Opinionista Dirk De Vos 16 March 2020

To solve our electricity supply crisis, we must break the Eskom myth

The Eskom of 2001 is a myth about a capable state-owned company which, like so much else, had managed to rinse itself clean of its apartheid past.

Most of us know the outline of why the country is again suffering from load shedding which, most of last week, saw us at Stage 4 — and there is no end in sight. Eskom’s older coal-fired plants, we are told, have not been properly maintained and are now suffering breakdowns. The newly built plants, Medupi and Kusile, are not yet complete and have a large number of design and build faults that will take many more years to fix — if that is even possible.

How this has come to be is woven in with issues of corruption and State Capture. Earlier in 2019 President Cyril Ramaphosa, during the ANC’s 108th birthday celebration, is reported to have said he wants to “restore” Eskom. But restore it to what? Perhaps he means restoring it to what it was in 2001 when Eskom won some Power Company of the Year award? At the time, Eskom was apparently supplying more than enough electricity at the cheapest rate in the world. 

So, what’s not to like? Well, the whole thing of Eskom ever being anything like the best electricity utility is a myth. Strangely, as myths in this country go, it is one fondly held equally by, variously, whites who regret the end of apartheid, “before the blacks took over”; the ANC with state-led industrialisation/economic development policies; and now a bunch of rentier BEE capitalists/chancers that have come together under organisations such as the SA Energy Forum (SAEF).

The Eskom of 2001 is a myth about a capable state-owned company which, like so much else, had managed to rinse itself clean of its apartheid past. A large part of Eskom’s existing infrastructure was built in the decade roughly from the second half of the 1970s and the first half of the 1980s.

The then ESCOM (functioning as a government department) had always been a key lynchpin in the apartheid economy which was based on supplying the cheapest possible electricity to the mines which would, in turn, using exploited and cheap black labour, extract and export the minerals (through the South African Railways and Harbours — now Transnet) generating foreign exchange and tax revenues to finance the whole thing and maintain a strong currency.

Other supposed capable institutions had to be developed in a world increasingly hostile to the apartheid regime. These included Sasol (to reduce oil dependency) and Armscor/Denel (to supply the weapons and machinery to enforce the whole system).

From the 1970s, ESCOM operated with a more-or-less open government chequebook and by the 1980s was either building or had on order 20GW (more than double Medupi and Kusile) of generating capacity. What is not widely known is that these builds were themselves disastrous — well over budget and over time with multiple teething problems. One result was surging electricity prices and, yes, load shedding. These issues became so serious that Prime Minister PW Botha was forced to institute a commission of inquiry, known as the De Villiers Commission (some things haven’t changed).

More seriously for the apartheid state, the whole edifice of the apartheid economy was collapsing through much lower commodity prices, the increasing costs of oppression and the disinvestment campaign. Apartheid was effectively over when American banks, led by Chase Manhattan, refused to extend new loans or roll over existing loans. South Africa defaulted and its currency tumbled. Within a year in 1985 amid runaway inflation, capital controls, interest rates well over 20% and a limping two-tier currency system, PW Botha had to quietly begin negotiations with the still incarcerated Nelson Mandela.

When the ANC came to power in 1994, its leadership was evidently surprised at the parlous position of state finances. The apartheid government had bled the state dry. There was no money and far too much debt — including foreign debt. Within all that debt, the 2001 Eskom accounted for more than a fair part of it.

It is a mystery how the ANC government which must have known how ESCOM had played a significant role in the downfall of a government, seems to be oblivious that history is playing itself out again.

Shorn of significant debt and with relatively new gear that had worked through its teething problems, Eskom, recently incorporated, was in excellent health. Its credit rating was even better than the government’s own. Not so healthy were the communities unlucky enough to be living next to the coal-fired generators and the coal mines feeding them with their low-grade coal on long-term contracts. But that had always been the case. 

The ANC government, when it was still led by progressive and forward-looking men and women, sought to restructure the electricity sector and adopted a white paper in 1998 which recommended the breaking up of the sector into generation, transmission and distribution as well as introducing competition and private-sector investment into generation. This never went anywhere. 

Eskom had previously entered into price pacts with the government which saw the price of electricity reduce in price year on year. It got involved in other things also. It self-financed the massive roll-out of electrification to black households who had previously been denied electricity during apartheid. At the same time, it got involved in developing cutting-edge nuclear technology (Pebble Bed Modular Reactor) and other things — like taking punts on the global aluminium market by supplying bulk electricity to wildly profitable aluminium smelters at essentially no cost. What it wasn’t doing was paying any tax.

If asked at the time why South Africa had such an abundance of cheap electricity, most would shrug their shoulders and say something about our cheap coal and the efficiency of Eskom. Neither of these explained the price we paid.

It is true that Eskom was supplied by cheap coal and this did have an influence on the electricity price, but in any electricity supply system, even one dominated by coal with no carbon pricing, the price of the primary energy can’t account for more than about 40% of the total cost of the electricity supplied to end-customers.

Put another way, if your coal (measured by its calorific content) is half the price paid by another system, the electricity you can supply cannot, on its own, explain electricity tariffs more than 20% of the other system.

The other costs are the fixed costs, salaries, maintenance costs, the margin added by distributors (which pay for their own fixed costs plus the surpluses municipalities have used to augment their budgets). More importantly, there are the capital costs of paying off fixed infrastructure or provisioning for replacing infrastructure as it has to be retired.

Since 1992, Eskom’s tariffs were set on the basis that it would never have to replace its capital base. Instead, it dissipated it until the first serious post-democratic supply shortage hit in 2006. 

Pricing electricity below the long-term cost of supplying it has several bad effects. First, in the broader economy, it creates incentives and makes the whole economy very energy-intensive. Before 2006, South Africa had one of the most energy-intensive economies in the world (measured by GDP/kWh), up there with countries such as Saudi Arabia.

Second, it takes the pressure off doing the sorts of things that make the economy more balanced and sustainable, like improving productivity through effective education, improving the investment environment by making government functions such as licencing processes easier and reducing our port and logistics costs. 

Third, it is impossible to justify an investment (whether made by the government, Eskom itself or the private sector) in new capacity when the electricity being supplied to the market is priced as if there is no capital cost component. What happened instead is that South Africa drifted into a crisis because we were taken in by the myth that ultra-cheap electricity was the natural order of things.

Since 2006, it has been one crisis after the other starting with the catastrophic decision to proceed with the building of Medupi and Kusile financed purely by debt.

The supposed efficiency of Eskom’s operations in the past is yet another dangerous myth. While the ludicrous (and criminal) coal procurement and maintenance practices of Eskom under the Molefe/Koko regime was extremely damaging to Eskom’s generation plant, it is just the most recent iteration of a long line of abuse of Eskom’s machinery. 

The rot set in at Eskom as early as the period under the mythical leadership of Dr John Maree. Here, a former Eskom executive describes some of those practices. What Dr Maree did was to incentivise practices that pushed the generation plant far too hard. As Eskom fails to provide sufficient electricity today, we have become familiar with the term Energy Availability Factor (EAF). It is now around 60% which is far too low. Under Dr Maree it was closer to 100% which is far too high. While we may have celebrated the apparent efficiency then, it came with long-term costs and the bills for these costs are falling due now.

The poor maintenance practices have continued under the swinging doors of Eskom’s leadership including the leadership of Brian “keep the lights on at all costs” Dames. All machinery needs mid-life refurbishment to extend the basic design lifespan. As we know, taking generators out of service to undertake the necessary refurbishments have not been done. The massive cost overruns at Medupi and Kusile have diverted money from both maintenance and refurbishing old plants and their delays have meant that there is no available generating capacity to take capacity out of commission.

Within Eskom, but not within the government, the state of the generation plant is known. In fact, in 2014 and 2015, Eskom commissioned studies which were co-ordinated by energy expert Mike Rossouw on the state of Eskom’s generation plant and what it would require to get it up to an acceptable standard again. Those reports should certainly now be in the public domain and circulating within government, and especially National Treasury, but they are not.

What the Rossouw reports may well show is that already in 2015, a significant portion of Eskom’s generation plant was unserviceable. This means whatever maintenance regime is now applied, EAF will not improve much.

It should be obvious that restoring Eskom to what it once was is not possible and even if it were possible, it would be a very bad idea to restore a system that was never sustainable in the first place.

Once we break the myths, we can have a far more sensible discussion on what to do next. Importantly, it would also make it easier for us to identify the various charlatans, including those mentioned earlier, whose narrow interests are served by having Eskom lurch on the way it has for decades.

South Africa has put off the necessary decisions about its electricity supply system for more than two decades and it has been immensely damaging. What we cannot afford is to throw any more good money after bad. We need to have a clearer idea of the future price path of electricity, but more importantly how electricity tariffs should be structured with the energy component (the kWhs supplied) and the system costs (the grids, energy storage, peak capacity, dispatched ramping capacity, frequency synchronising, frequency and voltage management and so on).

We have wasted so much time already. Unless we move on to making the right decisions immediately, we will be stuck with not just the legacy of very poor decisions, but also inappropriate investment decisions being made by both the public and private sector right now.

There is a rapidly closing window on preventing an outcome where permanent Stage 4 load shedding becomes the best-case future scenario for the country.

Know this: any further dithering on the part of our politicians caught up in their own ideological worldview and the myths to which far too many of them continue to hold, makes the breakdown of our whole electricity system a more certain outcome. Tick-tock. DM

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