Eskom, a flickering glow in the dark

2014-08-21 15:00

Eskom at a glance

South Africa churns out 260bn kWH of electricity per year (A kWH  gets one full load of washing done or powers a TV for 7 hours). Eskom provides 95% of South Africa's electricity and more than 60% of Africa's. Only 5% of the electricity generated by Eskom is consumed by households. 6-8% of electricity generated is lost during transmission per annum. The amount lost is equivalent to powering approximately 3 000 000 households, each consuming 25kWH hours of electricity per day for an entire year.

As a parastatal, Eskom relies on funding from the Treasury whose coffers are filled by the taxman SARS and other funding mechanisms which include borrowing from the financial institutions such as the World Bank and from the public through instruments such as the  Retail Savings Bond to mention a few. In the 2012/13 fiscal year, SARS collected R814.1 billion in revenue. Eskom’s debt stands at R225bn and with some power plants older than 30 years and nearing the end of their useful life. In 2012/13, state-owned companies' average return on equity slowed to 4%, from 7.6% in the previous year, mainly due to lower earnings and higher operational costs at Eskom.

Eskom is and can be a viable entity, putting South African households and businesses in a privileged position on the African continent. At present, a South African resident consumes 4500kWH more than their counterparts in Sub-Saharan Africa who have access to less than 120kWH of electricity per year. South Africa’s 70% rate of electrification is by far the highest in a region where countries have a rate of electrification averaging 30%. Furthermore, the South African government provides Free Basic Electricity (FBE) of at least 50kWh per household per month to poor households connected to the national grid. This is enough to provide basic lighting, basic water heating using a kettle, basic ironing, and access to a small black and white TV and a radio.

Eskom’s troubled past and present

Like many parastatals, Eskom has been shrouded by a number of setbacks:

  • a power crisis and a series of rolling blackouts
  • a breakdown in trust between its board, former chairperson Bobby Godsell and former CEO Jacob Maroga
  • a poor relationship with the media and the public
  • allegations that its coal procurement processes were in shambles and its coal division in a near state of collapse
  • a conflict of interest in a multibillion-rand tender deal involving the ANC’s investment arm Chancellor House
  • a major accident at the Duvha power plant which threatened the power supply;
  • The Medupi power plant which cost R77 billion more than the initial estimate;
  • CEO, Brian Dames resigned in December 2013, shortly after chief financial officer Paul O’Flaherty who earned over R10m between them in 2010/11 (this equates to R20 000 per working day)
  • Staff parties running into tens of millions

Big spender

South African power utility Eskom, has repeatedly fended off criticisms about its capacity to fund and manage projects such as the Medupi and Kusile installations that are projected to cost the company more than R200bn. Eskom, which last year received just half of the 16% price increase it asked for, is seeking to plug a R225bn cash flow shortfall until 2018 as it struggles to keep the lights on in Africa’s second largest economy. The government will probably provide Eskom with enough aid to avoid a downgrade, however, the treasury has been reluctant to act despite the implications. This may follow former finance minister, Praveen Gordhan’s warning in his 2013 budget speech. Gordhan indicated that parastatals, many of whom have received lifelines in the recent past, would have a harder time securing funding from the Treasury.

Should the Treasury not come to Eskom’s rescue, a cut in its credit rating would raise debt-servicing costs to 30% - 40%.

The group is SA’s biggest corporate borrower, with R254.8bn of debt securities and borrowing as at March 31. In June this year Fitch Ratings demoted Eskom’s outlook on its credit ratings to negative from stable, Standard & Poor’s (S&P) has downgraded the utility’s long-term local and foreign currency rating to BBB– from BBB. A further downgrade would see Eskom degrade from BBB- to junk, which will make it difficult for lenders to have faith in the utility and diminish prospects for financial salvation.

At present, the South African government is already spending more than it receives in taxes largely due to escalating public service salary bill. South Africa’s debt is fast approaching the halfway mark of our $400bn GDP and Eskom can only be funded directly by the government if South Africa increases its borrowings even further. Eskom's credit rating and fate is closely intertwined with that of the South African economy as a whole.  By borrowing more, South Africa’s credit rating gets to be downgraded and the cost of servicing debt will rocket. Though Eskom’s capital-spending plan is necessary to keep power running after a decade of underinvestment that has left the national grid strained, misappropriation of funds at the company is often a norm.

University of Pretoria’s  Prof. Jan van Heerden and Dr. Heinrich Bohlmann recommend that a direct increase in electricity prices (over a period of 3 to 5 years) should be the main instrument towards achieving cost-reflective production of electricity which will further strip the consumer of buying power and any ability to save. Eskom is expected to hike electricity tariffs by over 8 % next year. Furthermore, carbon tax is set to come into effect in 2016, Eskom may further fall into a financial black hole as the country’s largest polluter which ultimately will worsen the burden on the consumer.

A carbon tax rate of R120.00 per ton of CO2e increasing at 10% per annum will be implemented.

More than just power cuts

Should Eskom be unable to avert a financial crisis and ultimately fail to meet the demand for electricity at home and abroad, the economy of South Africa in its entirety could go into a meltdown. Power cuts in the past have induced a cut in gross domestic product by about 0.2 percent running into the lower billions per day.

A study by Deloitte (2008) found that load-shedding had substantial economic impacts across most sectors of the economy. If continued at 10% of total power capacity over a year could shave as much as 0.7 percentage points off GDP growth.

Some recommendations

Capacity building and institutional transformation within Eskom is vital, not only for the sake of averting a crisis but to augment the utility’s position as a major force in propelling the African economy as a whole. A lucrative Eskom could lead Africa’s energy revolution that could see the resurrection of dormant hydroelectricity plants in Zimbabwe, DRC, Ethiopia and Mozambique, just to mention a few. Not only will this ensure adequate supply of electricity for local consumption, but will lessen the pressure on the grid exerted by exports while contributing to economic growth across the board.

Independent Power Producers

While compelling reasons have been given against privatising Eskom, allowing independent power producers (IPP) a larger stake in South Africa’s energy sector will ease the burden on Eskom and create a more competitive environment for power producers. The Department of Energy is currently rolling out its Renewable Energy Independent Power Producer Procurement Programme but the cap on MWH each IPP is allowed to generate, stifles any prospects for those with the financial capacity and knowhow to contribute towards powering the nation. To date, the department has accepted bids by private companies to generate electricity from renewable energy sources with some power plants already under construction. According to the department’s report, 8 out of 19 independent power production plants will be operational by the end of 2014. The 19 power stations will have a combined generating capacity of 1041 MW and initial capital expenditure of R28 billion. More bids are set to be approved later this year.

A classic example demonstrating the need for more IPPs, is the Medupi power station, Eskom’s brainchild which is the single biggest infrastructure investment in South Africa after 1994. Construction of the power plant commenced in 2007 and was projected to be operational by 2012 but there are no clear indications as to when the lights will go on, 7 years and R150 billion later. Apart from the direct costs, the snowball effect triggered by the delays have a tremendous impact on the economy as a whole. The total cost of unserved energy figure for a delay on six units amounts to a staggering R1.408 trillion at R75/kWh (or R186bn at R10/kWh).

Renewable energy

South Africa gets an astounding 1,800 to 2,200 kilowatt hours per square meter (kWh/sq m) of insolation (i.e. amount of “solar radiation energy received on a given surface area in a given time”). The best possible in sunny California, for comparison, is 700 kWh/sq m. This is not to mention over 2000km of coastline to harness wind power. Based on success stories like Germany and Denmark, it is evident that creating a wider energy mix focusing on renewable energy sources not only works but is the way of the future. Decentralizing the generation and transmission of energy will not only create employment, new business opportunities, a cleaner environment but lowers running and maintenance costs in the long run. One needs only look at Denmark and Germany, to see that renewable energy sources are just more than a fad or fantasy for environmentalists.

Holding parastatals accountable

  • In the run up to the 2014 parliamentary elections, there were major noises made by Premier Hellen Zille about restructuring Eskom and ensuring transparency in public enterprises should the DA come into power. We do hope that till then, the Premier will ensure there will be an Eskom to restructure by keeping the power utility on top of the agenda.
  • Julius Malema expressed his dissatisfaction with the government/Eskom/NERSA/BHP Billiton deal which stood to provide free electricity to foreign investors. However, we have not heard a constant call for the parties to clarify the details of the agreement in keeping with transparency and accountability of the public entity.
  • A case in point is the speech made by Bantu Holomisa at the University of Johannesburg, where he spoke about the Eskom/Hitachi/Chancellor House deal in which the ruling party gets a share of the spoils every time Eskom increases the price of electricity. When is it going to be a case important enough to follow up so we can see the South African economy boom and benefit the hardworking man on the street.
  • In a 2008 newsletter to the nation, Mangosuthu Buthelezi, called for an end to Eskom's monopoly and the lifting of barriers which prevent independent producers to generate electricity and compete against Eskom. We hope these words will somehow be brought to the fore, that we may see changes that propel the economy forward.
  • Whatever happened to the Special Investigations Unit (SIU) audit that the President Jacob Zuma called for to investigate corruption  at Eskom more than 3 years ago "to uncover any corrupt practices or conflicts of interest, and will identify risks for Eskom, including contract fraud and legal non-compliance."? We hope calls for the report will continue being made so the results may be presented for all to see. 
  • The greatest challenge goes to local businesses, who consume the bulk of electricity generated by Eskom, to exert "expert pressure" on government so Eskom’s turn around goes beyond just a mere change in CEOs every few years.  Above all, the general public also has a role to play, regardless of political affiliation, to keep Eskom on the agenda, till we see some real change because when the lights go out, rest assured, Nkandla has a powerful generator.

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