Eskom: Ok, now it’s a crisis

2014-11-30 16:00

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It is better to cut power than to drive Eskom into bankruptcy or let the snowballing power plant failures destroy parts of the power system.

This is the bottom line from the state-owned power company, which this week released interim results that demonstrate how Eskom is stuck between the prospects of financial ruin and operational collapse.

Newly appointed Eskom CEO Tshediso Matona said the power utility is ‘unsustainably leveraged’.

Dewald van Rensburg reports

Rock: money

Government guarantees are the only things keeping Eskom operating as a “going concern” – a polite term for not being bankrupt and unable to pay for coal or diesel, build its new power plants or maintain the old ones on the increasingly rare occasions it is able to.

Eskom’s money troubles are getting worse as costs surge and the regulated price of electricity remains lower than Eskom requires.

In the current financial year, Eskom’s profit is projected to fall to R500?million from R7?billion in the previous year. In Eskom terms, that is barely breaking even.

The drain comes from the cost of coal and diesel as well as power from independent power producers (IPPs) – but also the mountain of debt Eskom is racking up.

The power utility is unsustainably leveraged, according to Eskom CEO Tshediso Matona.

It is capitalising most of its interest payments – adding them to debt instead of using cash on them in the short term. Even so, Eskom used more than R14?billion to pay back loans and interest in the six months to the end of September. Last year, that figure was R9.1?billion.

Eskom’s credit ratings are hovering just above so-called junk status thanks to government support. Any downgrade would have instant consequences – triggering the covenants attached to existing loans with development finance institutions.

The main problem is liquidity. At the end of September, Eskom had R13?billion in cash, but its target “buffer” is R20?billion.

Getting people to pay for electricity is getting more difficult as well. The debt owed by municipalities in arrears rose from R2.6?billion to R4?billion in only six months, while the infamous Soweto debt was also R4?billion. According to Matona, the municipal debt issue is “far more complex than what Eskom can manage”.

Eskom wanted to disconnect three municipalities but was stopped by government. The Soweto situation is also out of Eskom’s hands, despite the utility declaring “some successes” there, he said.

Eskom does not have “ownership of the issue”, he said, indicating it is really in government’s hands to break the long-standing tradition of claiming free electricity in Soweto, which became an organised campaign long ago under the banner of the Soweto Electricity Crisis Committee.

Public Enterprises Minister Lynne Brown said the interministerial committee crafting a rescue plan for Eskom has an “early draft” ready, which will be shared when it is “fully baked”.

As far as Eskom is concerned, the cornerstone of that plan still needs to be far higher power tariffs.

Hard place: power

The recent spate of serious incidents at Eskom’s power stations are only the most dramatic results of a general degeneration of the power station fleet due to overuse and a lack of maintenance.

The collapse of the Majuba station’s coal silo earlier this month followed massive damage at the Duvha station in March from an “overpressurisation incident”, which took out 575?megawatts of capacity. Majuba is now running at only 70% of capacity and coal gets delivered by truck.

After Eskom’s results presentation this week, it came to light that the Lethaba station has lost capacity due to a breakdown of the equipment that evacuates the ash of burnt coal from the station to an ash dump.

That has cost an unspecified amount of generating capacity, probably well over 700MW.

These losses dwarf the power that will initially be provided by the long-delayed Medupi station.

Far more power is lost due to the less dramatic but increasingly pervasive failure of boiler tubes – the pipes that transfer heat between the burning coal and the water that drives the turbines.

In the half-year, there were 108 boiler tube failures compared with 97 in the same period last year, according to Eskom.

Further “partial load losses”, due to anything from wet coal to unfavourable winds, are spread across the fleet and cause far more lost capacity than any of the big incidents.

What it all boils down to is a rising level of unplanned outages. In the six months, Eskom’s unplanned capacity loss factor was 13.3% of installed capacity – the maximum target being 10%.

Based on the twice-weekly system updates Eskom publishes, this loss factor has increased significantly this month.

The average unplanned outage level this year is 5?500MW, but it has been far higher than 7?000MW since the middle of October.

But Matona lashed out at the suggestion that the three major incidents in the past year makes it reasonable to assume there will be more.

“It was random; it could not be predicted,” he said in response to suggestions that Eskom’s stations should be inspected by a third party.

“It is not correct to suggest there is a fourth incident coming because we had three already.

“That suggests a link. We have aged plants. The antidote is maintenance.

“There are no grounds for a sense of crisis,” he said.

Power delayed

What is happening at Medupi?

When referring to the long-delayed Medupi power station, Matona says he is confident Eskom finally “has the project under control”.

The deadline for synchronising the first of six units to the power grid is the end of this year, with full production six months later.

If the target has to be missed by a few weeks to ensure things are done properly, that is what Eskom will do, according to Matona.

“It makes no sense to build it for seven years and then rush on the last week.”

Eager to instill some confidence, Eskom even launched a countdown clock on its website in September, counting the minutes to the synchronisation target date of December 24.

Kusile, the second new coal station, had a similar target for the end of 2015, but that will probably be missed after resources were pulled from there and put on Medupi, Matona suggested at this week’s presentation.

Escalating price tag

The cost of generating power

In the half-year, Eskom spent R38.2?billion on primary energy – a 22% jump that had little to do with actual coal.

About R2.5?billion of that increase is a penalty related to coal for Medupi, which Eskom was contractually obliged to be buying from Exxaro.

Another R2?billion stemmed from the added cost of the diesel generators, while another R2?billion of the increase was due to Eskom starting to buy power from IPPs in earnest. The IPP bill is going to escalate to R9.7?billion this year, from R3.3?billion before, says Eskom.

The upshot is that the average cost of delivering one kilowatt-hour of power will shoot up to 67c this financial year, compared with 59.7c a year earlier.

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