Letter to the editor: The DRC – Westcor dream: Response to Paul Tuson

Sir
“The DRC has slammed the door on regional cooperation and chosen to walk the path of isolation.” (WattNow editorial, September 2009).

Strong words indeed.  Several commentators, including Mr. Paul Tuson (“Why the Westcor dream may be unachievable in its current format”, Energize, Oct 2009), have reacted to the recent revelations made by Dr. Pat Naidoo about the perilous state of Westcor, a utility company in which Eskom, SNEL, ENE, Nampower and BPC own equal equity shares. Readers may recall that Westcor was created by intergovernmental fiat to tap into the vast hydro resources at Inga and wheel the resultant power to four other southern African countries along the west coast through the DRC, Angola, Namibia and down to South Africa.
The DRC was right to slam the door on this deal, so Mr. Tuson argues, because the equal shareholding amongst the five partners puts the DRC – and its national utility SNEL – at a great disadvantage. In spite of owning the energy source and having the Inga power stations in its territory, Mr. Tuson says, the DRC gets no more benefits from the project than the other partners, who reap only the rich benefits of the project.

And rich they are indeed. In his recent presentation to the SAIEE, Mr. Pat Naidoo forecast an electricity price of $0,05 cents per kWh for Westcor. With primary energy (i.e. water) costing $0,01 kWh (Eskom please note) and operating costs adding another $0,005 kWh, that leaves a tidy net profit of $0,035 kWh. With this income stream, the project has estimated it would be able to amortise the $5-billion capital cost and interest of the 5000 MW Inga 3 power station within 5 years and a further $3,5-billion attributable to the transmission infrastructure within eight years. Figuring on about 40 000 GWh per year of sellable output from this high load-factor hydro station, the huge free cash stream of $1,4-billion per year (the same order of magnitude as South Africa's entire budget deficit for 2009/2010) would be up for grabs after that, $280‑million per year for each of the five equal partners.

Mr. Tuson argues, however, that the DRC gets no recognition and benefits from owning the energy resources of the Congo River. All future energy income should return to the DRC, he feels, although contributions made by others to the development cost of the project should be compensated. Mr. Tuson likens the inequity to Eskom building a hydro station on the Gariep River and selling 50% of the output to Lesotho with Lesotho in turn demanding a 50% return on sales after all capital has been redeemed. I'm not sure the comparison is valid, but mixing electricity with water has always proved to be a lethal mixture and this may be a case in point.

A fatal confluence of conflicting interests in Westcor may lie at the root of its failure to achieve what it was hoped it would achieve; to tap into the vast regional resources for the benefit of us all. But before jumping to conclusions as to who is really benefiting (or not) from Westcor, it might be instructive to look at cash flows after the initial eight years. Imagine it is 2020 and Inga 3 is running close to full capacity, pumping out about 40 000 GWh/a into Wescor's extensive grid. Sixty % of its goes to Eskom and 20% each to SNEL (to feed two smelters close to the station) and ENE, BPC and NamPower combined. The selling price is $0,05 cents/kWh, water royalty to the DRC is $0,01 kWh and operating costs are $0,005 kWh (all in constant 2009 money values). Wheeling charges (which could be substantial) have not been taken into account.

Seen from this perspective, it seems that Mr. Tuson has a valid point: the Westcor project seems not to be founded on very sound economic principles. But it is not SNEL/DRC that should be walking away: Eskom should. Although $0,038 kWh is no longer such a huge shock given Eskom's latest pronouncements on the real cost of electricity (especially after taking executive pay into account), it is by no means cheap considering that it's hydro. But then again, its green, and it is a regional plus.

And what a regional plus! Look at SNEL, which may after all not be so hard done by. If one takes into account that it will sell almost all of its share of the electricity to smelter customers at about $0,02 kWh, its profit per unit are on a par with that of the rest of the region. And all cross subsidised courtesy of Eskom and the South African taxpayer …

There are of course many other questions that this exercise raises. Why is the price S0,05 kWh? Why is the repay so fast in an industry that typically looks at thirty or forty years? Why isn't the project horizon stretched to take this into account? Is the water royalty realistic (perhaps Mr. Tuson's point)? Are wheeling tariffs adequate to sustain Westcor's grid over decades? Should we not bring in world-class partners?

So there are many reasons why the Westcor dream may be on the skids. But I believe it's not only because of SNEL. Westcor may be flawed, as Mr. Tuson hinted, because it mixes generation and transmission. Oil and water also don't mix. Perhaps Motraco is not the best model, but something along those lines is probably more appropriate. Let the DRC develop its own generation resources – but it will need a market, and it will need help. It can perhaps encourage a few opportunistic customers to take the bait for now, but in our business it's the long term that counts.

One day the putative smelters will find themselves without backup power when they need it most. The benefits of an integrated electricity grid are only obvious to those with long memories and knowledge of the industry. Ian McRae, former Eskom CEO who recently turned 80, reiterated his view that what the region needs to move forward is a Southern African Grid. Westcor is part of that, and without it, the dreams of the region remain in peril. But let us not walk that road in isolation.

Contact L Jac Messerschmidt, Tel 011 802-1846, ljm@icon.co.za