The Eskom Sustainability Task Team, brought together by President Cyril Ramaphosa in late 2018 to advise government on actions to resolve operational, structural and financial challenges at the electricity utility, has revealed some of its findings about the state of the power producer’s dire financial situation, as well as proposals to put it on a more sustainable trajectory.

Energy policy guru and chair Anton Eberhard gave the media a high-level review of the recommendations contained in the committee’s report, to be submitted to the president by the end of April, and which he says will subsequently be made public. He joined the Ministry of Public Enterprises and the Eskom Executive at a press briefing at the Lethombo Power Station near Sasolburg on April 3, to discuss the utility’s current status and future plans.

Eberhard is a professor emeritus and senior scholar at the University of Cape Town, where he directs the Power Futures Lab at the Graduate School of Business. His research and teaching focus on governance and regulatory incentives to improve utility performance, the political economy of power sector reform, power investment challenges, and linkages to sustainable development sector companies.

He highlighted the progress made on the interim report supplied to the presidency in January. Eberhard said the team of six looked into the three main drivers of Eskom’s mandate, including the ability and capacity to secure electricity supply, the financial position to do so and the ways to remain sustainable.

While Minister of Public Enterprises Pravin Gordhan and the technical task team he employed clearly stipulated the imminent issues faced by Eskom at the media briefing — old kits breaking down, new kits facing structural and design flaws, the lack of proper maintenance and a shortage in diesel supply — Eberhard said what struck his team was a lack of core skills and capability, an issue iterated in a presentation by the technical task team’s Phindile Mooketsi.

Eberhard said that it should not be underestimated was how State Capture hollowed out skills at the organisation and disrupted governance systems at board and management level — and how deep that influence ran.

Both the advisory teams to the president and minister said that strong leadership should be reinstated at all key positions, power station manager positions should be made permanent to give authority to make decisions, and all other critical positions need to be filled with great haste.

Eberhard said that to ensure the security of supply in South Africa, adding new capacity to the system should go with the reintroduction of critical skills.

He said recommendations include promulgating and launching a new Integrated Resource Plan (IRP) and accelerating the Independent Power Producer (IPP) process to complement power generation in the country.

Imperative too, he said, “is to free up the system for generation for less than 100 MW. There is a huge existing pipeline of investment and innovation, so we need it to make it easier for smaller plants to obtain generation licences or to simplify the registration process.”

The second driver of the Eskom mandate — financial stability is probably the biggest contributor to the crisis in the utility’s confidence.

Eskom chairman Jabu Mabuza told journalists that the power utility is anticipating a R250-billion shortfall over three years, and the R69-billion capital injection announced in the February Budget speech is not even a drop in the bucket to start covering it. He did not venture into the ways planned to deal with this. Gordhan, however, said the government was looking into “additional mechanisms” to help the utility, but also did not elaborate on specifics.

“There is definitely a shortfall. There was a shortfall on tariffs and a shortfall on what National Treasury could inject into Eskom, but remember there are additional mechanisms that we are looking at to ensure that Eskom’s debt burden is manageable,” Gordhan said.

Eberhard said that Eskom was just not generating enough cash to cover its operations or to service its debt (the power producer is drowning in a liabilities pool of R420-billion).

“They are now borrowing additional funds to pay the principal and the interest on its existing debt,” he said. “Debt levels are too high and the way they are dealing with it is unsustainable. Something must give.”

The presidential task team has developed and commissioned an independent forward-looking financial model, which enabled it to identify interventions which could put Eskom on a healthier and more sustainable future path

“No single intervention will solve the problem,” says Eberhard. “There is no silver bullet.”

He said that on the income statement side Eskom needs to generate more cash by pushing up revenue and compressing cost, and added that Nersa tariff increases are not nearly enough. The utility also needs to clean up its balance sheet.

“Hopefully announcements will be made on that soon,” he said.

Eberhard said the cost of debt was a real threat to Eskom remaining a going concern. He said Eskom was only able to retire its cheapest debt now, while the utility’s credit rating continues to deteriorate. “Over the past 10 years we’ve seen its investment grade drop to 10 notches — from three to seven notches into junk territory.”

He said the team is looking into a new innovative financing facility — a blended option — which includes a concessionary component linked to climate finance:

“Combined with other sources, this could make a great difference.”

Climate finance refers to local, national or transnational financing — drawn from public, private and alternative sources of financing — that seeks to support mitigation and adaptation actions that will address climate change. To facilitate the provision of climate finance, the United Nations Climate Change Convention established a financial mechanism to provide financial resources from developed country “Parties” to developing country Parties. The financial mechanism also serves the Kyoto Protocol and the Paris Agreement.

Such initiatives aim at putting global power producers on a more sustainable path, the third and final point Eberhard referred to, and is included in the committee’s terms of reference. He said that South Africa needs to follow the precedent of energy transition elsewhere in the world and perhaps consider other business models for Eskom, which includes restructuring.

“We need to respond to innovations globally, to ensure Eskom doesn’t continuously return for bailouts, he said.

The recommendation by the task team to split the utility has already been accepted by The Presidency and adopted by Cabinet. The president mentioned in his State of the Nation address that Eskom needs to completely restructure its business model.

Ramaphosa said that the government will initiate a plan to split Eskom’s business into three separate entities, as expected, which will operate as Eskom Holdings. The business will focus on generation, transmission and distribution, he said.

Will it make a difference? Eberhard said the view of the task team is that it is a transformational approach for the future.

“It won’t necessarily resolve the immediate problems, but it puts the sector on a different trajectory — running a generation business is very different from running a distribution business. The one is customer-focused, while the other is focused on management, transparency of cost and efficiency”

Most importantly, he says, is that an independent grid combines the planning, the procurement and the contracting functions.

“Then you create a stable, transparent platform for contracting least-cost generation and attract more investment into the system.” DM