The State of Eskom: Changing… but slowly

Although Eskom accounts for two-fifths of South Africa’s greenhouse-gas emissions and has spectacularly failed to implement measures to reduce its greenhouse gas emissions, CEO Andre de Ruyter insists that the company is not a climate change denialist.

“Climate change is a risk that we are all facing and we must adjust,” he told an online audience at a Cape Town Press Club event on Tuesday. 

“Climate change and the decreasing cost of renewable energy have proven the case for the shift to renewable energy,” he says.

The cost of solar energy is falling steeply, making nuclear and coal-fired power among the more expensive forms of energy available. 

A case in point is the planned 2GW Al Dhafra solar farm in Abu Dhabi, mooted to be the world’s largest, where the cost of electricity will be an unheard-of 1.35 US cents per kWh.

The closest South Africa comes to this is R0.91 per kWh achieved in bid round 4.

“This is an astonishingly low number and is indicative of where this technology can go,” says De Ruyter.

With this in mind, in June Eskom established a Just Energy Transition project office, the first in South Africa. This will develop the business plans necessary to ensure the company leads the way in enabling the transition from a coal-fired and outdated business model to one that is more sustainable and green, De Ruyter says, while also addressing the socio-economic challenges implicit in the transition.

Within the next few months, Eskom will seek authorisation from its board and government to initiate a formal bidding process for the repurposing and repowering of the Camden, Komati, Grootvlei and Hendrina coal-fired power stations using lower-carbon generation technologies, according to this article.

Restructuring 

But if Eskom is to avoid the infamous death spiral, it needs to transform its centralised, top-heavy business model urgently.

“The news flow is that we are going slow on restructuring,” he says. “But nothing could be further from the truth.”  

The business has been “divisionalised” into Generation, Transmission and Distribution, and each has its own board and delegated authority. The business models are at an advanced stage, while the role of the “Centre” has been clarified, he says.

Involving the private sector in power generation is imperative.  

“To encourage private investment we need to restructure ourselves in a way that private investment could take place in generation. This is easier than selling shares in an entity that has R450-billion of debt. Of course, it is a policy question, but we think private sector participation is better in generation.”

But private-sector generation cannot happen without enabling legislation, which is outside Eskom’s control.

In this regard, private sector involvement in generation suffered a setback on Tuesday. 

The North Gauteng Division of the High Court referred the matter between the City of Cape Town and the Minister of Energy and National Energy Regulator back to the Intergovernmental Dispute Resolution Framework.

The case related to the City’s application for a Section 34 ministerial determination to allow it to procure electricity directly from Independent Power Producers.

“It is disappointing in that it further delays the City’s ability to provide electricity and to alleviate the impact of rolling blackouts on its residents,” says Kevin Mileham, the DA’s shadow minister of Mineral Resources and Energy.

The initial application for a Section 34 was made five years ago. “The Minister could, at any time, have rendered this case moot by responding to or deciding on the City’s application,” he says.

The DA would continue to push for the adoption of its Private Members’ Bill, the Independent Electricity Management Operator Bill, which would allow metropolitan municipalities such as the City of Cape Town, that have the financial capacity and technical capability to procure electricity from whomever they please, without requiring a ministerial determination.

De Ruyter acknowledges that this process has been delayed. 

“We are making good progress in legally separating Eskom into its three parts and we have carefully mapped out the activities that must take place to legally separate the Transmission entity from the system and market operator. 

“There are decisions that must be made by Nersa and others – that are out of our control.”

However, he adds that Eskom is working on an alternative plan to expedite the process, which is subject to board and shareholder approval.

“This will achieve the objective in less than two years.”

Shifting to a more sustainable business model is just one of the balls currently being juggled in a year in which De Ruyter says management “has had the kitchen sink thrown at it”. 

In March, the company was forced to shut down Unit 1 at Koeberg, South Africa’s only well-maintained power station, due to ingress of seawater. This resulted in stage 4 load shedding, damaging SA’s fragile economy and human psyche even further. 

Almost in parallel the company experienced a catastrophic IT system failure and the country went into hard lockdown, resulting in a significant fall in electricity demand.

Operations

What was bad for Eskom’s already parlous revenue was good for the maintenance programme and Eskom doubled up on routine maintenance. In the process, it achieved some significant milestones. For instance, unit 3 at Medupi has reached full capacity after a 75-day outage for boiler plant modifications to design defects. Unit 6 was completed in June. Work continues on units 1,2,4 and 5 and commercial operation of the final unit, unit 1, is expected in Q4 of 2021.

In addition, design flaws at the Ingula pumped storage scheme have been rectified and construction at Kusile has recommenced. 

Units 2 and 3 are expected to be commissioned in the second quarter of 2021, making a big difference to grid supply. 

Currently, energy availability is at 65%, which is “far too low”. The goal is to move this to 70% in 2021, 72% in 2022 and 74% in 2033. 

That said, keeping the lights on remains a challenge given the cold weather conditions and the gradual normalisation of economic demand.

De Ruyter warns that consumers should expect load shedding to get worse before it gets better.

“We have to take certain units down to complete our mid-life maintenance programme. As we take these units down, there is a risk of load shedding. But if we don’t do this, the risk will just get worse.” 

Costs

Of course, restoring maintenance to ordinary levels brings a direct benefit in terms of costs because the company regularly turns to its “last resort” open-cycle gas turbines, which burn about R3.5-billion to R4-billion worth of diesel a year. 

Taking a knife to Eskom’s bloated cost base has been a key focus area, starting with the primary energy bill. 

With this in mind, Eskom is examining its major contracts and recently took steps to cancel a five-year, R14-billion fuel oil contract with Econ Oil & Energy, which was renewed in 2019.

Coal contracts are also under the spotlight as Eskom spends R57-billion a year on coal, 51% of its costs. 

In March the North Gauteng High Court declared Eskom’s R3.7-billion contract with Tegeta Mining unlawful and invalid. Signed in March 2015, it stipulated that Tegeta would supply coal to Eskom’s Majuba power station for 10 years.

This is one of several legal victories in recent months.

Eskom is also working with the Department of Mineral Resources and Energy to relook at the cost of Independent Power Producer contracts. 

On the people front, the company quietly said goodbye to 300 managers who took voluntary severance packages earlier in 2020, a small start.

Debt

Of course, Eskom’s R450-billion debt overhang is never far from management’s mind. The company has previously stated that with a significantly reduced debt of R200-billion, a closing cash balance of R30-billion and an earnings margin of 35% it could become financially sustainable.

“We need to sort this out. We have full political backing, particularly from the deputy president,” says De Ruyter. “But removing R250-billion from the balance sheet is ultimately a shareholder issue. 

“We are doing what we can within our remit.” DM/BM