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WRAP | De Ruyter: Restructure will make us attractive for investment

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22 June 10:11

Eskom CEO AndrĂ© De Ruyter has said that the power utility's R450 billion debt burden is one of the biggest challenges it faces.  

Debt servicing costs amount to between R28 billion and R29 billion, and have been eating away at Eskom's profit line. The power utility recorded a R20 billion loss for the 2019 financial year, and similar projections are made for the 2020 financial year.  

But tackling debt will require a "multi-pronged" approach. "I do not think there is one silver bullet that is going to fix the Eskom debt challenge," said De Ruyter.  Ensuring operational stability by avoiding load shedding so that Eskom can make electricity sales, resolving disputes with the National Energy Regulator of South Africa so the utility can charge cost-reflective tariffs, and recovering debt owed by municipalities, are all needed, he said.    

De Ruyter said that Treasury's allocations to the power utility have also helped buoy its balance sheet. The power utility is also working on a cost reduction strategy. Notably, he said trade unions have been supportive in this regard and have even provided suggestions for how the power utility can cut costs.    

"I regard the unions as an ally, and we have built a good relationship with them so far."    

Although the Covid-19 pandemic has impacted Eskom's revenue generation negatively, De Ruyter said that Eskom could implemented some short term maintenance. Eskom has also been able to reduce the risk of load shedding from 31 to three days. But the risk of power cuts will remain for the foreseeable future, as Eskom will have to take off some of its units for long-term maintenance.    

Long-term or reliability maintenance is expected to last from July this year and until August 2021.    

On Eskom's restructuring process into three entities - generation, transmission and distribution - De Ruyter said this is part of a global trend and will be useful in positioning the country's energy sector to be attractive for future investment in the generation space.    

The three entities have been set up and their boards have been appointed.    

Speaking more generally on the energy sector, De Ruyter said that over time the sector will transition into the renewable space. In this event, it is important not to leave behind the communities who have built their livelihoods in the coal mining and coal-fired power stations over generations.

"The notion of a just energy transition is important," said De Ruyter. "We need to structure ourselves in such a way that we can attract that private investment to come in and compete and give us the most effective way of generating electricity in South Africa," said De Ruyter.

22 June 09:53

The grid should allow for a number of generation providers, that bid for contracts, says De Ruyter.

In future there will be less coal-fired generation capacity going forward. "We need to structure ourselves in such a way that we can attract that private investment to come in and compete and give us the most effective way of generating electricity in South Africa," said De Ruyter. This is why the restructuring process is warranted. 

22 June 09:50

On Eskom's restructuring process, De Ruyter explains that based on trends across the world that the days of vertically-integrated, monolithic utilities are over. 

Utilities are increasingly separated into entities - generation, transmission and distribution.

This is to ensure a level playing field in generation and attract private investment.

Transmission is a natural monopoly, it is an asset and selling it will not be good for the country.

In distribution there is already competition - with different municipalities selling power.

The three entities have been set up and their boards have been appointed. This is the precursor before their legal separation.

22 June 09:45

De Ruyter says it is important to find new generating capacity to replace that of power stations reaching the end of their life. 

It will require a multitude of solutions.

Doing this includes restructuring Eskom - this could allow more competition in the generation space. 

There are also various inquiries underway- which are policy matters the Department of Energy must respond

De Ruyter says that there is an opportunity to repurpose old power stations for gas or Solar PV and wind.

"Over time I think the energy industry in SA will transition far more into the renewable space, and we will see far more private investment coming into the generation space."

But de Ruyter says it is important not to leave in the lurch communities who have built their livelihoods in the coal mining and coal-fired power stations. "The notion of a just energy transition is important."


22 June 09:35

In terms of recovering funds from questionable contracts, De Ruyter said that they will not stop trying to recover money that has left Eskom unlawfully.

Recoveries have been made from McKinsey and Deloitte. There are some employees which Eskom has also lodged claims against.

De Ruyter says there are strong teams of lawyers and accountants working to get Eskom's money back.

22 June 09:33

When it comes to wage agreements, De Ruyter said Eskom will not go back on this deal and will respect it.

In his engagement with unions, De Ruyter said that they understand that the "milk cow is now at the point of being dry" and the cost base must be addressed. De Ruyter said he has received support from union members in this regard, in terms of suggestions.

"I regard the unions as an ally, and we have built a good relationship with them so far."

22 June 09:30

De Ruyter says Eskom is also looking to reduce procurement costs - primary energy costs.

Power stations are normally built near coal mines, but as the life of the station progresses coal is exported elsewhere over long distances which carries costs. Coal also becomes more expensive to extract. 

The world of international coal exports has also changed - the EU market to which SA used to export to has somewhat disappeared, said De Ruyter. The competitive forces have also changed. 


22 June 09:27

De Ruyter says the first and most important priority is to stabilise the balance sheet, this means paying down high interest debt.

Debt servicing costs amount to between R28 billion to R29 billion, which negatively impacts Eskom's profit line.

22 June 09:26

De Ruyter says that there are now 44 000 people employed at Eskom and the number is reducing.

About 36 000 to 38 000 members of staff would be the right number - this was the case in 2014, before governance at the entity became "a bit weaker", says De Ruyter.

 

22 June 09:22

De Ruyter says Eskom debt is among the biggest challenges it faces.

"Addressing the R450 billion worth of debt is going to require a multi-pronged approach. I do not think there is one silver bullet that is going to fix the Eskom debt challenge."

This includes ensuring operational stability (when there is load shedding, Eskom cannot sell power to generate revenue), Eskom must resolve its disputes with the National Energy regulator of SA to ensure cost-reflective tariffs, and Eskom must be able to collect the debt owed to it by municipalities. "If we can collect those debts, it will make a difference."

Treasury's allocations have also helped Eskom's balance sheet.

Eskom is also embarking on a cost-cutting strategy - so that it can live within its means. "We are managing our costs very tightly."

22 June 09:17

De Ruyter says load shedding is something Eskom wants to avoid.

But some units need to be taken offline for maintenance, if this does not happen it will compromise the system and increase the risk of load shedding, and "severe" load shedding. 

22 June 09:16

De Ruyter says to catch up on the maintenance backlog, it will take from 1 July to roughly the end of August 2021.

During this period, when carrying out the "reliability maintenance", the risk of load shedding will still remain. 

22 June 09:15

De Ruyter says short-term maintenance does not require plants being out of service for extended periods.

Long-term, intensive maintenance is planned to be implemented from 1 July.

22 June 09:12

On Covid-19, De Ruyter said the pandemic led to a significant drop in demand. 

Eskom then decided to implement short term, corrective maintenance - meant to fix known faults of the system.


22 June 09:11

Derby asks to what extent illegal connections are to Eskom.

De Ruyter explains that there are a number of factors at play- such as economic hardships brought on by Covid-19 which has led to an increase in illegal connections.

The second factor is that electricity networks have not been planned for increasingly dense populations - such as people renting out rooms in their backyards.

The fact that we have had the coldest winter in 10 years is another factor. 

22 June 09:08

De Ruyter addresses the power outages in Gauteng:

Load shedding is implemented across the country when there is greater demand for power, than that which the generating assets can provide.

Load reduction is introduced at a local level to safeguard distribution assets - such as green transformer boxes from blowing up as a result of becoming overloaded by illegal connections.


22 June 09:05

Speaking to Fin24 editor Ron Derby, De Ruyter says the first six-months have been a "huge education" for him.

He was "pleasantly" surprised by the calibre of people working at Eskom, they had been notably demoralised by events at the power utility over the past 10 years.

De Ruyter said he learnt that a lot of "catch up" work had to be done to address the backlog in maintenance.

"The foundations are there, but there is work to do to shore them up and to provide that base on which the SA economy can grow."

22 June 08:59

Over the weekend, Eskom reintroduced load shedding in Gauteng, due to network disruptions caused by illegal connections. 

Eskom has said illegal connections and overloading in the high-density areas of Gauteng caused the outages.

Load shedding returns in Gauteng

22 June 07:27

AndrĂ© de Ruyter officially took the helm at Eskom in January, and over his first six months he has had to overcome a load shedding challenge at the start of the year,  tackling debt owed by municipalities, as well as lead the utility through an ongoing restructuring process.

Eskom so far has been able to reduce its probability of load shedding in winter from 31 days to just three.

The Covid-19 pandemic has also presented the entity an opportunity to roll out short-term maintenance. Long term maintenance which requires longer shut down periods of plants is expected to resume after lockdown.

Covid-19 has also had the drawback of reducing Eskom's prospects of raising revenue. The Department of Public Enterprises now expects Eskom to record a loss of R16 billion this year.

Furthermore, the pandemic has also delayed work on a solution for Eskom's R450 billion debt burden, according to Public Enterprises Minister Pravin Gordhan. De Ruyter however has assured that the power utility will not be in need of any more bailouts this year. 

The restructuring of the utility into three entities - generation, transmission and distribution will be instrumental in helping Eskom deal with its debt, according to De Ruyter. 


Gordhan: Coronavirus delayed work on Eskom debt solution
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