The core problem with forecasting, Taleb says, is that we want to understand the present as the logical outcome of events in the past and then use this confirmation bias to extrapolate on some straight line basis into the future to make predictions about it. What we can’t foresee, Taleb’s thinking goes, are the unusual or extreme events, the Black Swans. But you can be sure of one thing: these unusual or extreme events are sure to occur. The best one can do is to make an assessment about which things are fragile, what is robust and interestingly, what might be Antifragile (things that gain from disruption, and the title of Taleb’s most recent book). So, that being said, here’s a prediction for the future. Eskom, our gigantic monopoly electricity utility, will not continue to exist in anything like its present form. It matters little what the dominant ideology is or what any politician, no matter how powerful, wants. The only question is whether the final break will be orderly or chaotic.
Eskom is doomed because it is about the most fragile thing around. It is an unsustainable business organisationally, technically/operationally, financially and environmentally. In short, Eskom needs to be euthanised before it dies a nasty, drawn-out death, taking the rest of us down with it.
The problems associated with running a massive monopoly are well understood. Monopolies struggle because they get no guidance or signals from the market, which means that they supply the wrong amounts at pricing that it also generally wrong. This perfectly describes Eskom over the last 20 years or so. There are, it must be said, arguments that run counter to this. Some take the view that Eskom is a natural monopoly, like roads or water infrastructure, but these are weaker arguments, because most other countries (including those countries with social-market economic policies) do not have a national vertically integrated monopoly the way we do. One lesson that is incontestable though is that if you are to have a monopoly in a critical part of the economy, your planning and execution has to be excellent.
Take France, for example, with its particular brand of dirigisme. There, the brightest and best are funnelled through the grandes écoles, a handful of elite universities to become a technocratic elite who then go on to staff practically every important position in the French bureaucracy and state-owned companies. It’s arguable whether this approach can match a more market-orientated approach, but Eskom has not, for the longest time, been run on anything like what the French would find remotely acceptable. The recent board ructions at Eskom and the suspension of its senior management are just the most recent examples of what has been a spinning gate at the top of Eskom. In the current board, there is, unbelievably, only one board member (non-exec) qualified as an electrical engineer. Perhaps there are still some opportunities for cadre deployment elsewhere in the public sector but not, ever, in the critical electricity supply system.
What emerges from the recent press conference hosted by Public Enterprises Minister, Lynne Brown, in response to last week’s load shedding, is that she doesn’t really understand what is going on. She now wants to appoint an independent team to do a three-month “deep dive” into Eskom’s operational and financial problems. So, when Minister Brown says there will not be a total black out, we want to believe her, because a national collapse of the grid is too awful to contemplate, but we should also be clear that she doesn’t really know whether this is the case. She is taking it on faith and so are we.
We do know that the most recent load shedding incidents saw as much as 5,000MW out for planned maintenance and a further 9,500MW was unavailable due to unplanned outages. The very poor maintenance protocols over decades has caught up with Eskom just as a good portion of its plant is reaching the end of its operational life. Sure, recent political pressure to keep the lights on at all costs played a part, but Eskom’s own internal incentives from the time of Dr Maree were also at fault. In essence, salary bonuses incentivised reducing costs to a minimum and to run plant above the recommended ratings that compensated for short-term outages to achieve high energy availability factors.
The problem with poor plant availability is that creates a snowball effect. Eskom seldom has the available capacity to pump water up its pumped storage facilities so these facilities are unavailable and weekends are used to pump some of the water up the hill. One of the less known new plants that are subject to perpetual delays and cost over-runs is the Ingula pump station storage system in the Drakensburg which will eventually have a generating capacity of 1,332MW. Another abandoned project, the Tabatse pump storage system, would have added another 1,5200MW. Even if Ingula is completed, Eskom will not have the base load generating capacity to use it. Improved maintenance might be able to halt the decline but, overall, plant availability is on a downward slope. There are additional reasons provided, such as wet coal (again), lack of diesel supplies for the gas turbines, designed as peakers but now running as baseload generators. The obvious response to all of this is to provide generator level reporting and management accountability against at generator level. It is the best immediate remedy there is.
The new coal-fired power stations, Medupi and Kusile, are catastrophic. Just last week, Eskom was forced to offer a re-instatement of workers with full pay, who – get this – had been dismissed for violence and destruction of property. The workers have Eskom and the rest of us over a barrel and, clearly, they know it. It should have been obvious that building some of the biggest coal-fired power stations in the world on a bespoke basis was never a good idea. Nersa, the electricity regulator, estimated in 2012 that Medupi, on a stand-alone basis, will supply electricity to the grid at 97c/Kwh. It is almost certainly going to be higher than that now. Kusile is likely to be even worse. This is important. This price is nearly 20% higher than the Department of Energy will pay future coal IPPs (who will be limited to just 600MW each), at least 25% higher than what wind generators supply to the grid, well above the best prices for solar PV and higher than Eskom’s current (and future) average tariff.
This points to Eskom’s main crisis: its financial viability. Intuitively, any entity that encourages you to use less of the only product it sells is heading for the rocks. Eskom says it is financially constrained. The government promised to inject around R20 billion and convert some existing debt into equity but that was before S&P downgraded Eskom to junk status. It is hard to know what the funding shortfall might be. Eskom’s own calculations in the most recent Multi-Year Price Determination process puts it at R225 billion but other estimates of Eskom’s shortfalls are far higher. There is only two ways to bridge the gap – have government pick up the tab and recover it from levying even higher taxes or through increased tariffs. Given Eskom’s sub-investment credit status, it would make sense to make the state’s existing implicit guarantee, explicit. This is somewhat like the debt consolidation exercises that debt counsellors arrange. South Africa could persuade the money markets that, even with more public debt (Eskom’s), its existing credit rating should remain in place because we are turning the corner and beginning to solve our electricity crisis.
Eskom’s environmental problems are just huge. Already it is the most carbon-dioxide intensive utility in the world, and it is in a contested process of applying for exemptions from compliance with the requirements of South Africa’s legislated air pollution standards. None of these deal with the environmental costs of coal mining and Eskom’s vast water consumption. Deferring these issues won’t make them go away – they will only get bigger as the rest of the world progressively addresses environmental sustainability.
It is time that South Africans stopped demanding from our politicians to sort out Eskom’s problems. Eskom is in its death spiral and probably has been for some time already. Any further bailouts will be followed by further bailouts, and will simply postpone the inevitable. Better to not squander the money, energy, political capital or whatever is needed to build a more robust electricity supply system. Business leaders and industrialists, long the main beneficiary of cheap electricity, should know that the Eskom story has run its course, and become involved in something different. Pretending otherwise is delusional.
So much, including the structure of our economy, the funding of local government and the provision of free electricity, is based on how Eskom once operated. What might a different future look like? Once propping up Eskom is not the main objective, other options present themselves. But there are no easy options – only different levels of pain that we will have to absorb. There are glimmers of what is possible in the renewables sector.
There is a joke lampooning homeopathy which goes: “What do you call alternative medicine which is proven to work? The answer is simply “medicine”. Alternative energy has grown up and needs to stand on its own feet. This is starting to happen. In 2013, the world added 143 gigawatts of renewable electricity capacity compared with 141 gigawatts in new plants that burn fossil fuels. Even acknowledging the difference between nameplate capacity (kW) and output (kwh), this shift is significant. Renewables are already competitive with traditional sources and are becoming ever cheaper.
The recent Round 4 REIPPPP announcements confirm this position with yet lower tariffs for all technologies – and the Department of Energy has announced that much more procurement of all types of energy is in the pipeline. One disappointing outcome from the recent Round 4 bidding window is that the outcome was still based on the tariff offered to whatever substation, and the usual economic development objectives. This favours projects in the very sunny Northern Cape, far away from where electricity is actually consumed, with the grid absorbing transmission losses. More problematic is that due to grid constraints in the Northern Cape, new projects can only begin to be built after 2018, or whenever that part of the grid is sufficiently strengthened, owing to the cost of projects located nearer our cities which can be built immediately. Banking on continuously falling solar panel prices three years hence with an option to withdraw any time before then may be a winning bidding strategy, but it’s not as good for the rest of us as building much-needed generating capacity now.
If renewables are to be taken more seriously, they need to compete on an equal footing with other energy options. So, instead of discrete bidding rounds based on different technologies, future IPPs could instead bid into grid-focused process which combines scoring based on location, time of day tariffs, peak availability, carbon emissions, period to completion/grid connection, as well as the existing rules around economic development, localisation, employment and so on. A wind farm might then bid in a project jointly with part of a gas-fired project or some other combination. To do all this, an independent grid operator is necessary.
Municipalities, for their part, need to throw off their lethargy and make their contribution. Legislation that makes this difficult must be revised. They will need to procure electricity from IPPs, promote embedded generation, develop demand response mechanisms and commence with time of use tariffs via simple meters. Most importantly, they need to stop using electricity to fund their other operations before they lose all their best customers to rooftop solar/embedded generation.
One gets the sense that the government knows that Eskom, in its present form, is finished, but like the prospect of an ice cold shower in winter (load shedding), its resolve to take matters in hand falters. We have a rapidly closing window of opportunity to have at least some control over our destiny. We should jump in now and take it. DM
"If you try to predict the future know that you will be wrong. The trick is to be as least wrong as possible; and be ready to change when you see how wrong you are!" ~ Sir Michael Howard