Government policies in the energy sector are undermining the financial viability of Eskom and will lead to significant job losses.
The policy of independent power producers of renewable energy has an adverse effect on Eskom’s balance sheet in the current context of an electricity surplus, flat electricity demand and the increasing Eskom generation capacity.
Renewable energy production continues to displace Eskom's generation capacity and, whilst the renewable independent power producers' costs are a full pass through to the consumer, the underutilisation of installed capacity has a direct impact – increasing the unit cost of Eskom generation under the current NERSA regulatory framework.
Pushing up costs
The 2017 prices for renewable independent power producers range from 77.5c/kWh to 380c/kWh. The prices in earlier rounds were significantly higher, pushing up the weighted average cost to 209c/kWh, against Eskom revenue of 83.6c/kWh.
By contrast, the Eskom short run marginal cost of production is about 40c/kWh.
In an environment where Eskom can afford to produce a kilowatt-hour of electricity for 40 cents, it was forced to buy this from the renewable independent power producers at 209 cents, but to sell it to consumers at 83.6 cents. This erodes the balance sheet of Eskom. In 2016, the resultant economic loss amounted to R16bn.
To be cost competitive, the renewable independent power producers had to come in at more economical levels of 77c/kWh or lower. The 27 independent power producers' agreements, which were referred to as a 'New Dawn' for renewables in South Africa by Minister Jeff Radebe, were signed at a weighted average price of 86c/kWh, which is higher than the economical levels of 77c/kWh. This will continue to weaken the balance sheet of Eskom, and make Eskom unworkable within the current regulatory framework.
The latest Eskom Corporate Plan is based on the average electricity sales growth of 2.3% per year, across local and cross-border sales. The current Eskom performance is below target.
The resultant lower revenues will impact on Eskom’s ability to generate adequate cash flows to meet existing debt commitments. In its 2017 Integrated Report, Eskom describes the impact of signing the renewable independent power producer’s agreements as follows: "We could be placed in a position where we may have to utilise the government guarantees provided to lenders. This would put the sovereign balance sheet at risk."
Similar arguments were placed before Justice Hans Fabricius by the Eskom Senior Counsel at the North Gauteng High Court on 27 March 2018. Eskom nevertheless signed the latest rounds of the renewable independent power producer’s agreements on 4 April 2018, effectively setting itself up on a death spiral.
Minister Jeff Radebe has since announced that South Africa will procure a further 1800 megawatts of renewable energy from independent power producers, and will launch a fifth bid window in November 2018. This is despite a projection of up to 10 gigawatts of surplus energy in 2023. Electricity consumption has effectively stagnated. Bid window five prices must beat the Eskom marginal cost of production of around 40 cents/kwh to make economic sense.
The minister also reiterated the intention to release the latest iteration of the Integrated Resource Plan within days and have it approved by Cabinet in mid-August. Given the projection of up to 10 gigawatts of energy surplus in 2023, and the expected 1800 megawatts in bid window five, the latest iteration of the Integrated Resource Plan is most likely to force the Eskom power plants to be retired at 50 years.
In 2015 Eskom changed the life of some of its generating power plants from 50 to 60 years. In April 2016, the Board moved away from an age-based decommissioning strategy to a fleet renewal strategy, based on the economic viability of fleet renewal, including the socioeconomic impacts of the affected plants.
The updated Integrated Resource Plan, based on a 50-year life, will affect five power plants. These power plants are Hendrina, Komati, Camden, Grootvlei and Kriel – all of them in Mpumalanga. The estimated economic activity created per year due the total capital and operational expenditure by these power plants between 2014/5 and 2016/17 was in the order of R32.4 billion, which is 0.8% of South Africa's Gross Domestic Product (GDP). In the same period, they have sustained, on average, an estimated 92 961 jobs per year, which is 1% of total number of jobs in South Africa.
The 27 independent power producer’s agreements signed on 4 April 2018 only locked R58.5bn-worth of investment and 13 000 construction jobs. They will generate only R13.4 billion of socio-economic and enterprise development expenditure into surrounding communities over their 20-year lifetimes.
The energy transition path chosen by Minister Radebe is not a just one. It is destroying the balance sheet of Eskom and has a net effect of destroying jobs. Eskom is forced to sell some of existing generation, distribution and non-core assets to reduce debt levels – and the structure and ownership of Eskom will be very different in the next 24 months.
* Matshela Koko was Eskom group executive for generation and former interim CEO. He resigned from the power utility in February 2018.