South Africa Coal Projects Collide With Water Scarcity, Financial Turmoil
By Keith Schneider
Not far from Johannesburg, set amid the corn and sunflower fields of the Highveld in Mpumalanga province, stand two unusually thick and tall candy-striped smokestacks, dozens of stout concrete support columns, and the tangled steel superstructure of the unfinished 4,800-megawatt Kusile coal-fired power station.
The proposal gained significant public prominence around the century’s end when South Africa’s bid to develop its own nuclear reactor design, and build several plants, was rejected by the global finance community. Medupi and Kusile, designed with advanced water conservation cooling and pollution control systems, and due to be completed by 2014 and 2015, respectively, at a cost of $US 6 billion each, were greeted as both momentous and logical. About 370 kilometers (230 miles) northwest, spread across a stretch of dry scrubland in Limpopo province, is the construction site for Kusile’s unfinished twin, the 4,800-megawatt Medupi power station. Almost two decades ago, around the turn of the 21st century, South Africa conceived the idea of building Kusile and Medupi, two of the four largest coal plants in the world.
For over a century South Africa’s economy fueled itself with the nation’s ample coal reserves, which today generate 90 percent of the nation’s electricity and 35 percent of its liquid fuel, employ tens of thousands of workers, and consume two percent of the water. Kusile and Medupi were promoted by South Africa’s elected leaders as signature statements of the new era of liberty, the freedom to think big, and the determination to power a modern economy of opportunity that would serve all of the people. That sense of optimism and zeal was reflected in Kusile’s Zulu name, which means “new dawn.”
Over the last several years, dawn has evolved into a gathering storm. Long construction delays and escalating costs, engineering challenges, and the intensifying risk of scarce water have pushed Kusile and its sister plant into the eye of a typhoon of economic, ecological, and social disturbances engulfing South Africa. In so many ways, the troubled development of Kusile and Medupi, and the tumult enveloping South Africa’s deteriorating financial and social condition, are not just mirror images of each other. The two plants, projected to be almost a decade late in completion and $US 20 billion or more over budget, are among the principal causes.
The trouble is not simply a matter of managerial missteps. The vortex of disruption that envelops Medupi and Kusile reflects the clash between the economic and ecological operating systems of two centuries. Kusile and Medupi arguably represent the most prominent global examples of big projects that do not fit their time.
Conceived in the resource-rich, ecologically stable, and capital-abundant 20th century, the two plants were viewed as reasoned answers to South Africa’s growing demand for electricity, and as evidence of a new government’s capacity to execute complex industrial projects.
South Africa sees its global reputation as tied to completing the two plants.
“They must finish and they will finish,” said Jacob Misimango, a 54-year-old business executive in Emalahleni who is seeking permits to start an open cast coal mine outside the city, in part to supply fuel for Kusile. “These projects have drawn the world’s attention. They have to finish. Why?
Number one. There is a shortage of electricity. The only solution is these stations. We have coal to fuel them.
“Two. It’s important for our government to prove we can do this thing. Our national pride is at stake. Not being able to finish is demoralizing. We must prove we can finish.
“Three. There is a lot of interest on loans that we have to pay back. We need to finish to pay back those loans.”
Big Ideas Encounter Tumult
But nearly two decades after they were initially proposed, both plants, and their builder, are crashing into the project-debilitating limits of the resource-scarce, ecologically unstable, and nervous financial markets of the 21st century. Said another way, the 20th-century narrative of economic progress, expressed by gargantuan industrial projects and centralized management practices, is breaking apart under intense ecological pressure.
Taking its place are two new stories. The first documents the advent of new energy generating technologies – solar, wind, and small hydropower plants – that are less expensive, consume smaller amounts of critical resources, especially water, and take a year or two instead of a decade to build.
From 2010 to 2015, South Africa brought 1,900 megawatts of renewable energy online – most of it wind and solar generated – at a cost of around $US 1.5 million per megawatt.
Wind and solar generating stations, according to the South Africa Department of Energy, now add roughly 1,000 megawatts of new generating capacity annually to the national grid, take up less space and cause much less damage to the land than coal mines, and use scant amounts of water.
Large projects, like Medupi and Kusile, are so vulnerable to delay, to land disputes, to disputes over water supply, to changes in markets, and to big cost overruns. Yet big institutions continue to support them.
The new plants also take 15 months to two years to complete, says a Department of Energy report made public late last year, and produce power at about half the current estimate of the cost of electricity that will be generated by Medupi and Kusile.
The second and more disturbing story describes the pernicious stubbornness of global financiers and industrial developers who persist in building immense energy and mining projects that cause severe environmental dissolution and financial distress. Building mega energy projects, never easy, is more difficult now in South Africa and around the world because evidence of permanent harm to the environment and communities also is activating a swarm of civic rebellions to halt construction.
Medupi and Kusile are examples of large-scale mega infrastructure projects that countries see as the basis of a development model that started after World War II,” said Janet Redman, director of the Climate Program at the Institute for Policy Studies in Washington, D.C., and an authority on World Bank loan programs. “Projects this large are seen as transformational. They cost a lot. They employ a lot of people. Their effects are meant to be big. But it’s a model that doesn’t make much sense now.
“Large projects, like Medupi and Kusile, are so vulnerable to delay, to land disputes, to disputes over water supply, to changes in markets, and to big cost overruns. Yet big institutions continue to support them.”
Kusile and Medupi at the Start
During the early years that followed the end of Apartheid and the first multi-racial democratic elections in 1994, South Africa was a nation unleashed. Guided by the first black president, Nelson Mandela, waves of relief and optimism, liberty and passion broke on a wide beach of pent-up human talent and economic possibility.
Schools got built. Electricity, water service, and housing arrived in informal settlements. Universities were opened to all capable students. New jobs helped lift millions of people out of poverty.
The years under Mandela’s management tilted South Africa’s view of itself. A nation that once embraced slavery, and for over a century subjected its majority black residents to a brutal and demoralizing system of fourth-class citizenship, was prepared to right grievous wrongs, pursue grand ideas, and achieve new international stature.
Any number of individual manufacturing plants, or new highways, or capable university-trained engineers and scholars reflected South Africa’s determination to succeed. In 2010, for instance, Durban, the third largest city, hosted the FIFA World Cup soccer championship. A year later the city also hosted the annual United Nations global climate conference.
None of the new government’s early projects, though, encompassed so many of South Africa’s scenarios of hope and accomplishment as the idea to build not one, but two state-of-the-art electrical generating stations that, when completed, would be among the largest coal-fired power plants in the world. And none so closely demonstrate how the early years of passion and optimism that followed the election of South Africa’s first black president have dissolved into a disturbing and potentially dangerous new era of economic hardship, social instability, deepening ecological turbulence, and acute water scarcity.
The idea for Kusile and Medupi was, and still is, firmly rooted in the mega energy project operating principles of the 20th century. In the early years of this century, the executives of Eskom, the state-owned electric utility, convened with cabinet departments of Mandela’s successor, President Thabo Mbeki, to decide on the basic concept for the twin 4,800-megawatt power plants. The talks intensified after Eskom’s plan to develop a new design for nuclear reactors, and build nuclear plants, crashed after global investment markets refused to provide financing for loan instruments that were not guaranteed by South Africa’s treasury.
Construction sites were chosen for Medupi in dry northern Limpopo province, and for Kusile in the agricultural Highveld of Mpumalanga province east of Johannesburg.
Big Loans For Construction
Though Eskom executives, as well as senior aides at the Department of Energy and Department of Water Affairs, declined to be interviewed for this article, the company’s public statements and government archives describe the confidence and striking national ambition that seasoned the projects. Supported by government-backed guarantees, Eskom raised the first round of financing out of its own reserves, the South African treasury, and a host of African and global financial institutions.
In 2010, the World Bank approved the largest loan ever in its African portfolio — a $US 3.75 billion cash infusion to build Medupi, and to complete a coal transport system and a 100-megawatt wind farm.
The World Bank loan and several other significant loans by global investors, among them the $US 805 million provided by the Export-Import Bank of the United States, encountered resistance in some of South Africa’s financial circles and public interest groups. Critics warned that using rands to pay back loans made in dollars would significantly raise borrowing costs because the rand’s value against the dollar was steadily slipping.
“We warned the government not to take the World Bank loan,” said Bobby Peek, founder and director of groundWork, a respected environmental justice group based in Pietermaritzburg near Durban. “The rand-dollar exchange was trouble. Eskom accused us of scaremongering. They took the loan when the exchange was eight to nine rands per dollar. Now it’s 16. We’re paying twice as much to service that loan.”
Every year since 2010, trouble surrounding the plants has amplified. Chancellor House, the investment arm of the country’s ruling party, the African National Congress, received $US 6 million in a payment designed to clear the path for Hitachi to win a big contract to supply the plants with boilers. The U.S. Securities and Exchange Commission investigated and Hitachi agreed to pay a $US 19 million fine last year.
And as the year ended, Eskom replaced Medupi’s construction manager and announced that the two plants are not expected to be completed until the early 2020s.
In finance circles outside of South Africa some analysts wonder whether they will ever be fully built. According to an assessment by Profundo Economic Research, a Dutch consultancy, the price tag for both plants has risen to more than $US 32 billion. Eskom, which has been reluctant to publicly release new estimates of the projected costs, has not disputed the Profundo projection. According to the utility’s public documents, construction costs are rising 11 percent a year.
Because so much of South Africa’s treasury is tied to backing the metastasizing debt of the two plants, the nation’s fiscal deficit, and Eskom’s corporate deficit – over $US 22 billion — are expanding while ratings agencies downgrade the corporate credit profile to junk status, and the national credit profile to near junk.
In order to recoup some of the rising costs, Eskom also has petitioned the National Energy Regulator of South Africa, the utility commission, to increase electrical rates. Escalating electricity prices are raking an economy that is employing just two of every three working age adults, and igniting fearful levels of inflation. World markets earlier this year downgraded the value of the rand to around 6 US cents. Economists forecast South Africa could slip into negative growth this year.
So much for the economic trends belting the two plants.
Water Scarcity is Serious Impediment
In the ecological realm, conditions are no better. Kusile and Medupi were proposed in an era when water was a bit more abundant in South Africa and there were 16 million fewer people. Climate change has seized South Africa and is causing havoc in the country’s meteorological cycles, producing less moisture in a nation that is already among the world’s driest. It is conceivable that South Africa’s swiftly increasing population – nearly 1 million new residents a year now – could combine with severe water scarcity to seriously hamper the plants’ full operation.
Both plants, if completed in full, will each consume 26 million cubic meters of water annually (6.9 billion gallons) in two regions where fresh water is already in short supply. South Africa anticipated the need for a torrent of process water by building a $US 200 million, 121-kilometer (77-mile) pipeline that supplies water from the Vaal River to Kusile, and a $US 1 billion project to build two pipelines covering 209 kilometers (130 miles), pumping stations, and other water supply and storage infrastructure that taps the Crocodile and Mokolo rivers for Medupi.
This year, though, the effect of the deepest drought in 34 years is producing fresh evidence that neither the Vaal storage system nor the Crocodile or Mokolo rivers may have sufficient water in the 2020s and beyond to sustain agriculture, a fast-growing population, existing industries, and two gigantic power plants.
Lastly, South Africa’s pursuit of a coal-based energy strategy is pouring tens of millions of tons of climate-changing gases into the atmosphere that are not making the disruption in meteorological cycles any less urgent. Kusile and Medupi alone will produce almost 70 million metric tons of climate changing gases annually, according to Eskom estimates. That amounts to a 16 percent increase in South Africa’s current 440 million metric tons of carbon emissions.
Road to Completion or Dismay
By now, the middle of March 2016, all of the six steam turbines at the Kusile power station, each capable of generating 800 megawatts of electricity, were supposed to be operating with water-conserving, air quality-preserving, state of the art fossil fuel-fired efficiency. The anticipated commercial opening of the mammoth plant was to be celebrated as a globally significant statement about a new democracy’s capacity to think big, and prove that an African government can deliver fresh currents of electricity to growing cities and modern industries.
Perhaps the original five-year construction schedule was too ambitious. Certainly the initial estimate of Kusile’s completed cost was too hopeful. Yet what greets visitors to the plant’s construction site on the South African Highveld is a mega energy generation project that is setting new international standards for construction delays, cost increases, design and engineering conflicts, and ecological impediments.
Last summer, Eskom formally opened the first 800-megawatt turbine at Medupi. In February Eskom announced the planned opening of the first 800-megawatt turbine at Kusile, scheduled in 2014 to open during the summer of 2016, was pushed back to sometime in 2018.
“You have to wonder how vulnerable international financial institutions are to this kind of disruption, economic and environmental,” said Janet Redman, of the Institute for Policy Studies. “Kusile and Medupi looked great on paper when they started. Now they may not have enough financial resources to make the projects work. Who’s serving as the watchdog? Who’s looking at the details of these big investments?”
South Africa today is tantamount to a global petri dish for measuring the calamities that occur when projects designed for 20th-century conditions are brought online in the 21st. Business executives and government leaders, here in South Africa and across the globe, are reluctant to recognize the trends or discuss the hazards. Both groups, though, have little choice but to adjust. Mother Earth’s storms, droughts, floods, plagues, and earthquakes are forcing the issue, changing energy markets, altering mining projects, and producing unsettling waves of civic doubt.
Troubled Mega Energy Projects Around the World
The trouble South Africa is having in completing Kusile and Medupi, while torturous, is not globally unique. Examples of 20th-century-style mega projects that are foundering in the much riskier ecological and economic conditions of the 21st are legion.
In India, construction on the 2,000-megawatt Lower Subansiri Dam in Assam, at the time the largest ever proposed in the country, was blockaded and then halted by rural residents in 2010 over authentic risks the dam presented for flooding, depleted fisheries, and inundated farmland. Three years later, a murderous flood in Uttarakhand’s Himalayan highlands killed an estimated 30,000 people, wrecked dozens of small towns, and washed away hydropower dams. The disaster was a body blow to India’s national plan to diversify its electrical generating sector with Himalayan hydro dams.
In China, national plans to convert coal to liquid fuels in more than 20 water-consuming processing plants were abandoned due to water scarcity and excessive climate changing emissions produced by the plants. Hundreds more coal mines and dozens of coal-powered electrical plants have been closed as China recognizes the consequences of the coal production and combustion cycle to air and water quality, the health of its citizens, and land degradation. China’s pivot away from coal is crippling coal markets in all the big coal-producing countries, including the United States and South Africa.
In Peru, executives of Newmont Mining and Buenaventura, its Peruvian partner, did not adequately anticipate the fidelity that Andes farming and livestock herding families held for the pure streams and clear lakes of their incomparably beautiful mountain region. Nor did mine owners anticipate how fiercely those farmers, known as campesinos, would fight to preserve the quality and supply of those water resources and their pastoral mountain way of life. In 2011, construction on Newmont’s new Conga mine prompted such fierce battles at the mine entrance and in Cajamarca, the regional capital, that Peru’s newly elected president, Ollanta Humala, declared a state of emergency. The resistance, spurred by knowledge that four natural lakes would be drained and replaced by four manmade reservoirs, subsided after Newmont announced that it was suspending work on the Conga mine indefinitely.
In western Panama, several watersheds have been the site of a decade-long civic uprising to halt the construction of hydropower projects. The strife is generated by Panama’s shifting views about energy production, economic growth, social fairness, and the value of its prodigious wild forests and water resources. In February 2015, as a result of civic opposition, Panama halted construction of the Barro Blanco dam. Not far away, Ngobe villagers are organizing to halt construction of Changuinola II, a 213-megawatt, $US 1.1 billion dam that Panama has approved in a bend of the Changuinola where the free-flowing river cuts between high cliffs of white limestone.
Last August, the Commonwealth Bank of Australia, that nation’s largest bank, said it would not fund the proposed Carmichael mine in Queensland, the biggest coal mine ever proposed in Australia. The mine’s role in adding to carbon emissions, potential damage to the Great Barrier Reef from coal transport ships, and a vigorous opposition campaign led by Greenpeace were factors in the bank’s decision.
Last fall, U.S. President Barack Obama cancelled the $US 8 billion Keystone XL pipeline to transport Canadian tar sands oil to American Gulf Coast refineries. The president said the 1,897 –kilometer (1,179-mile) pipeline would exacerbate climate change. Protestors along the route in the U.S. said it threatened water supplies and was not needed. By January this year, global oil prices had fallen so low so fast that some Canadian tar sands producers left the industry and others drastically curtailed oil production.