South Africa

Analysis: Electricity problems converge as Eskom CEO departs

By Chris Yelland 2 April 2014

We bid farewell to Brian Dames, the outgoing CEO of Eskom, after his last day at the utility on Monday. With a number of electricity sector problems converging, Eskom, as it is currently structured and financed, is simply unsustainable and unmanageable. By CHRIS YELLAND.

While Dames’ departure may be understandable – the burdens of office of the Eskom CEO are particularly onerous these days, and he indicates that he needs to get a life again – it surely cannot be said that Dames has achieved success. In fact, by leaving before the end of his term at a critical stage in the construction of the new-build programme – which is running three years late and which he and O’Flaherty led – Dames has surely failed in the mission and goals that he would have set himself upon taking office.

The reality is that the utility is facing enormous problems which are converging at a time when Eskom has been left with an acting CEO with no direct experience of running a major state-owned enterprise and business the size of Eskom, or managing projects of the size and technical complexity of Medupi and Kusile.

The long-standing generation capacity crisis has led to the invoking of emergency protocols on at least three occasions since November 2013 in order to stave off a national power blackout. This has forced regular mandatory load curtailments by Eskom’s largest industrial customers – 32 of whom consume some 45% of the electricity generated by the utility – as well as mandatory rotating load-shedding of industrial, commercial, agricultural and domestic customers country-wide for one day in February 2014.

To meet demand, an aging Eskom generation fleet is running flat-out with unacceptably low generation reserves. Coupled with deferred maintenance at its coal-fired power plants due to the generation capacity shortages, this is resulting in high levels of unplanned outages, with plant availability dropping well below 80% – significantly lower than industry norms. This effectively further reduces availability of an already low generation capacity.

It has also resulted in Eskom having to run its emergency reserves – 2,426 MW of diesel powered open-cycle gas turbines (OCGTs) in the Western Cape – for extended periods. The R2 billion budgeted by Eskom for diesel fuel in the financial year ending 31 March 2014 has risen to R10 billion, resulting in a cash-flow crisis which the utility claims is affecting other necessary capital and operational expenditure.

Recent heavy rainfall, and international demand for the low-grade coal used by Eskom, has highlighted the risks of the utility’s over-dependence on coal as its primary energy source. With about 90% of South Africa’s electricity generated from coal, and the looming “coal supply cliff” announced by the coal mining industry, Eskom and its customers are particularly vulnerable to coal supply, coal quality and rising coal prices. Similarly, South Africa is over-dependent on a single state-owned enterprise which generates more than 95% of country’s electricity.

With the heavy dependence on coal come the problems of water and air pollution, and Eskom’s massive carbon footprint, which these days is also linked to the inability to raise capital for new power plants. The country and Eskom are also constrained in terms of available water resources.

Eskom recently announced it was unable to meet the new Department of Environment air quality and particulate emission regulations (which are based on international standards) at its Kriel and other coal-fired power plants, and threatened to reduce power output at Kriel by 2,400 MW unless it was granted exemption from the regulations. Eskom has also delayed the installation of flue gas desulphurisation (FSD) plant at its new Medupi coal-fired power station, to which it is committed in terms of a World Bank loan.

These are actually not technical issues, but financial. The solutions are well-established but come at significant extra cost, and require generator plant shutdowns for extended periods at a time of severe generation capacity shortages and financial constraints. But they point to a utility that is simply not being managed and operated on a sustainable technical and financial basis.

The oft-repeated (and disingenuous) disclaimer by the utility that Eskom cannot do it alone, and requires the involvement of independent power producers (IPPs), stands in stark contrast with the recent burying of the Independent System and Market Operator (ISMO) Bill which would facilitate the beginnings of a market-based legal and regulatory framework with level playing fields for IPPs.

The failures by Eskom to contract some years ago with viable IPPs such as the planned 1,200 MW Mmamabula power plant in Botswana, delays by Eskom in renewing IPP contacts that expired in December 2013, and the current emergency arrangements for contracting IPPs, further point to contradictory energy and electricity policy, legal, regulatory and planning frameworks.

Eskom has imposed massive electricity price increases since 2008, which have no doubt played a significant role, together with the generation capacity shortages, in curtailing electricity demand and economic growth, and reducing Eskom’s electricity sales (in kWh units) to their lowest levels in seven years. The problem is that lower energy unit sales drives Eskom prices higher still in order to recover committed costs from declining sales volumes, and a vicious cycle ensues.

It must be appreciated too that the massive electricity price increases experienced to date are only to meet Eskom’s projected expenditure for the next five years. No new base-load or other generation capacity beyond Medupi and Kusile, to cater for economic and population growth and to replace the aging Eskom generation fleet, has been factored in. A decision and a funding arrangement for the planned new nuclear fleet of 6,000 MW to 9,600 MW, estimated variously to cost between R300 billion and R1,200 billion, has still not been announced.

Deferring critical decisions in respect of new base-load generation capacity in favour somewhat cosmetic and intermittent renewable energy projects at high cost, leaves the status quo with inadequate base-load capacity, thereby curtailing productive electricity demand and economic growth, which is then used to justify the scaling back on new base-load generation capacity in the first place. So the “do little” approach becomes self-fulfilling.

The problems in the distribution sector of the electricity supply industry are legendary, with plenty of talk and analysis of the issues, but little concrete progress toward the solutions, and a massive backlog in investment in network maintenance, upgrading and refurbishment, variously estimated to be somewhere between R30-billion and R60-billion.

Perhaps Dames has had a “Gorbachev” moment – like when Ronald Reagan announced his Strategic Defence Initiative which raised the stakes and the spectre of Star Wars to a cash-strapped dinosaur – with the realisation that ultimately it is all about the money, the absence of which finally spells the end of an era.

Or perhaps it dawned upon Dames that with a number of electricity sector problems converging, Eskom as it is currently structured and financed is simply unsustainable and unmanageable, that Eskom’s shareholder fails to appreciate this, and that it is time to get out while the going is (relatively) good. DM

Photo: Brian Dames (Sapa)

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