Video: Minister tells Eskom to “do something extraordinary”

July 15th, 2014, Published in Articles: EE Publishers, Articles: Energize, Featured: EE Publishers

 

Speaking at the utility’s integrated results announcement meeting on 11 July 2014, Lynne Brown, the minister of public enterprises said that the utility needs to improve its performance by thinking outside the box and doing something extraordinary.

Eskom has reported a net profit of R7,1-billion for the year ended 31 March 2014 (which includes profit on its embedded derivatives of R2,1-billion), up from R5,2-billion in the previous year, but significantly less than the R12,2-billion reported for the six months ended 30 September 2013. The utility assures the public that the surplus will be reinvested in the company in full to support its capacity expansion programme and to service debt. The utility’s revenues and profits are higher in winter due to greater sales volumes, seasonal tariff adjustments and lower maintenance costs.

Revenue for the period under review increased to R139,5-billion from R128,8-billion in the previous year, reflecting the impact of the 8% tariff increase and the flat demand for electricity (0,6% growth compared to the previous year). This increase in revenue was however, offset by escalating primary energy costs, especially on open-cycle gas turbines (OCGTs), and increased maintenance costs.

This translated into revenue of 62,8c/kWh, up from 58,5c in the previous year, while costs per kWh increased from 54,2 to 59,7c/kWh. Primary energy costs have increased significantly by 14,2% to 32c/kWh.  Given the tight reserve margin, the more expensive OCGT stations were operated far above previous load factors to ensure continuity of supply.

Brown said that, despite receiving support from the Department of Public Enterprises, generation performance continues to deteriorate. Brown went on to say that despite the difficult circumstances the utility finds itself, it needs to do something “extraordinary” because growth, investor confidence, and employment all depend on it.

Brown said that the utility needs to:

  • Stop the decline in generation performance
  • Think outside the box
  • Do the extraordinary

Promising to “walk alongside” the utility as it does this, Brown said that its profit of R7-billion will not be sufficient to guarantee its sustainability. She said that costs need to be contained if the company is to achieve its business productivity plan, and that the increase in costs is a concern to her department.

The company’s R7-billion profit includes R2-billion from a non-operational source. Therefore, although it reports an increase in net profit, it has in fact suffered an operational decrease of R100-million. The company is in a far from healthy state. Its fleet of aging power stations are becoming ever more troublesome as has been seen with the Duvha Power Station which suffered an over-pressurisation incident on 30 March 2014, taking almost 600 MW out of service. This event follows a fire at the same power station in December 2013 which damaged a coal conveyor belt and resulted in a similar loss of electricity generation.

Ongoing delays in the construction of the Medupi Power Station, caused by faulty welds and poor instrument and control software, has pushed the date of first power from unit 6 of this power station out by at least four years to mid 2015. Unit 5, the next to follow, is now expected to take a further ten to twelve months – mid 2016, with the next four to follow in six-monthly periods if all goes well.

This means that the soonest we can expect to actually have the full 4800 MW from this station is mid-2018 – eleven years after the project was announced, at a cost of three times the original budget! Then there’s Kusile Power Station which is due to come on stream , but can Eskom actually afford to run two new-builds simultaneously? Looking at its financial results released today it seems highly unlikely that it can.

The utility needs an urgent cash injection. And a large one at that. The utility is looking for R300-billion to fund its programmes. Looking at the differential between its revenue and expenses per kWh (4,9%), one wonders how such a debt would be serviced. Assuming the utility could make R7-billion net profit every year, and assuming the loan was interest-free, it would take Eskom 43 years to pay the debt off. Obviously the loan would not be interest-free, so the term would probably extend beyond 50 years – just as these new power stations reach their end-of-life. What about all the existing ones? If the utility’s full R7-billion profit is used to service the debt, how will it be able to replace the rest of its fleet?  The country needs 40 GW of generation, the current new build projects will provide us with a quarter of that.

Perhaps it’s time its sole shareholder, the South African government, takes decisive action: provide that much needed cash injection or offer shares in the utilty on the open market. Right now, Eskom appears to be pinning its hopes on a revised tariff increase by NERSA, as it made all its financial projections on a 16% annual tariff increase. NERSA allowed 8% per increases in its last decision (MYPD3), and the utility has applied for this to be increased to what it terms a “cost reflective tariff”.

It will be interesting to see how the utility’s board responds to the minister’s call to “do something extraordinary”.

Send your comments to: energize@ee.co.za

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