Eskom’s desperate state

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Eskom is in an increasingly desperate state. There is little hope that South Africa will have a secure and reliable electricity supply for years.

Yet there is seemingly little urgency from the government for fixing what is a major and binding constraint on the economy.

Eskom has lost skills, it is highly indebted, the bulk of its coal-fired plants will need to be scrapped within the next decade or so, and it is not making plans for the future. The overriding problem for the utility is that it is not operating in a favourable environment. At every turn, the dead hand of the government puts it under pressure when Eskom is deciding how it should do business, whom it should employ, and from whom it should buy. The government is also delaying regulatory approval for new private renewable projects to feed into the grid.

Eskom does not have the balance sheet or the borrowing power, or the project management expertise to come up with plans for the country’s energy future. We are heading toward a perfect storm on the country’s electricity supply situation – the prospects are for decreasing electricity output and inadequate movement on new sources coming on stream.

Yet a collapse of the grid would be catastrophic for the economy and result in an almost certain default on Eskom debt. At about R400 billion, Eskom’s longer-term debt is about ten percent of total South African government debt. As most of this is government guaranteed, this would be a substantial burden on the state and probably our financial system.

Last week we had another round of power cuts.  Eskom’s CEO André de Ruyter said the total unplanned capacity out of service due to failures at power stations was nearly 15,0000MW.

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Of this, some 720MW was due to an “operator error” according to Eskom. This resulted in an explosion in a 750MW generator at Medupi that had only started producing power for the grid a few years previously. That generator repair will cost R2.5 billion and take over two years to repair. That “operator error” made up 72 percent of the shortfall of 1000MW that results in Stage One of what is euphemistically called “load shedding”.

In addition, about 4000MW of capacity was also out of commission due to planned maintenance last week. That means that in total, over 40 percent of the generation capacity that Eskom says it has was out of commission.

Last year the government said that private companies could produce up to 100MW, but delays in the regulatory process to gain approval from the government are restricting the amount that can come onto the grid. If combined with battery storage projects, this could certainly alleviate although not solve load shedding. But currently there is not the infrastructure that would allow much more power from renewables on the grid in a number of provinces.

We are getting used to this reality, but the consequences for investment are ongoing and severe. Eskom’s disastrous state is one reason for the lack of investor interest in the country. It is not viable to invest in, for example, a new smelter, in South Africa.

The inability of the government to properly run an electricity utility is a red flag to investors and its own citizens that shows up sheer managerial incompetence. After all, power generation is not an experimental or cutting-edge technology.

For years business and many households have invested in their own generation or storage, all of which adds extra expense and inconvenience. Even with this there is still enormous economic damage that results from power cuts.

Eskom is caught in a high cost trap due to its aging fleet of power stations requiring massive spending on maintenance. That decreases the amount it can spend on new capital projects. Its coal-fired power stations are on average about 40 years old and have not been well maintained, in part due to the need to keep them going to avoid power cuts. That means unplanned outages and the need for maintenance will become increasingly frequent. There is just no way around that, even if renewable energy produced by independent power producers comes on stream rapidly. 

The utility’s number of employees exceeds that during the 1980s, when it was producing about the same amount of power and was still building new stations. Employee numbers have been cut back, but have still not fallen substantially. Like the other state owned enterprises, Eskom has been used for cadre deployment, and union and government pressure probably mean that it is highly constrained in running an economic operation.

And then there are the cost pressures from corruption and over-pricing of contracts. Empowerment often means buying from middlemen who add their margin. The tricks of the trade in corruption have emerged at Eskom – there are allegations about the wilful damage of plant and equipment to ensure replacement orders are made, and about adding weight to coal loads with steel or stones.

If the coal power plants are not scrapped, Eskom will have to commit to a R300bn programme to clean up its emissions from these stations. There is therefore considerable urgency for a commitment to come up with new large projects to shift away from coal.

The commitment by the European Union, Germany, France, the US, and the UK to provide R130 billion in concessional finance over five years to support a green energy programme in South Africa is probably insufficient to solve our energy problems. We will still need a contribution from nuclear or natural gas, as without massive storage facilities, renewable sources do not provide a source that is always available. We have not yet seen a rapid uptake of this financing with a massive increase in new projects.

Rather than a twenty-year deal to provide for the gap with Karpowerships, (the Turkish company that supplies power from ships anchored at a port and fueled by natural gas,) we require less costly and more viable longer-term solutions.

A solar project takes about 18 months from inception to completion, and a nuclear build will certainly take a decade or more. We are running out of time and hurtling to disaster.

South Africa’s pending energy disaster has to make a strong case for privatisation, ensuring speedy regulatory approval of projects, and changing the business environment. Our government with its mismanagement and corruption cannot manage the energy sector. That has been proven. There are simply not the mechanisms for rapid regulatory approval. And the raft of regulations on employment and procurement are hurdles to doing business.

Given the extreme urgency of the situation, the government is now at a decision point between catastrophic failure or improved prospects for electricity generation, whether it realises it or not. 

Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.