ESKOM CRISIS OP-ED
Dark, Dumb and Dangerous: Inside South Africa’s perfect (electrical) storm
The only thing that is certain about South Africa’s current situation is that we will have rolling blackouts for the next two years — at least. A top energy expert helps us understand the roots of the deepening crisis at a time when politicians are focused on political survival and not the big, bold courageous decisions that are needed to get us out of the hole we’re in.
South Africans are being forced to cope with a new normal: Stages 4 and 6 rolling blackouts for the foreseeable future. In some municipal areas, this can translate into up to 12 hours a day without electricity. What is very certain is that we will have power cuts for at least the next two years.
Like never before, the availability of electricity structures the minutiae of everyday life for everyone who depends on being connected to a reliable supply of electricity.
As households, businesses and municipalities scramble desperately to reduce their dependence on Eskom by installing diesel or (increasingly) solar-powered backup systems, Eskom has applied to the National Energy Regulator of South Africa (Nersa) for a 38% increase in the price of an electricity supply that South Africans no longer think is value for money.
Unsurprisingly, everyone needs a scapegoat, and the culpable have to find someone to blame. The National Executive Council of the ANC debates whether André de Ruyter should be fired; Gwede Mantashe accuses Eskom of treason; business responds with a show of force in favour of De Ruyter; unions call on the Eskom managers to quit; all those who have invested in Eskom anxiously wring their hands and wonder whether Eskom has a plan to get itself out of the mess; National Treasury has yet to say how it is going to take over between one- and two-thirds of the Eskom debt; foreign donors start to wonder if the Just Energy Transition Partnership (JETP) announced at COP27 will hold together; the new Eskom board seems strangely quiet; and the renewables sector frets over whether Cyril Ramaphosa will survive because they know full well that the “other faction” has never been too fond of renewables. The only small gesture of accountability was the apology for the rolling blackouts by Public Enterprises Minister Pravin Gordhan.
When it comes to making sense of the crisis, most South Africans only get snapshots about this or that dimension of the crisis — Stage 6 because more machines have tripped, Eskom has run out of funds to pay for diesel, Bid Window 6 has delivered far less than expected, Eskom wants a 38% price hike.
The big picture remains elusive at a time when things are changing at sonic speed and the levels of uncertainty rise on a daily basis.
Long-running historical drivers
Over the past two weeks, some fundamentals have shifted. We all need to know how they relate to one another and what this means for the medium- and longer-term future.
The big picture isn’t pretty, but it can be explained without providing a justification. To make sense of what is going on, we need to be aware of the long-running historical drivers and the immediate current dynamics that reflect a deepening of the crisis at a time when politicians are focused on political survival and not the big, bold courageous decisions that are needed to get us out of the crisis.
Many make the very serious mistake of focusing purely on short-term causes of the crisis: Eskom management team is incompetent, State Capture resulted in the looting of Eskom, political interference prevents Eskom from finding solutions, by definition all state-owned enterprises are inefficient, the just transition is a White Monopoly Capital plot, and so on.
What needs to be recognised is that there were three distinct historical moments when decisions were made that could have been different that have resulted in the mess we are in today.
First, the government approved the White Paper on Energy in 1998 which made it very clear that unless new generation capacity was procured by 1999, there would be an energy shortage by 2008.
Needless to say, the decision to procure more energy in 1999 was not made. The first “load shedding” was in 2007.
Eskom kept on pressuring the government to be allowed to procure new generation capacity, but the government accepted the advice of influential advisers that it would be preferable for the private sector, in particular BBBEE companies, to invest in new generation capacity. The problem is that the prices were too low to attract investors.
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Trevor Manuel, then influential minister of finance, insisted that exports would suffer if prices went up. Without increased prices, margins were too low to justify profitable private investment in power plants. And so the decisions were delayed and delayed, until President Thabo Mbeki apologised to the nation in 2008.
Starting in 2006, Eskom was rushed into building Medupi, despite having lost a lot of technical capacity to do the job properly. Kusile came later. To fund this new aggressive build programme, additional funding was obtained from the World Bank — its last big loan for coal power.
Pravin Gordhan (as the then minister of finance) signed the funding agreement with the World Bank in 2010. However, costs soon ballooned: what was supposed to have cost R163.2-billion for both Medupi and Kusile with a completion date of 2015, has ballooned to an eye-watering R450-billion (Kusile is still not complete, and both Kusile and Medupi are not running as they should). Herein lies the origins of the Eskom debt crisis.
From 2015 to 2017, CEOs Brian Molefe and then Matshela Koko refused to sign the Power Purchase Agreements (PPAs) for the shovel-ready renewable energy projects that had been approved for implementation.
At the time, then-president Jacob Zuma was obsessed with the implementation of an agreement he signed with Vladimir Putin to build a Russian nuclear fleet to resolve South Africa’s energy problems.
Influential presentations by Bain & Co to Zuma affirmed (with deeply suspect calculations) the financial and technical viability of this idea. As Meridian Economics has now confirmed, if those renewable PPAs had been signed then, 95% of current rolling blackouts would not be happening.
Many of those accusing De Ruyter of purposely sabotaging Eskom to prepare the way for privatisation supported the rise to power of Zuma and never opposed his delusional obsession with nuclear power, nor did they challenge Molefe and Koko to sign the PPAs. Some even call for the return of Matshela Koko as CEO of Eskom! Needless to say, the Zondo Commission recommended criminal action against both him and Molefe, and Koko has been arrested.
In 2019, shortly after Gwede Mantashe was appointed minister of mineral resources and energy in 2018, he was strongly advised to immediately clear the way for the procurement of large quantities of renewables if he wanted to be seen as the person who brings load shedding to an end.
Instead, Mantashe kept reiterating the need for — and viability of — coal-fired power and nuclear. Citing the red herring of “base load”, he refused to accept the need for renewables delivered either by independent power producers (IPPs) or Eskom.
Read more in Daily Maverick: “Gwede Mantashe has harsh words for Eskom as additional 1,759MW of renewables signed up”
If he had accepted the advice given then, which was to implement his own policy, namely the Integrated Resource Plan, renewable energy plants would have been connected to the grid by now. The result would have been a much-reduced level of power cuts.
Instead, after dragging his feet, Bid Windows 5 and 6 are now well advanced, and the cap on embedded generation has been scrapped (despite many years of defence of a 1MW ceiling by Mantashe). But these plants will only be connected to the grid in late 2024/early 2025. Until then, we have worsening power cuts.
There are a tough set of realities that the minister of mineral resources and energy has consistently denied. There are 90 electricity generation machines located in Eskom’s 15 coal-fired power stations. Most are old and the new ones in Kusile and Medupi are not running as they should.
Years of corruption during the State Capture years, stupid decisions by CEOs Molefe and Koko to suspend much-needed maintenance, corrupt and inefficient project management of the new build programme, plus increasingly serious sabotage, has severely damaged these machines.
Six of the 15 power stations must close soon, and the performance of the remainder must be brought up to scratch. However, to do this properly it is not enough to take them offline for a few days or even weeks to patch them up. Effective overhaul of many of the machines means taking them offline for months at a time.
If Eskom did this now, permanent load shedding at Stages 4 and above would inevitably follow. Eskom can only execute a deep overhaul programme when there is new generation capacity on the grid that will take up the slack.
The only technologies that can deliver new generation capacity quickly (within two years), affordably and on budget are solar and wind power, backed up with batteries and gas.
Coal and nuclear will take too long, and in any case, securing funding for these more expensive options is not possible in a world transitioning to much cheaper low-carbon technologies.
In short, while renewables get built over the next two years, we are dependent on Eskom to ensure that the average energy availability factor (EAF) does not dip below 60%, which is what will keep rolling blackouts at around Stage 2.
It’s bad — and getting worse
But what happens if we build less renewables than planned? And what happens if Eskom cannot prevent the EAF dropping below 60%? The bad news is worse than many predicted even just six weeks ago — it looks as if both may well be unfolding.
In its “state of the system” report published in November 2022, Eskom painted a worst-case scenario that would arise if 16GW of generation capacity was unavailable for various reasons.
This, Eskom pointed out, would mean averaging at a minimum of Stage 3 load shedding. Eskom announced on Wednesday, 7 December, that 19GW of generation capacity was unavailable due to unforeseen breakdowns. Later that evening this rose to 20GW as additional units tripped. This, plus the 5GW on planned maintenance, took the total unavailable to 25GW — way above the 16 GW anticipated for the worst-case scenario.
Taking into account the 1GW as the reserve margin, this left 22GW available to meet demand of about 27GW. Add to this the loss of half Koeberg’s capacity for the next 12 months due to an overhaul that cannot be delayed and water shortages due to climate change in our pump storage dams, and the dynamics of our perfect energy storm become apparent.
When more than half of Eskom’s 90 generation units are down, the only way to keep the lights on is to keep the diesel generators going for longer than planned. But between April and October, Eskom exceeded its R11-billion diesel budget. By November it had run out of money to buy more diesel.
As the worsening of the worst-case scenario materialised, Eskom realised it would need a lot more diesel than anticipated under the worst-case scenario.
National Treasury, however, refused to consider providing the money, while someone arranged a stop-gap measure that resulted in PetroSA providing Eskom with 50 million litres of diesel.
So where will Eskom get the funds to buy enough diesel for the next few months? The only possible answer is South Africa’s public and private banks. But for any bank, putting money into Eskom is totally unjustifiable according to normal banking principles. So the only reason they would do it would be to save the South African economy from crashing by helping to keep Eskom afloat.
For this, an extraordinary level of confidence is needed in South Africa’s political future and in Eskom management’s ability to keep Eskom afloat. This is why Minister Mantashe’s statement that Eskom “is agitating for the overthrow of the state” could not have come at a worse moment.
If the banks get frightened away by this statement and Eskom does not find the funds to buy more diesel, then it will be clear who will be to blame for permanent rolling blackouts at Stages 4 and 6 by the end of January.
Fortunately, all the business associations saved the day by quickly issuing a statement expressing their faith in the Eskom leadership. Of course, no one really knows whether this also reflects the sentiments of South Africa’s bankers.
Ironically, Minister Mantashe made his fateful statement at the same event where he was announcing the outcome of Bid Window 6. This refers to the way the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) works.
After a long and complicated process, a bid window is opened whereby the government stipulates how much renewable energy it wants to procure, and the IPPs respond with their bids. To qualify, they need authorisation from Eskom that their proposed utility-scale plants can connect to the grid and that Eskom will buy the energy. In return, the government provides sovereign guarantees to enable the release of loan finance.
The problem is that after many years of investment neglect and inadequate harmonisation of grid planning and location of renewables projects, the Eskom grid has very limited capacity to carry additional load.
Eskom has made it clear that it needs to spend R130-billion in the next five years to remedy this problem, and a lot more after that.
In July, the President announced that Bid Window 6 would increase the quantity to be procured from 2.6GW to 5.2GW (later curtailed to 4.2 GW).
Much to the shock of many in the energy sector, this week Mantashe only announced five successful bidders with a combined capacity of only 860MW. This could possibly rise to 1 GW if discussions with a sixth eligible project are successful.
The reason for this disappointing outcome? Lack of sufficient grid capacity for all the potentially successful projects that are effectively competing with private IPPs in the so-called non-REIPPPP Commercial and Industrial (C&I) space.
For many informed observers, this marks the death of the orderly transition that would have been possible within the parameters of the REIPPPP.
Instead, what is replacing the REIPPPP is the disorderly transition driven entirely by market forces. Ever since the cap on embedded generation was removed entirely by the President in his watershed July speech in the wake of Stage 6 load shedding, the disorderly transition has been unleashed.
This will see private and municipal buyers of energy procuring directly from renewable installations that they either own themselves or from IPPs who build and sell to third parties without having to rely on selling to Eskom or enjoying the security of sovereign guarantees.
Most, however, will need to wheel their loads over the grid, which highlights once again the grid constraint problem.
Under these conditions (both regulatory failure and grid constraints), it is very unclear whether the target of 10GW within two years to end the rolling blackouts proposed by the National Planning Commission in July can ever be achieved.
If this is true, then the wriggle room Eskom needs to close old plants and properly overhaul existing machines will not materialise. This means the prolongation of rolling blackouts beyond the envisaged two years.
Eskom has stepped smack bang into this perfect storm with its shocking announcement that it is looking for a 38% increase in the price of the electricity it sells.
What the public does not understand is that Eskom has for many years suffered the consequences of year-on-year increases approved by Nersa that were below the actual costs of keeping the lights on.
If Nersa had approved gradual increases in the price of electricity over a long period of time, South African households and businesses would have slowly adapted in multiple ways. Instead, as Eskom was forced to accept very low increases, its debt levels rose as did the quantity of funds allocated from the National Budget to keep Eskom solvent (thus taking away from other important social expenditures). Debt levels are now so high (around R400-billion) Eskom cannot service the debt without injections from the state.
But the state has diminishing funds to do this. The only option open to Eskom in this context is to apply for “cost-reflective tariffs” to get to where it should have been if Nersa had properly understood Eskom’s business. But now everyone will experience the shock, and at a time when our economy is on its knees and poorer households and businesses are taking serious strain.
To move forward, the following will need to happen:
- National Treasury must make good the promise of the minister of finance to take over between a third and two-thirds of Eskom’s debt, thus freeing up Eskom to allocate more funds to maintenance;
- The Board of the National Transmission Company of South Africa must be announced before the end of year so that this entity can get up and running fast to attend immediately to the need to rehabilitate and extend the national grid, a task that could get compromised if it is saddled with too much debt;
- A clear strategic plan is required that builds on Eskom’s Transmission Development Plan and describes in detail how the minimum of 10GW of renewables will be delivered by the start of 2025, which should be the target date for ending rolling blackouts;
- A clear multistakeholder high-level development plan for Mpumalanga is required that clearly demonstrates how the just transition will unfold in ways that will not threaten the livelihoods of workers and communities dependent on coal;
- The Just Energy Transition Partnership needs to be fast-tracked so that the $8.5-billion is accessed on terms that suit South Africa, with the bulk of the loan funds used to upgrade and extend the grid, and the grant funds to support the just transition in Mpumalanga;
- Government, and the President in particular, needs to reiterate support for the Eskom leadership that was expressed back in July;
- Eskom Board and management need to set a realistic average EAF of 60% over the next two years (not the unrealistic 75%), and provide South Africans with an understandable plan in non-technical language for how this will be achieved;
- A regulatory regime is needed that ensures that we do not run two separate renewable energy delivery programmes with contradictory outcomes that could compromise the goal of 10GW in two years, ie one through the REIPPPP and the other through the market;
- A consortium of public and private financial institutions is required that will come up with creative ways to resolve the financial crisis that underlies the energy crisis. Such a strategic plan could demonstrate what a five-year pathway looks like, and what exactly is expected of the government to make it work. DM
Professor Mark Swilling is co-director of the Centre for Sustainability Transitions at Stellenbosch University.