In 2001, Eskom was named the Financial Times Power Company of the Year at the Global Energy Awards Ceremony in New York. But in the past decade the company deteriorated to a point that all rating agencies identified the power utility as the biggest threat to the South Africa’s economy.
Eskom generates approximately 95% of the electricity used in South Africa and approximately 45% of the electricity used in Africa, according to the company. The state-owned utility can not cover its costs and make the huge interest payments on its mountain of debt. Its poorly maintained power plants are struggling to meet demand, and it has gone through 10 chief executive officers in a decade.
Eskom has not been able to undertake this maintenance due in large part to the huge cost over-runs of the new build programme, increasing fuel costs, poor revenue collection and the cost of servicing its substantial debt. It has also not had sufficient reserve capacity to take out units for extended periods of time to undertake essential maintenance.
Substance of Eskom crisis
South Africa was able to produce more electricity than it needed when white-minority rule ended in 1994, but the government did not foresee how sharply demand would surge as the economy expanded and previously neglected black areas were connected to the grid.
Eskom announced a series of multibillion-dollar investments after the authorities awoke to the severity of the problem in the mid-2000s, but the projects came too late and took too long to build.
The problems with the existing power plants, the new power stations, Medupi and Khusile were supposed to be fully operational in 2015, are coming online far later than planned and due to design and other faults are not yet performing optimally.
Instead of providing relief to demand pressures, the department of public enterprises admitted that they were badly designed, hence they failed to deliver power on schedule.
From November 2007 to January 2008, South Africa faced its first load-shedding. In December 2019, Eskom implemented in load-shedding as many of its units were down and some of its power stations were flooded. Back when this dreadful system was introduced, the government responded by building two new power stations Kusile in Mpumalanga and Medupi in Lephalale, Limpopo.
These two mega-projects were expected to solve the country’s power crisis as the rest of Eskom’s power stations were old and not performing at their best. Medupi was expected to provide 4,764MW, while Kusile was expected to produce 4,800MW. Construction at Medupi began in 2007, while at Kusile it started in 2008. Fast-forward 10 years later, the two projects are still under construction. Medupi is now projected to be completed in 2020, and its costs have escalated from R79bn to about R146bn.
Eskom present challenges
A lack of money forced the utility, which provides about 95% of the nation’s power, to cut back on maintenance and repairs to other plants, and it lacks key technical skills needed to do the work, despite having a bloated workforce. Plants that produce more than half Eskom’s power are at, or nearing, their ideal retirement age.
The country has experienced intermittent power outages since late 2005. They reached a peak in December 2019, temporarily interrupting production at mines and disrupting mobile-phone services. Eskom is currently losing about $1.4 billion a year.
While several factors have contributed to the load shedding that has been experienced in December 2019. The failure of Eskom to undertake this fundamental maintenance across all its power stations including the mid-life maintenance required to extend the life of the older power stations.
The financial war
The utility went through repeated board and leadership changes during the almost nine years Jacob Zuma was South Africa’s president. Investigations by lawmakers and the nation’s anti-graft ombudsman suggest that the upheaval was an orchestrated attempt by Zuma’s allies to raid Eskom’s coffers with his tacit consent.
Accusations that the utility had been looted are now being investigated by a judicial commission. Zuma and his allies deny wrongdoing.
Two former managers at Eskom, South Africa’s ailing power firm, have been arrested for alleged corruption and fraud worth 745m rand ($51m; 39m). Prosecutors said an investigation had revealed “gross manipulation” of contracts related to the construction of two new large power stations.
Fiscal state
In 2019, Eskom’s spent on diesel for of open cycle gas turbines (OCGTs) rose from R4.67m in January to R43.62m in February and then R140.67m in March. Eskom paid R47.4bn to 48 suppliers for diesel between 2009 and 2019, just to keep the lights on.
While generation capacity has been a serious threat, Eskom on the other hand is facing rising debt. Eskom debt stood at over R400bn in 2019. Eskom’s wage bill rose from R9.5bn in 2007 to R29.5bn in 2019.
Debt owed by municipalities has also been on the rise. As at June 30 2019, municipalities and individual users owed Eskom over R36.5bn. Soweto continues to be a painful thorn in Eskom’s side.
The southwest of Johannesburg area, home to more than a million people, has boycotted Eskom out of billions of rands. Illegal electrical connections and meter tampering reportedly assisted by disgruntled Eskom employees has left the national power supplier reeling.
Zimbabwe Electricity Supply Authority (Zesa Holdings) owes Eskom R322 million between $21 $22 million in outstanding payments.
Eskom is choking under a massive 450 billion rand ($30.6 billion) debt burden and struggles to meet electricity demand because its creaking coal-fired power stations haven’t been maintained properly.
It was burdened with $31 billion of debt at the end of September and its solvency is at risk. Sales are near a decade low as the economy stagnates. Increasing numbers of businesses and middle-class consumers have moved off the grid as the price of renewable energy drops.
Meanwhile, near-bankrupt municipalities are falling behind in paying their bills as customers in impoverished townships default on their debts or steal power through illegal connections.
Fixing Eskom
Eskom’s board and management were replaced in January 2018, the month after Cyril Ramaphosa succeeded Zuma as head of the ruling party, the African National Congress.
Phakamani Hadebe was named CEO, but quit as of July 2019 because his health was suffering due to the ‘unimaginable demands’ of the job. Andre de Ruyter, currently the CEO of packaging firm Nampak Ltd., will take over the post which has been temporarily filled by Chairman Jabu Mabuza in early 2020.
Eskom’s management has made a concerted effort to stamp out graft, and a number of tainted senior executives and staff have left the company.
Integrated Resource Plan (IRP) 2019 Strategy
President Cyril Ramaphosa announced the unbundling of Eskom into three entities namely, generation, transmission and distribution businesses under a state holding company by the end of 2021, a reorganization it says will permit each unit to manage costs more effectively and make it easier for them to raise funding.
The launched of a power purchase programme by government to fill the current short-term supply gap and to reduce the use of expensive diesel generators during peak times. The programme will prioritise power projects that can deliver power into the grid in the shortest possible time, between three to six months and six to twelve months from approval. The Ministry of Mineral Resources and Energy and the National Energy Regulator are fast-tracking applications for industry and business to produce and use its own electricity.
Government is determined to remove the bureaucratic constraints to self-generation and have those users with the capacity producing their own power. While these measures will increase the amount of electricity produced independently of the national power utility, Eskom will benefit from these new arrangements.
The wake of the hugely damaging power shortages of the last two weeks, government has agreed in keeping with the Integrated Resource Plan (IRP) 2019 to allow users to generate power for their own use and to accelerate the purchase of power from independent producers.
In effect, the path has been cleared for the expansion and diversification of energy production on a significant scale. Importantly, it is also what is needed to give Eskom breathing space to take some of its power stations offline to perform much-needed and long-overdue maintenance.
The IRP suggests that the country has a short-term energy supply gap of around 2,000MW to 3,000MW. When we visited Megawatt Park last week, some Eskom managers said that this is closer to 5,000MW. Additional energy supply from other sources would therefore help Eskom to get back on track and become a more reliable, cost-effective generator of electricity. Instead of weakening Eskom’s position in the electricity sector, new producers will assist the company in achieving greater efficiencies.
This approach aligns with the Roadmap for Eskom published in October, which, among other things, outlines the process for the restructuring of Eskom into three subsidiary businesses generation, transmission and distribution.
An immediate priority is the establishment of a new transmission entity, wholly owned by Eskom that can buy power from a range of sources, including Eskom’s own generating entity, independent power producers and producers from neighbouring countries.
Following clear least-cost principles, the transmission entity would then supply this electricity into the grid. The interventions that government is now taking means the new transmission entity will have a ready pool of suppliers once it is established.
The financial salvation
Recently, the South Africa’s parliament approved a R59bn bailout for Eskom over two years. The budget announced in February included a $4.6 billion cash injection over the next three years to help Eskom service its debt and free up money for operations. The government has since announced a rescue plan for the utility and doubled the bailout.
The support has added to state debt and caused South Africa’s budget deficit to soar, placing the country’s sole remaining investment-grade credit rating at risk. Eskom also plans to trim its workforce. That proposition is likely to meet with fierce opposition from labour unions, which also oppose the plan to break Eskom into three parts.
If the total collapse of Eskom is not on the immediate horizon, and Ramaphosa has said the government won’t allow it to happen. If it were to cease operations or the grid were to collapse, South Africa’s economy would grind to a halt and many businesses would be driven into bankruptcy, triggering an investor flight and multiple downgrades to the nation’s fragile credit rating as well as potential social unrest.
Power cuts have already weighed on South Africa’s Rand and bonds, and present a huge risk to smelters, mines and other energy-intensive businesses. If Eskom were required to build all and fund all required new generation capacity, steep electricity price increases will be required, which will serve to the detriment of the end-users, who will foot the bill in the end.
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