This is my first report as chief executive of Eskom, and as such I am reporting on the period in which my predecessor, Thulani S Gcabashe, was at the helm of our organisation. His term saw the transformation of Eskom to a business on a full commercial footing in terms of the Companies Act in 2002. Eskom was recognised as a utility of global stature in 2001 when we received the Financial Times award for the Global Power Company of the Year.

Thulani also actively led other transformation initiatives – the major focus on racial and gender equity and the procurement shift towards black economic empowerment. He spearheaded the transformation of Eskom Enterprises into Enterprises division, with a revised mandate to project manage and build new capacity. As such he has laid a solid foundation for substantial expansion of the organisation.

Power outages in 2006 and 2007 have brought into sharp focus the vulnerability of our power system. Several factors came into play – higher than expected demand, unplanned outages, and more importantly, a diminishing reserve capacity. In recent years our reserve margin for generation capacity has shrunk to between 8% and 10%. We aspire to a reserve margin of 15%. The margin is tight and will remain so until 2013 when new base-load stations start coming online. The next five to eight years will require a collaborative effort by all stakeholders to minimise the likelihood of power interruptions.

At the turn of the century government planned to bring more independent power producers (IPPs) into the economy. To create space for the IPPs, Eskom, as the incumbent player, was required to put its capacity expansion plans on hold.

The investment in the local electricity market by international players did not materialise, and as such in 2004 government instructed Eskom to start building new generation capacity. By then there was a backlog given the higher than expected growth in the economy.

Key to managing the electricity demand is ensuring new capacity through our massive build programme. The Eskom board approval for a significantly increased build programme budget – now R150 billion for the five years to 2012 – was primarily driven by a change in the electricity demand growth assumption, from 2,3% to 4,0%. Generation projects will take up 70% of the budget, with transmission investment accounting for another 14%. The remainder of the budget will fund improvements to our distribution network and efforts to diversify the energy mix.

The expanded build programme aligns our planning with government’s target of 6% GDP growth between 2010 and 2014. Under the revised plan, we will deliver an additional 22 000MW by 2017.

The first step taken early in 2003 was a decision to bring back to service our mothballed plants – Camden, Grootvlei and Komati. From August this year, 1 162MW will be available to us thanks to the return to service of five units at Camden and one unit at Grootvlei power station.

A further 1 029MW will be added from June this year by the open cycle gas turbines at Atlantis (Ankerlig power station) and Mossel Bay (Gourikwa power station). These new installations will help us address peak demand, especially in the western and southern parts of the national grid. Their contribution represents the first new megawatts to be added to the system in about 20 years.

For progress such as this, we must thank our staff and contractors for working tirelessly. Our ability to bring new capacity on stream is improving all the time.

Construction also started in May this year at Medupi power station, our new coal-fired base-load power station in Lephalale, Limpopo. The station will be capable of delivering at least 4 500MW. In addition, work has begun on the Ingula pumped storage scheme near Ladysmith, a peak-load plant that will deliver 1 332MW.

The contribution of our suppliers and subsidiaries, Rotek Industries and Roshcon, were key to these successes.

Numerous international markets are witnessing higher demand for electricity and are investing in more capacity. Higher demand results in cost escalation on almost all major items of equipment; and brings with it global competition in terms of equipment, suppliers and skilled people to run and build the new plant.

Our organisation has had to manage higher sales and meet high expectations over the last year. Sales volume growth of 2,3% was projected; 4,9% growth was delivered. Qualitative improvements are also evident. Our customer service index (a broad measure of customer satisfaction and service perception) moved higher, from 86,26% (2006) to 87,09% – a creditable performance, given the supply challenges.

Eskom’s financial performance has been satisfactory, driven by the high growth in sales and revenue. The profit for the group was R6 454 million, with R3 034 million (after tax) contributed from embedded derivatives.

One abiding issue is the volatile effect on our balance sheet of embedded derivatives. These instruments assist major customers by sharing risk on the long-term impact of commodity and currency movements and other shifts in rates and markets.

In 2007 embedded derivatives made a positive contribution of R4,2 billion (R1,3 billion in 2006) to our income statement, and are reflected in our balance sheet at a net cumulative asset value of R5,6 billion, but the potential always exists for these long-term contracts to go negative. Such movements are beyond our control as they are not linked to operational factors.

Intense focus on generating capacity is understandable when South Africa’s plans for more jobs and reduced poverty hinge on economic growth and a reliable power supply. Our determination to make a positive difference in the lives of customers, communities and among our workers and partners is reflected in our support for the United Nations Global Compact.

We are a signatory to the compact, the world’s largest voluntary corporate responsibility initiative. Eskom supports and upholds the compact’s 10 principles in the areas of labour standards, the environment and anti-corruption.

Our commitment is largely demonstrated through our sustainability index which is used to measure our sustainability performance. In 2007, our overall sustainability score was 3,0 (3,4 in 2006), indicating that our organisational performance across the technical, economic, environmental and social sectors is sustainable and that capacity growth is not being achieved at the expense of other areas of our business. The decline in performance was mostly related to a reduced reserve margin; generation availability and regrettable fatalities. We did see improvement in customer service, productivity and economic performance.

The electricity meters of 1 074 340 customers were reconfigured to receive free basic electricity (1 048 000 in 2006) and almost total coverage of municipalities has now been achieved, bringing relief to low-income households.

One of the key positives with our electrification performance in 2007 was the progress on infrastructure development, creating a platform for a better rate of connections from here on. Consequently, the Department of Minerals and Energy funded connections target has been raised to 100 000 households in the coming year.

The prospects for achieving the goal of universal access by 2012 are at risk, but it can still be done if adequate budget is allocated nationally to DME (who fund the programme). Eskom and municipalities roll out the electrification programme.

Procurement spend for the benefit of black economic empowered and black women-owned enterprises reached a new high of R16,56 billion (significantly up on the R14,57 billion target).

As the nation’s principal source of energy, Eskom is a key contributor to the Accelerated and Shared Growth Initiative for South Africa (Asgisa). Growth as defined under the Asgisa strategy is a broad concept that challenges every business to promote the development of communities, small business and individuals.

In 2007, our capital expenditure topped R17,7 billion. Thus we began exploring how best to channel these resources to benefit the local economy in areas close to our major projects. A major achievement in this regard is the incorporation of Asgisa compliance in our major tenders. We are using local contractors and suppliers more frequently than in the past. In fact, we have had some key successes with the communities around the new open cycle gas turbine plant in Atlantis and at Grootvlei power station.

In 2007, we exceeded all our racial and gender equity targets and progressed well in employment equity for people with disabilities. We must acknowledge, however, that in the area of skills and talent retention we continue to experience challenges.

In non-specialist categories we have average staff turnover, but in terms of critical engineering skills our turnover levels are higher than we would like.

The situation is challenging, but not unique. Internationally there is now a war for talent as major power companies are expanding their capacity at the same time.

We have examined some of the root causes of higher than average turnover, with particular focus on the needs of younger trainees. This included market-related remuneration, our culture and specific reasons for not meeting the expectations of the market.

In the last year, Eskom implemented a flexible benefits package for managerial and professional employees with effect from 1 October 2006. This gives employees choice in the structuring of their remuneration packages and will assist in attracting and retaining talent.

Our projects are often in remote areas and an influx of our staff puts pressure on local rentals, sometimes pushing them much higher. We may, therefore, have to take a new look at rent subsidies and staff housing at these sites.

Eskom has increased the trainee intake and is recruiting more widely. The targeted number of Eskom bursary-holders and trainees for the year was 4 000, in terms of our Asgisa commitment. The target was exceeded by 1 136; confirmation that we are responding energetically to the skills challenge.

For the first time, we organised both local and international job fairs. At these events in the USA and the UK, we recruited expatriate South Africans and other Africans. We shall maintain the recruitment effort while striving for higher retention rates. We see this as a key sustainability issue for the business.

Managing and mitigating environmental impacts is an Eskom imperative. We hope to reach a situation where all stations have visibly clear stacks. When we build new coal-fired stations, a key requirement is that emission reductions are integrated into the design. In the review period, particulate emissions were improved both against the target as well as the previous year’s performance.

The bigger issues relate to climate change and what we are doing about it. The greatest immediate action we have taken is that of increasing efficiency in the use of electricity and in our internal operations. We plan to accelerate these efforts in the future.

Currently 88% of our generating mix is coal-fired and for this we use more than 100 million tons of coal every year. Numerous avenues are open to us to reduce the impact of our coal-fired stations, including clean coal technology, underground coal gasification, fluidised bed technology and use of super-critical (more efficient) boilers. Although coal is our primary energy source for bulk power generation and will remain for some time; over the next 20 years we plan to cut the coal component of our optimised portfolio to 70%.

Renewable energy production will increase to 2% of the generating mix or 1 600MW through biomass, solar, hydro and wind facilities. This includes potential imports of hydro energy. Furthermore, the nuclear energy contribution to the national grid will rise to between 13 000MW and 20 000MW over the next 20 years. This will enable us to significantly reduce greenhouse gas emissions.

Commissioning plant and pushing forward new projects is not simply a matter of implementing an executive decision. Wide-ranging consultation is necessary. Environmental impacts have to be assessed.

We work with many partners; from community groups to planning authorities, contractors and suppliers to concerned individuals. We thank them for their input and co-operation. Our vision – Together building the powerbase for sustainable growth and development – emphasises teamwork. The value of working together was powerfully demonstrated in the review period.

In this regard, I must thank the former chief executive – Thulani S Gcabashe – our chairman, the Eskom directors, my executive colleagues and senior officials in the Departments of Public Enterprises and Minerals and Energy as well as the regulators for their assistance.

Eskom employees faced many challenges over the past year and, as such, the teamwork across divisional boundaries has been exceptional. It would have been impossible to keep our system running smoothly without the dedication of all 32 674 members of our team. They have played an indispensable part in ensuring that we remain a world-class organisation.