A quick fix for South Africa's power shortage problem | Aggreko

A short-term quick fix for South Africa's power shortage problem

Interviewer Profile: Alec Hogg is a writer and broadcaster. He founded Moneyweb and is its editor-in-chief.

- Download this interview from Moneyweb

ALEC HOGG: In this boardroom talk special podcast, Rupert Soames, chief executive of Aggreko is with us in studio on a day when Aggreko is going to assist South Africa, I guess Southern Africa you could say, in trying to close the gap in its power shortage. Rupert just to give the background to what Aggreko does, you're called a world leader in temporary power and temperature control. It’s quite a... what does it actually mean?

RUPERT SOAMES: It’s quite a mouthful – what it means is that when people need power either for a short period of time or in a hurry, we provide it. So we provide power for the major events like we were in... two years ago, we provided the power for the World Cup here in South Africa along with our partners Shanduka. And we are providing power for the Olympics in London for 2012 and we also provide the power for a lot of coal countries. So we’ve got power in Nairobi at the moment, giving them extra power, Angola – about 20 countries in Africa and we operate in about 100 countries worldwide. And you’d be surprised how many countries have power shortages at the moment and what we do, we don’t provide permanent power stations, we provide short-term bridging power stations. We come in, we solve the problem whilst the utilities go and build new power capacity or whatever.

ALEC HOGG: And presumably demand has been growing.

RUPERT SOAMES: Demand has been growing because the world economy demand for power in the world is growing far faster than supply, particularly in South America and in Asia and in Africa and it’s absolutely astounding what's happening in Africa. You’ve got the economies growing at 6%, 7%, 8% and demand for power growing at 10% or 12% - and my favourite statistic at the moment is that last year was the milestone year when the number of mobile phone subscribers in sub-Saharan Africa exceeded that of the European Union – 340m phone subscribers in sub-Saharan Africa...

ALEC HOGG: You need to update that number, 660m was the number quoted at the Africa Economic Summit and the story was that there are more mobile phones in Africa than there are people in North America.

RUPERT SOAMES: Yea I can... and it’s transforming the economy and when people talk about the African economy and dependence on commodities, I just don’t buy that as being true. What I see is happening is organic growth from people beginning to trade with each other.

ALEC HOGG: Did you focus on Africa as an opportunity, being a UK-based business?

RUPERT SOAMES: Absolutely – I mean only 5% of our revenues come from the UK and we are a completely global business but we specialise in power, and in Africa is a very large part of our business.

ALEC HOGG: How big?

RUPERT SOAMES: It’s probably about 25% of our total business worldwide and we have installed over 1,000MW of power of new capacity in Africa over the last five or six years and I think that beats anybody with the possible exception of the Chinese.

ALEC HOGG: The announcement today is of something rather different though – it’s a power plant on the border of Mozambique and South Africa. Is this a new strategy for...?

RUPERT SOAMES: It is new, it’s new for us and I don’t think it’s ever been done in quite this way before, but it is well known that the whole Southern African region is short of power but it is also blessed by a very strong infrastructure in terms of transmission – the wires that link the various places. Now, we got to hear about three or four years ago that in Mozambique there was some spare gas resources that the Mozambiquans didn’t know what to do with particularly, they didn’t have a good use for it. They had the rights for the gas, but all they could do was sell it as gas and we approached them and said well how about this as an idea – rather than selling the gas, why don’t you let us put a power plant up near the South African border and we’ll convert that gas into electricity and Mozambique can have some of the electricity and South Africa can have some of the electricity. It sounds simple, but it’s been four years in the making. It’s been probably the most complicated project we’ve ever been involved in, there are a lot of parties to it and ourselves and our partners, Shanduka worked very, very hard over the last two to three years to make it happen, as have EDM which is a Mozambiquan utility and Eskom.

ALEC HOGG: I guess the fact that you’ve broken through must now open opportunities in lots of other areas, in supplying to the South African grid.

RUPERT SOAMES: I think it’s more the principle of establishing the idea that private companies can go and invest in building power stations, albeit in our case for a very short period of time, and then sell power across the whole of the South African  power pool. Because it’s not just South Africa that’s short of energy, but there's Zambia, Zimbabwe, Botswana, Namibia – many of these countries are short of power. And what you will, I think, increasingly find is that you will find areas that are power energy rich like Mozambique where – stick a stick in the ground and gas comes out ... they're finding a lot of gas there. It’s going to be an energy hub and the South African power pool – this big transmission network is a way that that can be distributed across the region. I think it’s going to be a very important regional factor.

ALEC HOGG: You mentioned temporary or short-term – that was the part of the story today I didn’t quite follow. Only for two years that you're going to be supplying the grid...

RUPERT SOAMES: Yup, because it’s the nature of what we do is that, particularly with gas, is gas tends to be sold for years and years and years in advance and its only occasionally small windows where there's a bit of spare gas that what we do is we nip in there and use that spare gas and make use of a scarce resource to provide power. We’re doing the same in other countries. In Bangladesh recently they had... a whole power plant broke down and so they had 200MW of gas that they couldn’t use and we popped up and said I tell you what, we’ll come in and put in a new gas power plant whilst you're fixing the other one, you can use the gas and generate electricity from it. And it’s a pretty compelling argument. Now it’s not a replacement for long-term permanent power stations, and we know that we only represent a tiny speck on the landscape and that the really big stuff is coming from the big permanent power stations, but it’s an important part and it’s this ability to move incredibly quickly. We have built 100MW power station in less than 20 weeks and we’ve done the gas pipeline, we’re doing the interconnection into the grid – we specialise in moving really, really quickly and then at the end of the project we pack our bags up and take the kit away and go and do it somewhere else.

ALEC HOGG: You're going to parachute it in and pull it out...

RUPERT SOAMES: The Maputo port is pretty full of our equipment at the moment, but importantly for this, and this is particularly important for the Mozambique utility is that when we go away we’re going to leave a whole lot of brand new infrastructure there which they will be able to use to put permanent power capacity in if they want to, subsequently. So we’re not taking it all away – we’re as part of this arrangement, we’re leaving a lot of infrastructure in Mozambique.

ALEC HOGG: It’s a different business model to the one that we’ve seen in South Africa from another British company called IPSA – Peter Earl’s business. Listed on the stock market, hasn’t been successful at all – why do you think they have not been able to crack what you clearly have?

RUPERT SOAMES: Just to be clear, what we’ve announced today is that we’ve initialled these power purchase agreements – there are still some hoops to go through...

ALEC HOGG: But you did say that you can sell it into the grid.

RUPERT SOAMES: Yea, we’ve got regulatory approval to do this, but there are still some hoops to go through around it. Now our model is very particular. It’s highly specialised. We operate, as I say, in 100 countries around the world and we just respond to... we’re highly entrepreneurial, we move very fast, we deploy our equipment very quickly and the great thing about it is if it’s not needed, we take it away and go and put it elsewhere. It’s not concreted into the ground, it’s all in containers and it’s a very successful business model but any... we’ve got about 9,000MW of capacity worldwide which we deploy in everything, as I say from the Olympic games through to providing power to whole countries and there are often countries where the grid has been underinvested and where it’s a pretty compelling proposition to them, that somebody is prepared to come along and say, you don’t have to commit to us for 20 years, you don’t have to say that you're going to take this for 10 years, just do it for six months, for a year, for two years and if you don’t want us you send us away again.

ALEC HOGG: But what it does tell us is that there finally has been an opening up to the private sector of the power grid that was dominated, monopolised by Eskom in the past, and that is a step change for this country.

RUPERT SOAMES: Well I think that Eskom have been as enthusiastic as anybody involved in this, in helping to develop the South African power pool and I think that everybody realises that the path for the future for the security of supply for the whole region, lies in this idea of using this big transmission network, to go and share power between different areas. And I think where we have perhaps been able to knock on a door is that we are only here for a short time, but we are establishing a principle I hope, that other companies will follow and get braver about independent companies providing power across the South African power pool because it’s going to be one, not the only, but one of the ways that more capacity can be brought into the region.

ALEC HOGG: What are you selling it into the power pool at – what price per kilowatt hour?

RUPERT SOAMES: That is a commercial issue between Eskom and EDM, the Mozambique utility because there's a lot of other stuff that we’re doing. We’re building a whole power plant; we’re putting in a whole lot of infrastructure...

ALEC HOGG: But presumably it’s more than 31c which is what Eskom gets for its power from its big power stations...

RUPERT SOAMES: Well somebody said to me, how does it compare with the cost of a coal-fired power station. I said well it’s obviously more expensive than a coal-fired power station is sitting on top of a coal field, and is there to run for 40 years...

ALEC HOGG: But I guess the critical thing is that there's a power shortage and you're going to be able to help to fill that shortage.

RUPERT SOAMES: And relatively speaking, it’s a small part of the overall mix. So you’ve got in the power mix, you’ve got everything from coal, which is pretty dirty with large emissions, but very cheap, up to nuclear power which is humungously expensive but very reliable and has a long life and we’re somewhere on that continuum, in the middle of that we’d be part of that mix, but only for short periods of time. And it is cheaper to have permanent capacity than to use us. However, if you haven’t got the permanent capacity it’s much, much better to use us.

ALEC HOGG: Shanduka as your partner – how were they selected?

RUPERT SOAMES: We’ve been working with Shanduka now for six, seven years. We did the Confederations Cup and then the World Cup with them. They’ve got extensive resources. They helped us get all the local supplies and the local content for the World Cup – they are a trusted partner of ours, they're sophisticated, they are good business people, reliable and we have a good relationship with them. We find working with them very productive.

ALEC HOGG: And you do that pretty much across the continent or just in South Africa – not just with them, but with other partners on the continent?

RUPERT SOAMES: No, actually it’s very rare that we work with anybody else, and it is in particular in Southern Africa that we have found this partnership with Shanduka works well. Generally speaking that we work by ourselves but for the World Cup we started working with Shanduka. It worked well so we’ll continue with this project.

ALEC HOGG: Rupert we were talking before we went on air about your family connection with South Africa – we have to touch on that as we close off here. A grandson of Winston Churchill who has a deep history in this country - are you a regular visitor?

RUPERT SOAMES: I’m here as often as I can – recently I’ve been coming here about once a month, but no, I love this country and I have just such high hopes for the whole of the African continent. I am a real optimist about what I see – the organic growth going on in Africa at the moment I find terrific, exciting...

ALEC HOGG: And not just the Chinese pulling out our resources.

RUPERT SOAMES: No I think it’s much more than that. What I’m excited by is seeing – actually I’m much more excited about the growth in use of mobile phones which I think are a terrific enabler of trade and Adam Smith said, “Trade between nations increases wealth”. Well try seeing what trade between people who live 10km away from each other who actually can start communicating with each other. And see what it does by giving people bank accounts and all that sort of thing, and it took Europe and North America - it took us 150 years to go and cut down enough trees to put a telephone in every house and Africa is doing it in about 10 years without a single tree dying...

ALEC HOGG: The leapfrogging situation... and I guess you would be at the sharp end of that because if a country needs power, at least in the short-term if it’s growing, it will come and knock on your door.

RUPERT SOAMES: They do because what we can do is we can provide it very, very quickly and without them having to go cap in hand to various financial institutions and raise humungous amounts of money to go and build permanent power stations which will take them five or 10 years to build. The power station we’re delivering in Mozambique we will build from scratch in 20 weeks. It’s astonishing how fast we can move, and we’ll run it for two years and then take it away again.

ALEC HOGG: Just in layman’s terms a 107MW plant – how big is that? Can you give us some kind of context?

RUPERT SOAMES: Generally speaking you would say in the African context a megawatt will supply between 7,000 and 10,000 households with power. Now in the overall context of the Eskom grid, it’s a small amount but it’s in a particularly strategic location where it’s helping to stabilise the whole of the grid in the area and it probably accounts for the part that Mozambique will take – will probably be about 25% of the demand in Maputo of an afternoon. So it’s not a huge amount of power, but its strategically important. It’s more the principle of countries co-operating and to share resources and to create energy.

ALEC HOGG: If you had a different strategy, would you be encouraging others to build power plants? I’ll put this in context – in discussions I had with Warren Buffett’s power utility in the US, they looked at South Africa, they looked at investing here, co-investing with Eskom and then decided not to do it. That was some years ago though - would you think that it would be an opportunity now to be reassessed?

RUPERT SOAMES: I think there's an opportunity for any investor who is serious about investing in energy to invest not only in South Africa, but Southern Africa as a whole and I think that one of the foundations of that is this South African power pool, this tremendous network which allows people to share power and resources such as hydro power which is a vital commodity. If you want large scale renewables with a lot of wind, with its intermittency you ought to have hydro power there as well and it’s terrific the strides that have been made in creating a market in South Africa that will attract overseas investors. And from what I’ve seen from a distance, of the interest that’s been shown in the various bidding rounds for renewable energy, it’s got to be pretty encouraging.

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