JOHANNESBURG — For the first three days of December 2018, the country has been plunged into electricity shortages as Eskom restarted rotational load shedding. While coal problems have come to haunt Eskom once again, this time it’s a range of other issues, according to energy expert Chris Yelland. In this podcast, Yelland explains why Eskom’s entire model is increasingly under the spotlight as concerns mount over the state energy provider’s long-future and sustainability. – Gareth van Zyl
*This transcript has been edited for brevity.
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It’s a pleasure to welcome energy expert Chris Yelland on the podcast. Chris we’ve been experiencing various stages of load-shedding over the last few days and you’ve always had the inside track on what’s going on at Eskom. What exactly then is driving this latest round of load-shedding?
Well, I do believe that the issues are multifaceted and there are very deep issues in the Eskom context, and it all boils down to the question of the sustainability of Eskom as a business. And there are really three pillars upon which sustainability is built. The first is financial sustainability. The second is operational sustainability, and the third is environmental sustainability. And each of these pillars needs to be on firm ground for the business to be resilient and sustainable. And the point is that Eskom is not on firm ground on all three of these pillars. I mean, just looking at the question of environmental sustainability, one may ask how does this affect the businesses’ robustness and ability to weather the storm?
You know, the environment is becoming increasingly important not only in South Africa but around the world. And if you want to access finance from banks and financial institutions, they want to know that you comply with environmental laws and that, going forward, you are in fact an environmentally sustainable business. They are not happy, for example, to lend money to build new coal-fired power plants that don’t meet the latest and highest standards of environmental sustainability. So, this just gives you an idea that even the environmental issues impact the ability of a company to borrow and to build new capacity going forward. The fact is that at the moment none of Eskom’s coal-fired power stations — except for Kusile — comply with South Africa’s environmental regulations, let alone the rest of the world.
The only reason they can continue to operate in South Africa is that they have an exemption from South Africa’s environmental laws for the time being and, in fact, our coal-fired power stations would be illegal in virtually every country of the world.  That is not a good position to be in. Â
It’s really a combination of factors then, but Eskom is so entrenched with its coal-fired plants. How will they ever get away from that?
Let’s just first of all look at how, right now, Eskom is experiencing serious coal supply problems. Now, it’s not that there isn’t plenty of coal in South Africa. There are mountains of coal in South Africa. The issue with coal is about getting the right quality of coal and the right quantity of coal to the right place at the right time at the right price. And unfortunately, poor management, and frankly some very questionable deals have hampered Eskom, such as the Tegeta deals which have now landed Eskom in trouble and Eskom has run into supply problems. It has not invested adequately in the cost-plus coal mines. The emerging coal miners have not been able to bridge the gap and supply from these cost-plus mines. They’re exporting their coal because they can get a much better price on export markets than Eskom is prepared to pay.
And therefore Eskom is facing shortages. But of course, ultimately, it’s a logistical problem because there are mountains of coal in South Africa. There are also mountains of coal in Limpopo that they can transport. There are price issues and the ability of Eskom to pay the market price for coal. And again, that’s not a good position to be in. There are quality problems with this coal that they are getting and that is also causing other power plants not to be able to run the full load because the value and the ash content of the coal don’t match up and this means that they can’t operate the power stations at full load. So, these are operational issues in this business but there are also big financial issues.
Then there’s the ability of Eskom to put aside the necessary money to capitalise its costs with the cost of mines and to do the necessary maintenance on the plant. Eskom doesn’t have a capacity problem. It has more than adequate generation capacity; the problem is that it’s not available when it’s needed. And we are seeing right at the moment — there’s a dramatic decline in the plant performance and the energy availability factor. If we had the energy availability factor in terms of international benchmarks, we would have more than enough electricity. The reality is, though, that we’re having a lot of downtimes – unplanned outages way above what Eskom planned and way below the international benchmark. This is just pushing us into meeting the demand by shedding at the moment as we do not have the available capacity to boost the demand even though the demand is lower in the summer.
So, Chris, I think a lot of people who are listening to this are going to ask themselves, “But hold on a second, earlier this year in January, Ramaphosa who was then the Deputy President, basically instituted a new board at Eskom after he had won the ANC election and there were a lot of quick moves on that. How is that board handling the current crisis and are they equipped to handle this current crisis?
Well, they’re handling it with great difficulty. But I think we must be aware they only started in late February this year and the Eskom financial year started on the 1st of April this year and we’re just in the mid-year financial term for the period ending 30th of September. The outlook and financial performance for the past six months are very bad. For the next six months, it will be much worse because the second six months is always at a time when Eskom suffer losses in the first half. The reason for that is that demand is higher in the winter months than in the first six months.
The price of electricity is higher in the first six months in the winter months and then the second six months they also do a lot of maintenance which costs a lot of money in the summer. Estimates are projecting a R50bn loss for the year. The new management has been saddled with the legacy of several years of mismanagement, which is very clear. I do think that the new management has made huge improvements on the past and that they are facing the issues honestly and realistically but it’s a very difficult situation that they are in — financially, operationally, environmentally and in terms of their staff numbers.
They are overstaffed and overpaid. And when it takes a lot of pain and resistance from existing staff to these challenges it’s not going to come easily.
Is everything starting to completely fall apart for Eskom and they can survive this?
If we put that good plan together, then it can be saved. At the moment, we do not yet have this plan. We do not have, for example, an integrated energy plan, despite the fact that the law requires the Minister of Energy to publish this plan every year since the law was promulgated in 2008. We don’t even have our first integrated energy plan published. We also don’t have an up to date integrated resource plan for electricity which is the country’s plan for the electricity sector. We’re hoping that this might come out in the first quarter of 2019 but it will be long delayed — the last one was published in 2011…
We’ve been told that this plan has been tabled with the Department of Public Enterprises with the Minister and with the cabinet. And it’s all got to be negotiated and workshopped and dealt with publicly with labour and large customers of electricity, with municipalities etc. So, this plan is something that in front of the Minister, it is far from being an accepted plan that is ready to be implemented or better be workshopped with the buy-in from all the different stakeholders. So yes, we’ve got to have a plan.
So with the plan coming together, I’m hoping that the plan will be announced formally and accepted by the time the president does the State of the Nation Address next year and then the budget speech that will explain how we implement the plan. The budget process is another input on this road towards having a proper plan in place and then finally there is a general election next year which I hope will give political certainty to President Ramaphosa and the authority to implement a new plan with the confidence and knowledge that he has a solid political support…
People can recognise a man with a plan and if you ever went out there with a credible plan and I think it will likely give him much broader support amongst the electorate.
Chris Yelland, it’s always good to get your insights and see what’s happening in the energy sector in South Africa. Thank you so much for giving us the latest.
It’s a pleasure. Thank you.
