Intractable problems, both internal to Eskom and imposed from without, are keeping South Africa mired in darkness, and things are not looking up.
André de Ruyter, the CEO of Eskom, delivered a frank sketch of the dire state of the electricity utility in a fascinating interview with David Ansara of the Centre for Risk Analysis.
He comes across as composed, competent, and determined, but despairing at the intractability of the problems he is facing. He pulled no punches.
There are many reasons why it may be impossible to recover Eskom from the abyss that it is in. Some are massive internal problems, but many can be attributed to government policy decisions, both in the past and today.
De Ruyter described the awful state in which he found even the utility’s flagship power station, Lethabo, where there was ‘an extremely serious challenge with basic disciplines like housekeeping, safety observance, managing basic process parameters’.
Warned
He says that government was told as early as 1998 that power demand would exceed Eskom’s supply between 2005 and 2008, and that new power stations had to be built. Eskom duly ran out of power in 2007, as predicted. (COO Jan Oberholzer separately confirmed this take.)
This sparked the rush to build two of the largest and most sophisticated coal-fired power stations in the world, Medupi and Kusile, but despite massive delays and cost overruns (and much creative filling of ANC coffers), both power stations ‘have some very serious designed-in and built-in design defects that we now have to correct at great expense’.
Combined with a massive backlog in maintenance going back almost 20 years, Eskom’s fleet has been driven extra hard, which only exacerbated the maintenance problems.
He says when he got to Eskom in 2019, he found systemic corruption and fraud amounting to billions of rands, facilited by ‘I think deliberate neglect of our SAP system’.
The consequence is that Eskom has not caught up, and perhaps cannot ever catch up, with maintenance on its coal-fired plants, which average 43 years old.
In the short term Eskom needs between 4 000MW and 6 000MW of additional capacity, and in the longer term it needs to almost double its existing name-plate capacity of 54 000MW.
Renewable energy
The reason Eskom needs so much, says De Ruyter, is because with renewable energy, you only get about 30% of the nameplate capacity rating. A 100MW solar or wind plant will only add an effective 30MW to the actual supply of electricity.
In addition, he says Eskom will need about 4 500MW of storage capacity to cope with the intermittency of renewable energy, which in itself will constitutes mega-projects and cost between R60 billion and R80 billion.
Neither the state nor Eskom has the wherewithal to do what is needed.
To finance all this capacity, De Ruyter says, Eskom will leverage the desire of foreign governments to promote lower carbon emissions by replacing old, soon-to-be-retired coal plants with renewable energy. This will also require ‘maximum private sector investment’.
Asked whether South Africa shouldn’t rather exploit its rich coal reserves to develop the economy and address poverty, before worrying about climate change, De Ruyter makes a very convincing counter-argument.
He says that there simply is no investor appetite to finance coal projects, even among Chinese lenders.
‘Coal is no longer a fuel that is acceptable to the international financial community, so even if you had the opportunity to build a new coal-fired plant, you wouldn’t be able to finance it, and you wouldn’t get the environmental approvals and you would also not get insurance’, he says.
Another factor is that major economies, such as the European Union, are already implementing border taxes based on the carbon footprint of imports, which means South African exports, such as cars and aluminium, will compete with – and lose to – rivals who use green energy.
He acknowledges that this seems like injustice, given that the rich world built their economies on coal, but ‘having a grudge against reality doesn’t help you’.
Mega-projects
In addition to the unbankability of coal, major coal projects will take too long to come online, he says, and ‘specifically in South Africa are fraught with execution challenges…and corruption’.
The same is true for nuclear. De Ruyter is not opposed to nuclear in principle, and cites Koeberg as Eskom’s ‘most competitive plant’. But, he says, existing nuclear technology won’t get built, in South Africa or elsewhere, being both too expensive and too time-consuming. New-generation small modular reactors are very promising, will likely only hit the market in ten or more years.
One could make the same argument for a domestic natural gas industry. It should have been kick-started a decade ago, when major oil and gas firms were eager to explore the Karoo shale, but it wasn’t. Even if major gas finds are made now, it would take more than a decade for a reliable gas supply to contribute to the national grid.
In the short-to-medium term, then, this leaves renewables as the only source of energy which is both financeable, and can be built sufficiently quickly in large numbers by private companies.
Eskom needs additional capacity in years, not decades, and since it is mired in debt, it needs the private sector to build much of it. That eliminates all contenders other than renewables, and whatever is needed to back up renewables.
Mpumalanga
De Ruyter is aware that one of the most costly aspects of renewable energy is the fact that every little 100MW plant will require a high-tension connection to the grid. For plants located far from existing grid infrastructure, acquiring the rights-of-way and building connections over long distances can become enormously expensive.
This is why he specifically names Mpumalanga as a promising location for new renewable capacity: ‘We’ve got some of the best renewable energy resources anywhere in the world, and in particular in Mpumalanga, we’ve got an established transmission grid and we can provide access to this grid on an almost instantaneous basis. That’s part of the reason why we are making available land in Mpumalanga that we own to secure additional private investment to bring capacity onto the grid as soon as possible.’
Private co-generation
De Ruyter does not see any rationale for capping industrial co-generation plants at 100MW, and believes that the cap should be lifted entirely.
He also takes issue with the current registration process of such private capacity with the National Energy Regulator of SA (NERSA), which he says ‘is pretty much identical to the licensing process’, so it doesn’t actually liberalise the market at all.
Operation Vulindlela is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery by modernising and transforming network industries including electricity. De Ruyter hopes it can persuade NERSA to bring these new plants onto the grid speedily.
Procurement
De Ruyter agrees that preferential procurement policies also weigh the utility down.
‘I think we as a country need to decide what are our priorities, and then we need to decide what is the simplest way to address the most serious challenge that we face today as an economy, which is the supply of electricity, and if we can solve that as quickly and as efficiently as possible then we should do so’, he says.
‘Interposing non-value-adding intermediaries in the process of procurement inflates cost, it introduces additional risk in terms of potential corrupt practices, and it also slows down our supply chains. I therefore think that there’s a good case to be made to streamline procurement processes in order to ensure that we can head off this challenge in the most cost effective way possible.’
He points out that whatever the noble intent of these procurement rules, it adds cost to electricity, and the cost of electricity, in turn, affects the costs of every other economic activity in the country, making the entire economy less competitive and less able to generate growth and jobs.
Local content
The same is true for local content requirements. He says that there is a single local manufacturer of solar panels, which enjoys very strong protection under South Africa’s trade policy, and that essentially all government-procured solar panels have to be bought from this one supplier. This adds 15% to 20% to the price, and limits the available capacity to about 300MW per year.
‘Now if we need 6 000MW of capacity, then we had better understand that it’s going to take us 20 years to meet the requirement, because we want to give preference to one local supplier that employs a couple of hundred people,’ he says.
‘What is the greater good? The greater good surely is to have the lowest cost electricity available as soon as possible in the most reliable manner to business industries so that we can grow this economy and solve challenges of economic growth and poverty.’
He adds: ‘It’s extremely difficult to run a 24/7 industrial enterprise within the constraints of a system that was designed to provide, arguably, office supplies for government departments. There are fundamental differences in terms of best modern procurement practices, for example strategic relationships with original equipment manufacturers and the ability to source the lowest prices from low-cost countries in order to ensure that we can get low-cost electricity.’
Sabotage
On the high-profile cases of sabotage that have come to light recently, De Ruyter is equally forthright, saying that Eskom is not getting serious support from the South African Police Service (SAPS).
‘We know that there are people with clear criminal intent who are released the following day on the instructions of senior officers’, he says. ‘Now that’s a clear indication that there is something awry in our law enforcement system.’
He cites an example of three managers responsible for the theft of R100 million per month who were released ‘on a derisory R500 bail’.
Municipalities
Municipalities owe Eskom about R47 billion, and many of those municipalities are functionally bankrupt. De Ruyter argues that if people don’t want their municipalities to be cut off, they need to vote out the councillors who refuse to pay for utilities.
He also points out that many municipalities with distribution rights levy heavy markups – sometimes over 100% – on Eskom’s own electricity tariffs.
‘SALGA, the South African Local Government Association has recently launched a court case against Eskom, trying to compel Eskom to hand over all distribution to municipalities’, he says. ‘Clearly there is an economic motive at play here, because municipalities want to have access to another source of revenue, but in our view what’s going to happen is that if they are successful in this application then customers and municipalities are going to end up paying more. Again you have to ask, is this in the public interest?’
On the outstanding municipal debts, De Ruyter is of the view that ultimately, National Treasury will have to step in, either to bail out the delinquent municipalities, or to bail out Eskom because it hasn’t been paid by other parts of government.
He considers this problem ‘an intractable political issue’, however, which cannot be resolved by the courts, or by Eskom.
Cities going their own way
De Ruyter is fully in support of larger metros who are investing in independent power supplies to reduce their dependence on Eskom, and is eager to help them by providing grid connections and wheeling this electricity over the grid.
Despite the loss of revenue this would imply for Eskom, it is more important to De Ruyter to relieve the pressure on the hobbled utility.
Dark days ahead
De Ruyter’s forthrightness paints a grim picture of both the present state of Eskom, and its future prospects.
Eskom is reaping the fruits of many decades of poor planning and neglect, despite government having ample warning that electricity shortages would inevitably result from inaction.
Staying ahead with maintenance on old, unmaintained power plants that were driven too hard for too long is difficult, if not impossible. Eskom’s limping coal fleet will likely limp along until the plants reach their end of life, never guaranteeing South Africa a reliable, abundant, low-cost energy supply.
Cumbersome regulations hamstring the rapid private sector investment that is required to bring at least 200 new generation plants online in the short term, and build as many as 1 500 renewable energy plants over the long term.
Renewable energy is the only option in the short-to-medium term, so Eskom will simply have to live with the intermittency, demand cycle mismatches, expensive storage requirements, and the high cost of grid connections.
Onerous procurement processes, focused on black economic empowerment and protection of local suppliers, rather than on efficient energy production, slows down everything Eskom does and raises electricity prices unnecessarily, with knock-on effects throughout the economy.
Municipal distributors on one hand significantly raise the price of electricity to consumers, and on the other threaten the supply by failing to pay their debts to Eskom. This is an ‘intractable political issue’.
Corruption inside Eskom remains rife, and the authorities are not helping Eskom to get it under control.
Get off the grid
A great deal will have to change before South Africa’s electricity outlook begins to improve, and at present, Eskom seems powerless (if you’ll excuse the pun), and government, far from helping, is being the bloody-minded, ineffective government we’ve come to know so well.
The best hope is for metros to rapidly commission private generation capacity, and for industrial users to rapidly build a great deal of co-generation capacity.
For consumers, the message is clear: get off the grid if you can. If you can’t, learn to live with regular outages, because they will be with us for a long time to come.