A week after taking the helm at Eskom Holdings SOC Ltd., Brian Molefe was grilled by lawmakers over why the South African power utility, once ranked the world’s best-run, couldn’t keep the lights on.
Molefe, who was head-hunted from state-transport company Transnet SOC Ltd. to become Eskom’s sixth chief executive officer within a decade, was blunt: the company didn’t get the capital or tariff increases it needed to expand generation in time to meet surging demand and had run its plants into the ground.
“It’s spilt milk,” he said. “We are in the situation that we are in. We have to build the power stations that are going to take us into the future.”
Molefe will have to address more than a funding squeeze and moribund plants to end blackouts that are throttling Africa’s most industrialized economy. He’ll also have to overcome the legacy of years of state dithering over energy policy, a dearth of skilled personnel and strikes and technical glitches that have repeatedly delayed the construction of the first new coal-fired facilities Eskom has built in a quarter century.
Founded in 1923, the utility was known as the Electricity Supply Commission before changing its name to Eskom in 1987. It built its initial hydropower station in 1925 and commissioned its first two coal-fired plants two years later.
Dozens more facilities followed over the next six decades, turning Eskom into the world’s fourth-largest power utility. Expansion peaked in the 1970s and early 1980s when about 20,000 megawatts of power, or almost half of Eskom’s current capacity, was installed.
Eskom’s expansion was curtailed in 1985, as sanctions were instituted against the apartheid regime, foreign loans dried up and the economy stagnated, along with electricity demand.
Alarm Bells
The ANC’s energy policy initially focused on connecting the more than 40 percent of households and tens of thousands of schools and clinics in black areas to the electricity grid. The broadening of access to power coupled with resurgent growth as the economy opened up and began to consume Eskom’s excess capacity.
“In the 1980s and early 1990s, Eskom had a huge degree of autonomy,” Anton Eberhard, a professor at the University of Cape Town’s Graduate School of Business, said by e-mail. “That gradually got eroded. There was a time when the government stopped Eskom from building new power stations.”
The first alarm bells were sounded publicly in 1998, when the Department of Minerals and Energy released a policy paper warning that the country could run short of energy by 2007 and a decision on expansion would be needed by the end of the next year. It advocated allowing private investment in the industry.
No Action
With no imminent crisis in sight, the government took no immediate action.
In 2000, Thulani Gcabashe replaced Allen Morgan as CEO. In 2001, the utility was named power company of the year at the Financial Times Global Energy Awards in New York. All of its 78 production units were considered to be in good working condition.
Potential investors in the power industry were deterred by some of the world’s lowest electricity prices and the bankruptcy of Enron Corp. in the U.S., and in 2003 South Africa placed its privatization plans on hold. That year, Eskom announced a program to restart three idled coal-fired plants.
The post-apartheid government was confronted with a plethora of problems and energy shortages weren’t on the list, said Jacob Maroga, who succeeded Gcabashe in May 2007.
“Eskom looked like a stable company, providing cheap electricity,” he said in an interview in Johannesburg. “Eskom almost became an unintended victim of that era.”
Nationwide Blackouts
In late 2004, the government awakened to the looming energy crunch as economic growth and power demand surged, and Eskom announced it would spend 50 billion rand ($4.1 billion) on expansion over five years. In 2005, the five-year investment budget was more than doubled to 102.8 billion rand.
The first power cuts struck the Western Cape province in late 2005, when a generator at the nation’s sole nuclear plant near Cape Town was damaged by a loose bolt. The coastal city and Johannesburg experienced further blackouts in 2006.
In May 2007, Eskom approved its biggest five-year investment program yet — the construction of the Medupi and Kusile coal-fired plants and 11 other generation projects, worth 203.6 billion rand. The targeted completion date was December 2015. South Africa’s then-president Thabo Mbeki apologized to the nation for poor planning.
In October 2007, countrywide rolling blackouts began. The crisis intensified and a national electricity emergency was declared in January 2008 as the grid neared collapse, shutting most mines and factories for five days
Demand Underestimated
“We underestimated the scale of demand,” Alec Erwin, who served as South Africa’s public enterprises minister from 2004 to 2008, said in a May 22 interview at his Cape Town home. “Our planning was two or three years behind.”
Blackouts were suspended in February 2008 as Eskom brought more of its idled plants’ units back into service and delayed maintenance to comply with a government instruction to ensure power supply wasn’t disrupted in the run-up to the staging of the 2010 soccer World Cup.
Maroga resigned as CEO in 2009 and was replaced by Brian Dames, who headed Eskom’s generation business.
The outage reprieve lasted until last year, when a lack of upkeep took its toll on Eskom’s plants. In 2015, just 49 of its 121 generating units were in good working order, 32 were in poor condition and the balance were somewhere in between. Kendal, Eskom’s biggest facility at 4,166 megawatts, has six units.
Regular breakdowns ensued. Load-shedding, as scheduled blackouts are known in South Africa, has taken place on average every third day this year.
Rating Cuts
Dames quit in March 2014 and Collin Matjila served as acting CEO for six months until Tshediso Matona, the director-general of the Department of Public Enterprises, was appointed to the post. Matona was suspended amid a probe into the company’s performance after just six months and agreed to resign on May 18 this year after losing a bid to be reinstated. Three other senior officials were also suspended.
Moody’s Investors Service cut its rating for Eskom to non-investment grade, or junk, on Nov. 7 last year and Standard & Poor’s followed suit in March, with the management upheaval cited as one of the reasons.
Molefe, who presided over an improvement in rail and port services at Transnet and formerly ran the state pension fund manager, was named acting CEO on April 17 and tasked with sorting out the energy crisis. The National Treasury expects power shortages to limit the economic growth rate to 2 percent this year, short of the 5 percent the government is targeting by 2019 to address a 26 percent unemployment rate.
Limited Scope
With the Medupi and Kusile plants running four years behind schedule, Eskom has limited scope to boost its generating capacity and Molefe is focusing on optimizing output from existing plants.
“We have been delinquent with maintenance,” Molefe said. “We have to catch up. It’s not a permanent situation.”
The government, which expects power shortages to persist for two to three years, has revived the idea it first floated in 1998 of selling off a stake in Eskom or disposing of some of its plants. It’s also contracting private companies to supply it with 17,000 megawatts of renewable energy and electricity generated from coal and gas by 2022. The utility currently supplies about 95 percent of South Africa’s power.
“South Africa’s lack of timely coordination of our planning, alignment and implementation of our country’s energy programs has created serious challenges for us,” Energy Minister Tina Joemat-Pettersson told lawmakers on May 19
http://www.bloomberg.com/news/articles/2015-06-07/once-lauded-eskom-now-derided-over-south-african-power-outages.
“There’s a belief out there that the electricity challenge is a result of the failure of government, of lack of leadership … The economy of apartheid was racially
It wasn’t until in 2004 that government started acknowledging that electricity supply was insufficient for the growing economy, prompting the department of minerals and energy to invite proposals on how to increase production by at least 1000 Megawatts (MW) annually from the year 2007.
The private sector was hesitant in responding to the request, raising, amongst other concerns, Eskom’s intention to retain at least 70% of generation and therefore dominance of the market.
Economists are telling us we’re heading for disaster, and no one seems to be listening. Like when Eskom said we would run out of power…
— Stuart Theobald (@rationalhill) July 30, 2015
Eskom’s challenges continued unabated, eventually reaching their height in 2008 when nationwide power outages were rolled out by the utility as reserves in the grid reached their lowest levels ever. This led to high profile government officials admitting to erroneously refusing to heed the desperate pleas by Eskom. The then Minister of Public Enterprises Alec Erwin was first to acknowledge this mistake in 2007:
“We took the decision to charge Eskom with providing 70 percent of new capacity. As I have indicated, we accept with hindsight that the decision was too late. It is the underlying reason for the conditions with which we are now faced.”
President Mbeki’s admission of the failings of his administration are a far cry to the current trends in government in which incumbents refuse to take responsibility for not being able to deliver on infrastructure projects. However, his admission did not help remedy the situation. A barrage emerged of problems that seem intractable.
The financial status of Eskom
In addition to its poor production capacity, Eskom’s balance sheets have not been in good shape, which compounds the utility’s inability to provide the required electricity. The poor state of its finances is the reason that the public utility has been downgraded to junk status by sovereign rating agencies such as Standard & Poor’s.
It is clear that Eskom needs to get its house in order; however, it is unlikely that its state of finances will receive a clean bill of health any time soon. Recently the National Energy Regulator of South Africa (Nersa) threw out Eskom’s application for 25% tariff hike, suggesting that the utility might need to come up with ways to generate the required financial resources in order to keep operations going. Government’s move to sell Eskom’s 13.91% stake in Vodacom is the latest in a drive to inject equity into the utility.
It is not clear how much Eskom spends and saves. Currently, its books are not transparent, which Nersa has cited partly as the reason for not granting the tariff increase. However Eskom made the case for the need to recover R53bn to plug holes on its finances as a result of higher operation costs.
While Eskom recorded a profit of R7bn in 2014, there is no disputing the fact that it is grossly inadequate to bring the utility out of the red. Its capital projects, which include the construction of new power stations, come at a hefty price.
Conclusion
Eskom is in a dilapidated state and it has plunged South Africa deeper into an energy crisis. The energy utility has failed to keep the lights on in spite of the fact that consumption levels have been declining.
There is no doubt that for things to go back to normal, Eskom will need a massive capital injection in order to breathe a new lease of life into its operations.
Small wonder it has frantically been devising ways to turn its fortunes: from tariff hikes to selling of its stake in commercial enterprises, to seeking funding so that it can fast-track its infrastructural projects.
Power cuts are bad for business – and they are also an extra risk to your security. In addition to interfering with the effective running of your household and business security systems, you have another vulnerability: your insurance may not cover you if you are burgled or robbed during load shedding. And, your policy may not cover you for damage to equipment where it is linked to an erratic or faulty power supply. That’s the reminder from Terry Booysen, the CEO of a professional services firm that specialises in compliance and risk issues. He reflects on warnings from the insurance industry. Check your paperwork. With power cuts as frequent as they are, it seems likely the crime rate is set to rise.
The growing constraints on South Africa’s power grid makes load shedding an unwelcome reality that many households and businesses will have to contend with during 2015. While this has many implications, one of the most concerning is the fact that power outages compromise safety and security.
In an extended outage, the battery back-up on security equipment such as automated gates and fences, alarm systems, security cameras and outdoor motion passives may well run out before power is restored. The fact that automated gates are not operational presents a further complication during load shedding, in that armed response companies are most often unable to gain access to the premises.
Many criminals are capitalising on the situation, utilising the planned load shedding schedule to plan burglaries or robberies. You could well find yourself holding the short end of the stick in such an event, particularly if your insurance coverage terms don’t specifically provide for circumstances that are beyond your control.
According to Mandy Barrett of insurance brokerage and risk advisors, Aon South Africa, consumers may find their claims rejected by insurers if their security system is not functional and they experience a burglary or break-in during a power outage.
Members of South Africa’s security industry have warned that scheduled blackouts pose a risk to homes and townhouse complexes.
In a letter to Eskom, the SA Intruder Detection Services Association said load shedding was creating “a major security risk”.
And Institute for Security Studies senior researcher Johan Burger said recent cases indicated that criminals knew load-shedding schedules. He predicted an increase in crime when the power was off.
Lionel Strong, an executive member of the Security Association of SA, said: “Many of our members are reporting more robberies during power cuts than before. Criminals are targeting vulnerable areas hit by power cuts.”
Power failures have overtaken crime as the leading concern for small business owners in South Africa. This is according to the findings of this year’s SME Survey by research company, World Wide Worx released today.
Previous surveys show that SMEs have in the past attributed their sleepless nights to crime, the high cost of fuel, or even interest rates.
This year’s survey is a result of interviews with 1 4000 decision-makers across the country, with the majority of SMEs based in the Gauteng province followed by the Western Cape. The majority of the SMEs had been in business for 10 years or more.
Arthur Goldstuck, MD of World Wide Worx and principal researcher for SME Survey says the results show a dramatic shift in what SMEs consider to be the biggest external threats to their businesses.
Government departments and municipalities owe electricity parastatal Eskom almost R189 million in unpaid bills, public enterprises minister Barbara Hogan said on Wednesday in response to a parliamentary question from the opposition. R162.7 million of the debt is owed by municipalities.
Eskom has revealed that as much as 7% of the country’s electricity is stolen via illegal connections, something the state power utility can no longer afford.
This comes amid a power crisis and rolling blackouts as Eskom struggles to keep the lights on.
Andrew Etzinger who is the spokesperson Eskom recently told Talk Radio 702 that the company has its own private police force “that goes around every day removing hundreds of illegal connections. A couple of days later and those connections are back.”
He noted that Eskom has 300,000 kilometres of power line throughout the country. He said municipalities would have as much as six times more than that. “We just cannot police it all the time.”
He stressed that the problem was not only home owners, but business owners too.
He said that as much as 7% of the country’s electricity was stolen via illegal connections. “We desperately need that revenue…we cannot afford it anymore,” Etzinger said.