POWER & THE ECONOMYPOWER & THE ECONOMY

Keith Jefferis

March 19, 2008

Structure of Presentation

� Consumption Trends – Short and Long-Term

� The Mining Sector

� Supply & Demand Forecasts

� Conclusions� Conclusions

Short & Long-Term Consumption Trends

Electricity Consumption & Economic Growth (Non-mining)

8%

10%

12%

14%

16%

5%

6%

7%

8%

9%

10%

Electricity

GDP

� Chart compares annual growth rates of non-mining electricity consumption and non-mineral GDP

� Both are cyclical (boom & recession)

� Track each other very closely –electricity consumption closely related to growth

0%

2%

4%

6%

8%

0%

1%

2%

3%

4%

5%

Electricity

GDP

NMGDP Electricity

related to growth

� 1% increase in non-mining GDP associated with 1.6% increase in non-mining power consumption

� Makes electricity consumption a useful leading indicator of economic activity

� Sharp fall in power supplies in Q1 2008 will lead to negative GDP impact unless power consumption efficiency increased

Long-term Consumption trends

200

250

300

Monthly Consumption (MWh ‘000)

� Very rapid growth in power consumption� 1998: avg 134,000

MWh/m� 2007: avg 268,000

MWh/m

0

50

100

150

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Mines Non-mining

MWh/m� doubled in 9 years

� Average annual growth 1998-2007� Total: 7.8% a year� Mining: 5.3%/yr� Non-mining: 9.8%/yr

Power Intensity of GDP

140

160

180

200

Index (1997/98 = 100)

� GDP growth avg. 5.8%

� Power consumption has grown faster than GDP (except 2006/7)

� Hence units of power consumed per unit of GDP produced has

80

100

120

140

Index (1997/98 = 100)

GDP Power

consumed per unit of GDP produced has increased

� Increased dependence upon electricity� e.g. increased household

electrification

Monthly Pattern of Power Consumption (Peak Demand, 1997-2007)

2%

4%

6%

8%

Deviation from average (trend)

consumption

� Regular pattern of peak power demand� Lowest in summer (Jan-

Mar)� Highest in winter (Jun-Jul)

System stress is most

-6%

-4%

-2%

0%

2%

Deviation from average (trend)

consumption

� System stress is most intense in peak periods

� Maintenance planned for summer period, but can be caught out by unexpected events (rain, cold)

Mining Sector

Mining Power Consumption

� Mining sector is major power consumer� 41% of total in 2007� down from 47% in 1998

� Major consumers:Orapa/Let’kane28%

BOTASH 1%

Tati Nickel12%

Mupani Gold3%

Major consumers:� BCL – copper/nickel

smelter (Selibe-Phikwe) –36%

� Debswana –Orapa/Letlhakane –28%

� Debswana - Jwaneng 20%

28%

Jwaneng

20%

BCL 36%

Mining in the Economy - GDP

Trade, hotels etc.

11%

Govt16%

Soc. & Per. Serv4%

� Mining dominates GDP

� 42% of total in 2006/07

� Share of power consumption in line with

Mining42%

Manuf4%

Water & elec2%

Constr.4%

Trade11%

Transp. & comms

4%

Fin. & bus. Serv11%

consumption in line with contribution of mining to the economy

Exports (2007)

Nickel/copper17%

Soda ash1%

Gold

� Minerals comprise 82% of exports

� Diamonds dominate at 63% (but lower than in recent past)

� Nickel & copper second largest

Diamonds63%

17%Gold1%

Other18%

� Gold & soda ash relatively minor mineral exports

� Importance of minerals in exports means that power supplies to mining sector are a priority

Major Mining Projects

� Major mining developments under way� BMR Activox refinery (Tati)

� Tati Nickel expansion (Selkirk)

� Debswana – Orapa & Jwaneng expansions

Mowana copper mine (Dukwe)

BPC Projections

Project Current 5 years

Tati Nickel 39 113

BCL 65 65

Orapa 44 93

� Mowana copper mine (Dukwe)

� Lerala diamond mine (Diamonex)

� AK6 diamond mine (Orapa) (African Diamonds)

� Gope diamond mine (CKGR)

� 80% increase in power demand projected over next 5 years

Jwaneng 41 77

Mowana 7 ??

Lerala/AK6 ?? ??

TOTAL 216 390

Supply & Demand Forecasts

Sources of Supply

150

200

250

300

‘00

0 M

Wh

/mo

nth

� 3 main sources:

� Morupule

� Eskom

� Other imports

0

50

100‘00

0 M

Wh

/mo

nth

Morupule Imports - Eskom Imports - other

� Other imports (ZESA/HCB/EDM)

� Shares in 2007

� Morupule 20%

� Eskom 72%

� Other 8%

Power Supply Issues

500

600

700

800

Peak demand (MW)

Emerging Supply Deficit � Peak demand increasing at around 11% p.a. 2008-2011

� Non-mining 9.8%

� Mining as per BPC ests.

� Over 750MW in 2011

0

100

200

300

400

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Peak demand (MW)

Morupule Eskom Deficit

� Eskom firm supply reducing from 2008-2011

� 2008,9: 350MW

� 2010: 250MW

� 2011: 150MW

� Eskom can cut up to 10% if load shedding in SA

Power Supply Deficit

30%

40%

50%

60%

400

500

600

700

800

% of peak demand

Peak Demand (MW)

� Anticipated shortfall on existing trends:� 2008: 0 MW� 2009: 70MW� 2010: 239MW

0%

10%

20%

30%

0

100

200

300

400

2008 2009 2010 2011

% of peak demand

Peak Demand (MW)

Eskom/BPC HCB/ZESA

Deficit % of demand

� 2010: 239MW� 2011: 412MW

� Remember:� peak demand is in

winter!� Eskom may be unable to

supply contracted amounts

Supply Options

� Short-term� Mozambique (via Zimbabwe)

� HCB – 60MW contracted in 2008

� 2009 - ?

� EDM - ?

� SA (Eskom), Malawi, Tanzania chasing the same power

� Medium-term� Diesel

� Available, flexible – but expensive

� Coal-bed methane� Not yet exploited

� Needs substantial investment in extraction

� Zimbabwe (ZESA)� Send Botswana coal to Bulawayo

and share power 50-50 (45MW)

Needs substantial investment in extraction

� Solar (PV/steam)� Resources plentiful (sunlight)

� Large-scale generation still experimental internationally

� With current technology, not competitive with coal for grid power

� Competitive for remote/off-grid settlements

� Technology changing fast

Supply Options

� BPC tender for 240MW from IPP by 2009

� At tender review stage:� Coal-bed methane (1)

� Diesel (3 proposals)

� Medium/Long-term� Morupule B (expansion, BPC)

� 600MW

� Tender award stage

� BPC timelines appear highly optimistic

� Mmamabula (CIC/IP)� Mmamabula (CIC/IP)� 2100-2400MW, 2013?

� BPC entitled to 25% offtake

� Bogged down in tariff negotiations with Eskom

� Morupule C� A further 600MW - 2015?

� Aviva, others

Price Impact

� Current BPC retail tariff� 40t/kWh

� Approx 6 USc/kWh

� Average Eskom tariff� Approx. 18 c/kWh (2.5 US

c/kWh)

� Cost per kWh of different options (new capacity, US c)� Hydro

� 2 – 4 c

� Coal � 6 – 8 c

Small-scale Dieselc/kWh)

� Steep price rises programmed, to fund new investment

� Will still be cheap by international standards

� Small-scale Diesel� 25 – 35 c

� Solar� 15c?

� Major tariff increases inevitable

� Short-term capacity (diesel/gas) likely to need large government subsidies

Conclusions

Concluding Points

� 2008 supplies should (just) balance demand, assuming no major Eskom problems, but winter (June-July) will be tight

� 2009 – 2011 supply/demand balance worsens sharply, both in Botswana and in SA

� Supply to diamond mines must be

� Solutions:

� Supply Side Enhancement� Expedite Morupule B (“national

emergency!”)

� Businesses - invest in expensive standby generators

� Actively encourage IPPs

� Short-term solutions (Diesel generators)� Supply to diamond mines must be

fully maintained

� Power cuts have major negative impact on:

� productivity

� business confidence

� investment climate & new investment

� economic growth

� Demand Side Management (DSM)� Defer major projects?

� Mothball BCL smelter (Selebi-Phikwe)?

� Rationing of industrial/ commercial/residential consumers

� Time-based metering/tariffs

� Energy-saving awareness

� Significant price increases inevitable:

� funding expensive new capacity, both long-term and short-term

� encourage more efficient consumption

Long-term Prospects

� Much more positive outlook for Botswana & region� Mmamabula

� Other major coal-fired generation projects

� Botswana and SA have major unexploited coal reserves

� BUT� Global warming/ climate

change issues may impact on coal-fired generation

� Obligatory carbon pricing / sequestration would add to costs of coal-fired powerunexploited coal reserves

� Rehabilitation of capacity in Zimbabwe, Zambia, DRC

� Grand Inga hydro (DRC)/ Westcor (30 000+MW)

� In ten years could have surplus of cheap power again – unexploited hydro and coal resources

costs of coal-fired power

� Would make hydro, solar (& nuclear) much more attractive

� Economics of power generation in flux!

Thank You