Only 10% chance of more Eskom load shedding – Etzinger

I met Eskom GM Andrew Etzinger in unlikely surroundings. We were together in Secunda as part of the induction party for Sasol’s engineering recruits. Breaking bread and sharing a few hours in a far-away place can do wonders for relationships. Ours has developed in the years since. And despite tough spots he is often thrust into, Etzinger has always communicated logically, clearly and honestly. Stripping away the drama and sharing reality. As he did today in our CNBC Africa Power Lunch show. Once again settling nerves and clearing up the confusion. – AH

ALEC HOGG:  To give us an operational update on the Eskom…there’s lots of confusion and we’ll get into that in a moment, Andrew.  Wasn’t that an interesting interview with David Constable?  The way that shale gas is transforming the whole energy function in the United States…in our context, Eskom must be paying attention?

ANDREW ETZINGER:  It’s a game changer, for sure.  If we’re trading off for example shale gas versus a massive nuclear program. These are the implications for South Africa.  Trillions of Rands’ worth of electricity infrastructure needs to be developed over the next few years and if shale gas is going to be everything it promises to be, that diverts hundreds of billions of those trillions towards an entirely different technology for South Africa, so it’s very exciting.  Of course, we’re keeping a close eye on it.  A lot has to do with price, obviously.  This isn’t just free energy out of the ground, so we’ll need to see how our shale gas competes with other resources in the region as well, and not just in South Africa.  Mozambique, even Zimbabwe, and now Botswana are all good prospects and we’re keeping a very close eye to get the very best deal for South Africa.

ALEC HOGG:  It’s very exciting and it’s a transformation, as you say.  It’s been a game changer in the United States and we haven’t quite understood in South Africa, what the implications are.  Who knows?  Maybe you’ll be dropping electricity prices in future.

ANDREW ETZINGER:  Let’s hope.  That would be great.

ALEC HOGG:  Andrew, what is going on?  Business Day this morning says Chief Executive and Chairman of Eskom at odds over what’s going on…  You’re the man we rely on.  What’s the situation?

Andrew EtzingerANDREW ETZINGER:  It seems to be confusion around the use of the word ‘crisis’.  Of course, different people, under the conditions we’ve had over the past couple of days would describe…  Some would describe it as a crisis, or not a crisis and I think it comes down to nit picking about a particular issue.  I think there’s good alignment between the Chairman and the Chief Executive.  I think our Chairman used the word ‘crisis’ and our Chief Executive said it wasn’t a crisis but ultimately, I think the fundamental reality is understood by all.  We have a very serious situation whether you call that a crisis – being something out of control – or not.  I personally haven’t used the word ‘crisis’ when communicating because we have it under control.

ALEC HOGG:  But we did have load shedding for the first time since 2008 and I guess some people would say that’s a crisis.

ANDREW ETZINGER:  Yes, of course, and I think certainly for business, that would be a crisis from the perspective of business.  If you don’t have electricity and you need this electricity to function then that, in your environment, would be a crisis.  I would not however, say Eskom’s in a crisis and I think the fact that we are doing load shedding proactively to protect against a system blackout – I think we spoke about that on a previous occasion – is once again a proactive measure.  It’s an indication that we have the situation under control.  It’s not pleasant of course, to our customers who feel the brunt of the actions we’re taking to protect the grid, but the grid is fundamentally stable, it’s in good shape, and we’ll make sure it stays that way.

ALEC HOGG:  Well, the grid’s good.  I got an SMS over the weekend – and we spoke about this before – on your database, which said ‘thank you helping us.  Thank you for switching off your pool pump and your geyser, or whatever it was.  We no longer need to continue with load shedding.’  Was that an accurate SMS?  Can I relax now?

ANDREW ETZINGER:  Yes, what we’re doing is monitoring the situation on a daily basis, so you would have received that SMS I presume, on Friday.  It goes out to everyone, whether you have a pool pump or not, so I take your point that there would be certain inaccuracies relating to your particular appliances.  However, as of Friday, we’ve had no load shedding, the grid is still very tight, and we can’t rule out the possibility of going back unfortunately, if we did see technical problems arise again.  The SMS was really talking about – at that particular moment – load shedding had been suspended.  Let’s work to continue it that way.

ALEC HOGG:  So in the immediate future…how long is that then?  If you tell me on Friday ‘no more load shedding’, does that mean that tomorrow you might send an SMS to say ‘sorry.  We have issues again’?

ANDREW ETZINGER:  We can’t rule that out, so I think what we’re saying is…

ALEC HOGG:  So what is the risk of it happening?

ANDREW ETZINGER:  All right, we are at the moment monitoring the situation on an ongoing basis.  We can’t actually give you a definitive ‘yes or no’ answer.  I guess it comes down to probabilities.  I’m a statistician, but even I wouldn’t attach a number to it.  If I were pushed, I would probably say ‘ten percent chance of load shedding and a 90 percent chance that everything will recover’.  Certainly, since Thursday, we’ve seen significant improvement in the performance of our generators in responding to the wet coal.  We’ve had better (dryer) coal coming through from our suppliers over the last few days.

ALEC HOGG:  Andrew, what is the story with wet coal every time it rains or it rains for an extended period?  We, as members of the public, don’t actually buy that story.

ANDREW ETZINGER:  No, that’s fair enough and understandable.  Since 2008, we’ve done a lot of work to make ourselves resilient against wet coal.  In fact, since 2008, you wouldn’t have heard us talking about wet coal, so the plans we’ve put in place have worked.  This time, the weather has been extreme.  It’s been well outside the bounds and the assumptions that we’ve made, together with meteorologists and the weather department about what we can expect.  We do a lot of risk analysis in Eskom on a continuous basis through a very formal process, looking at thousands of risks to various points on our supply chain.  This has therefore been well outside those bounds, so the dry coal stockpiles, which we had developed and built up at our power stations in response to the best information we had, unfortunately, weren’t enough and that’s what’s happened.  In the next round of planning, we’d have to change those assumptions and change the level of dry coal stockpiles.  There’s a cost associated, unfortunately, so we will improve our resilience.

ALEC HOGG:  What happens in countries where it rains all the time?  The poor people in England: how do they manage to get the wet coal to work for them?  For us, we have a couple of weeks of rain and we’re in trouble.

ANDREW ETZINGER:  Well, it’s certainly interesting that you mention England.  We – ourselves – had power interruptions relating to the weather.  Let me just start there.  If there is…and it comes back to an understanding of the risks and the risk profile…  If you’re in a country such as England or Germany where there is a substantial chance of ongoing rain, of course, you will build particular mechanisms even to the extent of putting coal undercover permanently, but there’s a cost.  At what point do we make that investment, knowing that investment costs money?  It’s expensive, and we need to ultimately pass those costs through to you as a customer.  What we do is we take a risk-based approach to all the risks to our infrastructure, which can be anything to a power line.  We can’t for example, afford to put in 100 different power lines to your home, but to secure your supply we would actually need to do that.  At every point there are certain risks and we have to do our very best to manage those risks in a cost-effective manner.

ALEC HOGG:  So the whole rational approach that you’ve taken to us is great.  The emotional approach that most members of the public have is, ‘but hang on, we’ve been paying substantial increases in the last few years.  Eskom still can’t get it right’.

ANDREW ETZINGER:  Sure, the increases have been significant over the last number of years, but our price of electricity is still amongst the lowest in the world.  On the residential side…yes, there are countries, particularly those in Africa where electricity is either free or it’s heavily subsidised, so we don’t actually look at residential.  On business however, that certainly is the case.  Yes, we would all want lower electricity costs and perhaps technologies, as we were talking about – gas and the opportunity from fracking etcetera – could improve the situation and of course, we’re looking at that.  We want to provide the world’s lowest cost of electricity again, as we did before.

ALEC HOGG:  What about more privatisation?  What about letting the private sector get more involved?  We heard, a moment ago, David Constable talking about Sasol in the U.S. doing some cogeneration into the power grid.  Can they not do more of that here?  Can you not encourage people more?

ANDREW ETZINGER:  Yes, we do.  In fact, Sasol is an independent power producer that participates on our grid, as an example.  We have more than 30 contracts with independent power producers, some of which are actively producing.  Others are in the final stages of construction to feed into the grid, so the independent power producer in the private sector is also going to be a very big game changer in the grid – already.  However, I do think the important point to make is that it will not necessarily translate into a lower electricity price.  Those private investors will want a return, which is probably going to be bigger than the government of South Africa, as Eskom’s shareholder, wants.

ALEC HOGG:  I don’t think that’s an issue; it’s more security of the supply…  If you take, by the end of next year with the independent power producers coming in, what percentage would they be producing of the power South Africa consumes?

ANDREW ETZINGER:  Just in terms of the independent power producers that are active in South Africa, you’ll be looking at about 1600 megawatts by that stage, and that would translate into about five percent of the South African capacity, which will increase very rapidly from that stage – from five percent.  Ultimately, the government has said that 30 percent would be the minimum level at which they would feel comfortable that IPP’s are playing a meaningful role.  Again, what’s very important is if you’re looking at security of supply, this is not going to be the be-all and end-all.  Remember, 20 years ago, when we wanted an electricity market/competitor to come in, nobody came in.  Nobody wanted to come in and make the investment to take Eskom on through a competitive process, which is why we’re led to the situation we have.  We stopped Eskom making investments 15/20 years ago, which is why we are here now.  We have to be very careful about the way we design a market and the way we encourage IPP investment.

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