South Africa’s electricity crisis: The way ahead for Eskom

May 12th, 2019, Published in Articles: EE Publishers, Articles: Energize

South Africa’s electricity crisis is worse than most people believe. Eskom, the state-owned power utility which supplies the country with 95% of the electricity consumed is effectively insolvent and has no way of getting out of its predicament without a massive financial bailout from the government. Those who believe it can save itself are either naïve or misinformed. Yet because of its importance to the economy, Eskom cannot be allowed to fail.

Prof. Anton Eberhard

Speaking at a seminar held at the Johannesburg offices of the University of Cape Town’s Graduate School of Business recently, Prof. Anton Eberhard said that this crisis is happening at a time when technological developments in electricity generating systems are accelerating at a phenomenal rate. Solar- and wind-powered electricity generation is becoming both cheaper and larger in scale. New wind turbines produce more electricity output and new solar PV panels are increasing their efficiency dramatically, providing more power per square metre than ever.

These technological developments make Eskom’s fleet of coal-fired power stations virtually obsolete. The financial and environmental cost associated with coal-fired power is far higher per kWh than those of renewable energy, yet the power utility produces 80 to 90% of its electricity from coal. Furthermore, it is building two new coal-fired power stations in the face of increasingly crippling costs. As a result, electricity tariffs are spiraling, older power stations are failing and the electricity system is in total disarray, destroying many new business opportunities.

Eskom’s power stations have never been in a worse state, Eberhard said. Badly maintained power stations keeping breaking down, while the few active units of the new build projects – which are riddled with design faults – produce far less power than they were designed to deliver. These factors undermine the power utility’s ability to achieve its mandate – determined at its inception in 1922 – to delivery cheap and plentiful electricity to drive the industrialisation of the country. Today, the power utility’s energy availability factor (EAF) is declining steadily and as its output declines, its costs increase.

But despite its technological problems – and there are many – Eskom’s greatest problem is financial. The power utility’s debt now stands at about R450-billion. It keeps borrowing money on short-term contracts to help it meet its commitments to its long-term loans.

Due to its ever-increasing debt to fund its new-build projects which are many years late and four-times over budget, increased coal and payroll costs, non-payment by a number of municipalities and the residents of Soweto, together with the limits set on tariff increases by the national energy regulator (Nersa), the utility is expected to post an unprecedented R25-billion loss as at the end of March this year. It cannot trade its way out of it financial position. Only a massive bail out from government can rescue Eskom, but at an enormous cost to the country. The money which the government must give to Eskom could have been used to build schools, clinics, and other vital infrastructural needs.

The way forward

According to Eberhard, doing nothing is not an option. Without real tariff increases and government support, Eskom is financially unviable even if lenders were to continue providing liquidity.

The solution is simple but painful, he said. The solution can be boiled down to three elements: Increased electricity tariffs, the cutting of costs by Eskom, and a massive injection of cash by government. Increasing tariffs will encourage consumers to improve energy efficiency and motivate the search for alternate sources of energy, which will reduce load on Eskom which might enable it to close one or two of its older power stations. Reducing costs at Eskom would entail a number of painful interventions including a reduction of personnel; and, as stated earlier, a government bailout would deprive the poor of much needed infrastructural development.

Unbundling or restructuring Eskom into three separate entities will improve transparency, be easier to manage, and will provide a least-cost transmission system available to all power generators, making it fair and equal for anyone who wishes to participate in the sector.

In its bid to maintain its monopoly, Eskom has resisted the entrance of new independent power producers. But, as Eberhard says, Eskom should operate the transmission network only and have no say regarding new generating companies entering the market other than them meeting prescribed financial and technical criteria.

The value of renewable energy

Renewable energy offers real and tangible benefits, Eberhard said. Bid prices in the expedited round were R0,62/kWh. Round five may see bids of R0,50 or lower. A recent bid in Zambia yielded US$0,039/kWh (about R0,56/kWh).

The demand for coal for electricity generation is declining globally and is predicted to die by 2050. The use of coal for electricity generation in the UK, for example, fell from 42% a few years ago to zero on occasion. Contrary to what some people believe, renewable energy can be used to supply sufficient and reliable electricity to support industrial companies. In the UK, there ae literally thousands of small renewable energy fueled power plants many of which generate more than 1 MW of power. These power plants use wind, solar, battery storage, hydro and biogas technologies to produce clean power.

Conclusion

Now is the time to restructure Eskom, Eberhard said, so that we are not faced with endless bailouts and so that competition and investment are accelerated. Accelerated innovation in disruptive power technologies, services and markets are shifting and upending relative prices, resource shares and the location and pattern of energy production and use.

Eskom needs further interventions so that its systemic risk to the economy can be mitigated. All relevant stakeholders, consumers, taxpayers, employees and investors will have to bear the cost. The utility needs to change its business model to accommodate and embrace these changes.

Furthermore, the financial community wants a realistic plan from Eskom and a credible commitment to implement the plan within a prescribed time frame. The power utility’s recovery plan must show aggressive operational savings.

Since Eskom cannot be allowed to fail, the country is left with no choice but to fund the financial shortfall. However, government must liberalise the sector and allow independent power producers help to meet the country’s needs. This will entail scrapping the need for a generating licence under 10 MW and simplifying and speeding up the registration process, he said.

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