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24 March 2018 02:41 (South Africa)
Opinionista Dirk de Vos

Eskom: A dinosaur waiting for a giant meteor

  • Dirk de Vos
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions (qedsolutions.co.za) out of Cape Town.

If it ain’t broke, don’t fix it, goes the old saying. But sometimes something is so broken that you have to start again. There are plenty of alternatives out there to Eskom’s current model. Why aren’t we making use of them?

The reasons you’re given for the current rounds of load shedding depend on who you’re asking. Eskom put the blame on coal suppliers, but that’s by no means the only factor. Another factor is the inability to build new generating capacity. The new coal-fired Medupi and Kusile power stations. Both these projects are years behind schedule and the prognosis for completion in the next few years looks poor. Not only have the construction costs exceeded the initial budgets by more than a third, the delays mean that we pay interest on the funds invested without the benefit. There are other costs as well: Recently Exxaro Resources got paid R1,6 billion by Eskom for coal that it did not deliver to Eskom owing to the delays at Medupi.

Perhaps the focus on the multiple problems besetting Eskom distracts us from confronting the more serious problems to come. There are problems with the very premise upon which Eskom - and indeed large electricity utilities around the globe - will undergo fundamental change, driven by evolving technologies, both in the area of generation but, more profoundly, in the area of electricity storage.

Eskom, in its present form, is a dinosaur waiting for a giant meteor. Eskom is huge. By revenues, Eskom is in the top five companies in South Africa. Eskom also represents our whole electricity sector, from generation, transmission, distribution and half of all retailing (the other half being the municipalities). This level of integration is virtually unknown in other democratic countries.

Eskom is also behind the technology curve in almost every respect: Over 90% of our electricity is generated by coal-fired power stations. Eskom is one of the world's worst carbon dioxide emitters. Eskom's consumption of scarce water is another problem. Its power stations consume about 1,433 litres of water per MWh fed into the grid. Our grid is largely aging and under-capitalised.

Alternative means of generation, notably renewable energy, are gaining traction. South Africa’s renewable energy programme is well underway and gas-fired generation is replacing coal in many countries. By shifting to gas, the USA has managed to reduce its own carbon emissions while increasing its generation of electricity. Gas power emits half the amount of carbon dioxide for every KWh generated.

Renewable sources are, for the moment, still marginal. Even if our renewable programme runs for as long as intended, only 14% of total generating capacity supplied through Eskom’s grid will be via renewable sources. However, even in the slow-moving capital intensive energy sector, the technology trajectory can veer off in surprising directions. Vodacom’s earlier business plans forecast a subscriber base of less than a million. No-one could have predicted how the World Wide Web would change everything or how Facebook would explode out of a Harvard University dormitory.

Of the most promising technologies is photovoltaic cells (Solar PV). This technology has its own equivalent of Moore’s Law. Moore’s law states that the size of transistors (and also their cost) halves every 18 months or so. Swanson’s law states that the cost of the photovoltaic cells needed to generate solar power falls by 20% with each doubling of global manufacturing capacity. On one end of the spectrum, PV cells being tested in R&D laboratories are four times more efficient than those now commercially available (still subject to Swanson’s law). On the other end of the scale, advances in nano-technology look set to create ultra-cheap materials that can capture the sun’s photons and transmit the resultant loosened electrons, which can be applied much like paint to a building or a road. The problem with renewables is that, in the case of solar, they cannot generate electricity when there is no sun. This is why there is a continued need for fossil fuel-powered energy to provide baseload power.

But there are changes afoot. In a note to its clients, investment bank Morgan Stanley suggested buying shares in Tesla Motors, the company established by Elon Musk, which produces electric vehicles. This despite the fact that Tesla has never made a profit, and won’t anytime soon. The suggestion is not because of the bank’s interest in the cars made by Tesla, but because of the advances in its battery technology. Tesla uses the same lithium-ion battery technology that is used in laptops and cellphones. This opens a huge vista – Morgan Stanley depicted the opportunity as in the graphic below:


Tesla announced recently that they planned to build a billion-dollar “gigafactory” with Panasonic which would manufacture, in one place, the same amount of lithium-ion batteries by storage capacity currently being produced globally. You can be sure that several Chinese manufacturing mega-factories are planning to do the same thing - bringing down costs dramatically.

This changes everything, because it makes distributed generation possible. Instead of huge, dirty power stations located far from their customers, distributed generation has electricity in smaller quantities being generated near the point of use. If the source of generation is clean, generation can happen in or near urban areas, which saves on transmission losses. It also means small increments of capacity can be added quickly, without the need for long-term plans when, say, a 5,000MW coal-powered station is commissioned. Of course, the risk of widespread load-shedding and the resulting economic damage is greatly reduced.

Already, Tesla’s move has provoked discussion around the globe. It could be a total game-changer. While distributed generation from all type of sources is just beginning to happen in most places, in Germany it already represents 20% of installed capacity. Some in the US think that it could race from almost nothing to a third in just four years from now. Whatever the position, it could seriously disrupt the revenue model of electricity utilities and municipalities everywhere.

The history of Telkom in South Africa should be a lesson for the government. Instead of embracing the changes brought about by the ICT revolution, the government sought to shelter Telkom from competition by preserving its monopoly to the detriment of economic growth, access and innovation.

Whichever way you cut it, the answer to Eskom’s short-, medium- and long-term problems are the same: Break it up and prepare the sector for the future. The first step is to separate the grid from generation: Our grid will need substantial investment to accommodate many small producers selling excess power back to the grid and allow for time-based dynamic charging. A smart grid will also allow us accurately to predict and forecast demand. The Independent Systems Market Operator Bill that has been languishing in Parliament for many years is but a small step in this direction. It needs to become law to prepare our grid for a different future. This type of investment will need to happen first in that part of the grid falling within the jurisdiction of our larger metros. They, too, should be allowed to commission and buy power from independent producers. They will also need to wean themselves off the cash cow that is their margin over bulk Eskom supplied electricity.

The grid is quite separate from generation and the commissioning of new power plants. Eskom should put each of its power stations in separate operating entities. The way one manages and operates a power station that is 40 years old into retirement is quite different from how one manages a newer one. Eskom has proven that it does not have the project management capabilities to build large power stations – so it shouldn’t do it. Commission any new power station in the same way that we commission renewables. Put the construction risk onto the private sector, not the taxpayer.

These suggested changes will have another beneficial effect: The Department of Public Enterprises (and the rest of us) will get a better view of how the how system is working and what to fix. Fixing Eskom as a whole is a near impossible task. We might even find it easier to find willing CEOs to replace the departing Brain Dames. DM

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  • Dirk de Vos
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions (qedsolutions.co.za) out of Cape Town.

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