During last week’s serious bout of load-shedding, the acting Secretary-General of the ANC, Jessie Duarte, was out campaigning and needed to deflect blame for the Eskom disaster. With the ANC having mismanaged Eskom for years, the deflection appeared lame, but she did ask a number of pertinent questions.
‘We met with all ANC members responsible for energy, and our critical question was about how to deal with the Eskom issue,’ she was quoted as saying by News24. ‘Where we are right now with the issue is that we are demanding an answer; we want to know what is going on with Eskom. Why is this thing not able to be resolved?’
The ANC has played a large role in creating the Eskom mess, but there is no doubt about the vital importance of her questions. The power producer is a mammoth entity and vital to the economy, and an implosion would trigger a severe economic and financial crisis. More than 90 percent of the country’s power would be down, causing severe economic damage. Eskom would be unable to pay its creditors, sparking a wider financial crisis. Eskom’s total liabilities of R565 billion are the equivalent of more than ten percent of GDP.
The Eskom crisis is a constraint on growth and investment. Heavy industry needs reliable power to keep going and cannot depend on renewables. Load-shedding causes a multitude of economic losses and disruptions. And Eskom’s inefficiency means it endlessly requests higher prices from the regulator, adding to inflationary pressures. Then there is the burden on the government budget due to endless bailouts.
Well, in answer to Jessie Duarte, here is what is going on at Eskom and some of the reasons.
Worst performance
Eskom’s crisis means that today electricity generation and use levels are below those prior to the onset of South Africa’s electricity-supply crisis in 2008. Even before last week’s almost continuous load-shedding, this year was heading to be Eskom’s worst performance on record. And things could get a lot worse.
The crisis is the result of years of inadequate maintenance and insufficient investment in new power generation. Its two newly built flagship power stations have come in at way over budget and years late. The government hopes that ultimately the Medupi and Kusile stations and private power contributions will ease load-shedding.
Even though the volume of electricity produced rose in the second quarter of this year due to improved maintenance and the commissioning of the sixth and final unit at Medupi, we still have had heavy load-shedding this year. The main reasons are old plant and insufficient maintenance. This year Eskom needed to spend about R11 billion on maintenance but initially only allocated R3 billion, and a few months later an additional R3 billion. And because of the late allocation, it has not planned to do the amount now fully budgeted this year. Even with a private sector contribution from wind and solar, there is likely to be a continuing shortfall in electricity due to the de-commissioning of old power stations.
Increasingly inefficient
Eskom’s 30 coal-fired power stations are well past their halfway lives and are becoming increasingly inefficient. That means the utility’s Energy Availability Factor (EAF), which measures its ability to produce power compared to its maximum capacity, has been dropping. Eskom recently said this was at 59 percent, a level well below the 72 percent envisaged in the government’s plan for the energy sector, the Integrated Resource Plan.
Higher load-shedding means less revenue and higher losses. Eskom’s revenue has been declining at a rate of about one percent for the past ten years. All this, and irregular spending, means losses: R18 billion last financial year and R20 billion in the year before.
Further pressure on Eskom revenue is from large unpaid amounts owed by municipalities. At the end of last financial year municipal debt to Eskom in arrears stood at R35 billion, out of a total of R39 billion at the end of August. Many municipalities have simply blown their revenue elsewhere and often face large numbers of residents that are highly averse to paying user charges. Ultimately, those who pay end up subsidising those who have illegal connections, and the non-payers.
When President Cyril Ramaphosa visited Soweto to campaign in the run-up to the local government elections, he was confronted by a crowd objecting to load-shedding and the high cost of power. One resident interviewed on TV said electricity should be a basic right and that bills should be capped at R200 a month no matter how much was used. Instilling a culture of payment could be a long battle.
The ANC Secretary General also asked how to deal with the Eskom issue.
Private sector
The government will at some stage be forced to resolve the problem of an Eskom that is not fit for purpose and is collapsing. Eskom’s ability to service its debt is eroding as its efficiency and hence revenue drop. Due to its problems Eskom is severely constrained in borrowing sufficient amounts to embark on any massive new build programme. This will all have to be resolved by allowing the private sector to play a far bigger role, or by an operational and financial implosion at Eskom that forces the state into viable solutions.
One solution is to place its 30 coal-powered stations into a state company that will ultimately be liquidated once these are all decommissioned in the next few decades. It is now almost impossible to borrow to build coal power plants and Eskom would probably find it impossible to sell off this fleet. Another company would take on the debt owed by Eskom and what is owed to Eskom by municipalities. Much of the Eskom debt carries a government guarantee and the fact that this cannot be fully paid from power generation revenue has to be faced. Getting to grips with the problem will probably gain the country credit on the financial markets.
Best option
As part of this process, the private sector should be allowed to build, own, and operate power stations with no limit on capacity. Gas- or nuclear-fueled power stations are the best option to ensure the country’s base load supply, but renewable could play a large role. Ultimately, Eskom will be left only with a role in transmission, but this infrastructure might be privatised to help pay off its debt. Regulatory changes would be required, particularly those that could take out municipalities as middlemen and could better ensure payment by users.
Finally, the ANC Secretary-General asked why load-shedding is not being resolved.
That is because government has clung to the idea that it can effectively run a massive state-owned utility. It was only earlier this year that government lifted the limit on what independent producers were allowed to generate to 100MW. The main obstacle to any resolution is the ideological rigidity against allowing far greater private involvement in power generation.
[Image: Gordon Johnson from Pixabay]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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