africa. It consists of five members anpointed by the State President. Its principal function is to es- tablish, maintain and operate undertakings for the efficient sunply of electricity to government departments, the South African Railways and Harbours Administration, local authorities, companies, and other persons carrying on industrial undertakings and general consumers. It is a body corporate, capable  - 2 - of suing and being sued, and is empowered with adequate authority for the carrying out of its functions in the power field. 7. ESCOM has authority, under its basic Act, to borrow by issuing securities either in South Africa or elsewhere, after obtaining the approval of the President. An amending Act to the basic Act, passed in 1952, enables ESCOF to borrow from the Bank and enables the Minister of Finance to guarantee, on behalf of the Government, any loan obtained from the Bank. 8. In 1958 an Electricity Act was passed consolidating the existing laws relating to the control of the supply of electricity, but effecting no changes of substance. 9. ESCON operates seven undertakings licensed to generate and distribute electricity in the following areas: (a) Cape Western; (b) Border; (c) Natal Central; (d) Natal Southern; (e) Cape Northern; (f) Rand and Grange Free State; and (g) Eastern Transvaal, as shown in the map attached. Each undertaking is treated as a separate, self-supporting, commercial entity. 10. The combined capacity of ESCOM's undertakings is 3,484 NVI which is about 65% of the total installed car2acity in South Africa. However, due to the characteristic high load factor of electricity utilization in the mines, ESCOM provides over three-quarters of the electrical energy used in the country. A graphic record, for several years past, is shown in Annex 1, while the energy sold, annually, to the various classes of consumers is set forth in Annex 2. Practically all of ZSCOM's power plants are thermal and use coal as fuel. A detailed list of existinR generating facilities is given in Annex 3. 11. ESCOM's undertakings form two isolated and two integrated electrical systems. In the former group are "Cape Western" and "Border" and in the latter, "Natal Central-Natal Southern" and the "Cape Northern-Rand and Orange Free State-Eastern Transvaal" electric systems. 12. The Cape Northern-Rand and Orange Free State-Eastern Transvaal electrical system, for which the Bank loan is required, is the largest of the T3SCOM group. Its installed caDacity is 2,652 MJ1 or about 76%p of the total. 13. The activities of ESCON are directed by the Commission, whose present chairman, a professional electrical engineer, is a full-time member. The principal executive officer is the General Manager, who is assisted by an adequate technical, administrative and financial staff in the supervision of the undertakings and the control of all major construction work. Practically all the power stations, transmission lines and substations, built in recent years, have been designed by ESCOIV engineers and construeted under their super- vision. The high competence of the staff is evidenced by the performance and reliability of the plants and other facilities commissioned during the past few years. The undertakings of ESCOM are well managed and the various electric systems are well maintained and efficiently operated. The performance of the power stations for 1960 is shown in Annex 4.  - 3 - III. TFE P0' FLR MARKET 14. ESCOH's areas of sun-ly, which aggregate over 140,000 square miles, cover the most highly develoned nortions of South Africa. (See map.) Within these areas are some municipal undertakdngs with their own power stations and distribution systems, most important of which are Johannesburg, Cape Town and Pretoria. 15. Energy sales of ESCCMI for 1960 amounted to over 16 billion kwh of which 13 billion kwh or 81. was supplied by the Cane Northern-Rand and Orange Free State-Eastern Transvaal electric system. Details are given in Annex 5. 16. The Cape Northern portion of the integrated system includes the city of Kimberley, headquarters of the diamond mining industry, and the area also produces iron ore, asbestos, limestone and manganese. The area, in general, is utilized for cattle ranching on a fairly large scale. 17. The Rand and Orange Free State area of the interconnected system is the heart of gold mining activities and where coal is also found in abundance. In this area the largest city in South Africa, Johannesburg, is located. Large areas are cultivated for the production of food grains, and there exists an extensive network of rail and road communications where the largest in- dustrial expansion is taking place. 18. In recent years new gold mining areas have been opened up in Eastern Transvaal and, because of its large deposits of coal, new industries are also being established in this section of the system. Cattle and sheep farming is also carried on in portions of this area. 19. As shown in Annex 5, about 64% of the energy sold in 1960 from the integrated system was for mining, 21S was for industry and the balance for bulk supply to municipalities, traction, etc. The large consumption by mines, gold mines in particular, (for compressed air, water pumping, ventilation, hoisting and reduction) accounts for the very high system load factor, which for the year 1960 was 78g. 20. I*arket forecasts are regularly prepared by ESCOM in close cooperation with the Transvaal and Orange Free State Chamber of Mines, with representatives of industry and with railway officials. A projection of the peak load of the system, based on these forecasts, is shown in Annex 6. It indicates an average annual increase of about 7.5;> over the next five years. 21. For the purpose of revenue estimates of the combined ESCONI under- takings however, an annual rate of increase of 6I in energy sales has been assumed. This forecast is on the low side as evidenced by a 9.3% increase in 1960 over the previous year and an average annual increase of 8.8% over the past ten years.  - 4 - IV. THE: ESCOM ZPAITSION PROGRAI 22. The 1960-64 program of ESCOM provides for the expansion of four power stations by an aggregate additional capacity of 435 Y,tJ and the construction of two new power stations with a combined capacity of 950 Mi. The program also provides for the construction of about 3,550 miles of transmission lines and feeders, of which 1,120 miles would be 275 kv, 1,300 miles would be 132 kv and the balance of lower voltages. It also includes the necessary substations. The major items of the five year program are given in Annex 7. 23. Most of the projects of the expansion program have been started and are in various stages of construction. A construction schedule is shown in Annex 8 from which it will be seen that all the major plant and equipment under the program is scheduled to come progressively into operation between April 1960 and August 1964. 24. Like the existing plants, the additional generating plants will be thermal, taking advantage of an abundance of low cost coal in the country. Proven coal reserves in South Africa are over 25 billion tons (see Annex 9), almost 1,800 times ESCOM's consumption of coal during 1960 which approximated 14 million tons. The average cost of coal used in ESCOPI's power stations is about 12 US cents per million BTU as compared with costs ranging between 18 and 31 cents, recorded for the year 1958, at the ten most efficient thermal plants in the United States. 25. ESCOM has been slow in the adoption of higher pressures and tempera- tures for their thermal plants but this has been due, to a large extent, to the very low delivered cost of fuel. The new Komati and Ingagane power stations will employ 1250 p.s.i. and 9700F, pressures and temperatures re- spectively, which will be the highest in the country. Generating units are limited to a capacity of 125 MW by reason of transport restrictions. ESCON has adopted a transmission voltage of 275 kv for its largest transmission lines but plans to increase this voltage in the future when requirements on its system justifies doing so. 26. The estimated cost of the exnansion program is R195.8 million ($274.1 million) of which about 56% will be spent for new generating capacity and the balance for transmission lines, substations and distribution, as shown in Annex 10. This amount includes interest during construction of R13.9 million and a contingency allowance of 5;. The estimates are based, for the most part, on firm orders for plant and equinment and on construction contracts already awarded and are therefore realistic. 27. The average annual capital expenditure of DSCOY under the current expansion program, equivalent of $55 million ner year, will be spent at a fairly even rate throughout the period. This annual amount is 12.55t of the aggregate expenditure on capital account as of December 31, 1960. 28. For the procurement of plant and equipment ESCOM invites tenders on an international basis. The selection of supnliers is made by a Tender Board consisting of eight ton officials. Likewise, contracts are placed for all tyrnes of construction work after receiving bids from various contractors,  canable of carrying out the particular type of work. The supervision of erection and construction is, in all cases, carried out by a resident or field engineer who is responsible to the head office of ESCOh. 29. The ESCOM expansion program is planned to meet carefully prepared forecasts of load growth and to replace obsolete facilities. The program is sound and is designed to best meet the needs of the various ESCOM undertakings in the most economical manner, and is being vigorously pursued. V. TFE PROJZCT 30. The project pertains entirely to the "Cape Northern-Rand and Orange Free State-Eastern Transvaal interconnected system". The expansion program for this system calls for the addition of 75 MW, net after making allowance for retiring three obsolete stations with an aggregate capacity of 116 nIJ, which will increase the system generating capacity from 2,652 IEl to 3,AO6 B. A list of the power stations and their respective capacities is given in Annex 3, while the projected demand and installation schedule is shown in Annex 6. The project also consists of a new 275 kv transmission system and step-down substations, details of which are given in Annex 7. Komati Power Station 31. A good portion of the loan funds will be used for the new Komati power station which is being constructed in Eastern Transvaal at the mouth of Blinkpan colliery which will supply coal for the power station. Plant under erection or on order for this station consists of five 100 NW sets and two 125 KH sets with unit boilers to match. The first unit is scheduled for operation in September 1961 and the seventh in August 1964. The Komati station is planned for an ultimate capacity of 1,000 NW. Highveld Power Station 32. The expansion of Highveld power station in the Orange Free State will also form part of the project. This station is now operating six 60 NW units and two additional generating units of like size with unit boilers to match will be added. The additional units are scheduled for oneration in March 1963 and will increase the capacity of the plant by 120 MW to 480 NW. Transmission Lines and Substations 33. The project also includes a new 275 kv transmission network and sten_ down substations at Nevis, Snowdon and Scafell. The new lines will have an aggregate length of 314 circuit miles and the substations a total initial ca- nacity of 1170 TVA. The date of initial operation of these transmission and substation facilities is scheduled to coincide with that of the Komati power station in September 1961. The location of the new 275 kv transmission system appears on the annexed map.  -6- Estimated Cost of Project 34. An estimate of the entire cost of the project is given as follows: Millions of Dollars Equivalent Foreign Local Millions of Exchange Currency Total Rands Komati Power Station 23.80 65.80 89.60 64.00 Highveld Power Station 3.50 9.94 13e44 9.60 275 kv Transmission Lines 0.68 8.78 9.46 6.76 275 kv Substations 6.37 3.61 9.98 7.13 Total 34,35 12 2a24 0779L Proposed IBRD Loan 14.00 lOo00 Balance 20.35 77.49 The unit cost for the new power station is estimated to be the equivalent of .11l9/kw and for the power station expansion ,