Eskom black hole sucks in more! Needs R4bn in diesel to keep SA lights on until Xmas

South Africans had high hopes that President Cyril Ramaphosa would stamp out corruption and quickly turn around the economy when he took over from graft-tainted Jacob Zuma in February last year. But it was a big ask. Inroads are being made in investigating and bringing to book the key players in the state capture scandal. Eskom has occupied much of President Ramaphosa’s time, too. So far, his moves have failed to impress business leaders or credit ratings agencies. This week, Business Unity South Africa leader Sipho Pityana said the man brought in to rescue Eskom lacks the wow factor – and he is right. Who has really heard of any dynamic or groundbreaking achievements by South African Institute of Chartered Accountants CEO Freeman Nomvalo? Besides, Nomvalo is only taking on the Eskom job as a temporary task, having been seconded by SAICA. The acting CEO meanwhile, is Jabu Mabuza – who has to divide his time presiding over Eskom with other directorships. The government keeps throwing money at Eskom, including billions for diesel to ensure the lights literally stay on until the end of the year. But the funds are not enough to fix the ailing state entity holding back economic growth. Marianne Merten has analysed developments at the Daily Maverick. Her article is published here, with permission. – Jackie Cameron

Up to R4.32bn will be spent on diesel to keep the lights on until the end of 2019

By Marianne Merten

It’s only by April 2020 that Eskom expects to ditch the need for diesel to run its open cycle gas turbines to supplement electricity supplies, according to a system outlook document seen by Daily Maverick.

Until then those gas turbines make the difference between load shedding and keeping the lights on, and the economy limping along, at a cost of between R4.32bn and, at best, R608.5m until 31 December 2019. Anything from R47.13m in the best-case scenario to R1,07bn in the worst would be needed for diesel to keep these gas turbines going between January to April 2020.

And that means Eskom, which is R450bn in debt, continues to hold South Africa to ransom – despite already having received R23bn additional funding for 2019 in February’s Budget, and with another R26bn available once Parliament passes the Special Appropriation Bill that Finance Minister Tito Mboweni introduced in the House on 23 July.

However, on Tuesday both Eskom and the Public Enterprises Ministry said the cost of running the gas turbines was justified when weighed against the cost of load shedding to the overall economy and people’s living conditions.

Government’s refrain for more than a year is that because Eskom is the greatest risk to the South African economy, steps are underway to stabilise the power utility. But reforms, steeped in politicking, are moving at a snail’s pace: the chief reorganisation officer announced in February has only just been appointed to a lukewarm reception, while yet to get going six months after its announcement is the unbundling of Eskom into generation, transmission and distribution entities.

And so Eskom lumbers along, still using the Tetris-based planning system introduced in 2015 by the then newly arrived chief executive Brian Molefe before he was outed for his part in State Capture first in then public protector Thuli Madonsela’s November 2016 report, and subsequently also in the 2017/18 parliamentary inquiry into Eskom State Capture.

As in the 1980s Russian-designed computer puzzle of slotting blocks, Eskom slots planned outages for maintenance, of 8,500 megawatts (MW), alongside various scenarios of unplanned shortages in what is called “capacity plan Tetris V4.67” in the System Outlook document dated 22 July, as seen by Daily Maverick.

Running gas turbines to keep the lights on comes at a cost: R4.31bn until the end of 2019 in the worst-case scenario with more than 2,000MW of unplanned outages on top of the planned ones. And then another R1.02bn from January 2020 to April 2020 in this worst-case scenario.

But even in the best case of no additional unexpected shortages over and above the planned outages, it will still cost R608.5m to the end of December to keep the lights on. In 2020, the picture is a little bit brighter: diesel costs are expected to run at R2.32m in January and R44.81m in February before March lights up overwhelmingly green, indicating a power surplus and some wiggle room.

The middle-of-the-road estimate, according to this system outlook document, would cost Eskom some R1.73bn over the next five months to the end of December 2019. And another R277.12m in 2020 until April.

According to the document, the costs for the gas turbines are calculated on an assumed cost of R3,520 per megawatt-hour. If the price of diesel goes up, the gas turbines will be more expensive to run. If Medupi Unit 2 and Kusile Unit 2 are not available as planned in this system outlook – and there have been problems at both these coal power plants – the plan goes out the window.

There is precious little to brighten the Eskom’s power/cost delivery outlook. According to the document, in September only two days are green-lighted, even in the best-case scenario – the 14th and the 22nd – with shortfalls ranging from just over 1,000MW to well over 4,500MW on many days, especially in the worst-case situation. It only really starts looking better in mid-December around the time the festive season holidays start. January looks green; February 2020 is grim again.

Approached for comment, Eskom said on Tuesday that it strove to minimise the use of gas turbines.

“However, the cost of load shedding to the South African economy in orders of magnitude is higher than the cost of diesel fuel. Eskom will thus reprioritise available budgets to use the open cycle gas turbines where they are required to avoid or minimise load shedding. Eskom plans to use gas turbines mainly for peak hours and when it is absolutely necessary,” the power utility said in an emailed response.

The Public Enterprise Ministry said late on Tuesday that supply shortages have had a detrimental effect on the economy, but that as maintenance is returning power stations fully to the grid, the use of gas turbines would drop.

“The cost of running the open cycle gas turbines has the benefit to the country’s economic growth in reducing supply constraints. The cost of running the open cycle gas turbines must be justified against the opportunity cost to the economy in case of load shedding… The economy would have been severely impacted if Eskom had not used the open cycle gas turbines,” said the ministry’s written response.

“No modern economy can grow and be successful without security of energy supply. So ‘keeping on the lights’ is fundamental to the success of businesses and the living conditions of citizens.”

No one will dispute that operationally and financially, Eskom is in a bad state.

After more than a decade of above-tariff increases, Eskom again complained that the 9.41% from April 2019 approved by the National Energy Regulator of South Africa (Nersa) was insufficient.

But the reality is that consumers are struggling with the skyrocketing price of electricity. While Eskom may charge 90 cents a unit, municipalities put their own top-up, pushing up the unit price to R2 or even more. Rich and middle-class consumers are increasingly going off-grid through solar or gas, while anecdotal evidence suggests the working poor are reverting to paraffin and candles.

It’s this that former Eskom CEO Phakamani Hadebe described as “a death spiral” at the power utility’s financial results presentation on 30 July, a day before his two months’ notice period ended and he left, officially for health reasons.

And it is what Moody’s rating agency also noted in its brief on Tuesday.

“Eskom’s ability to grow revenues is constrained by falling electricity demand (some 1% per annum over the past decade), reflective of a weak economic environment, and the level of tariffs set by Nersa…” wrote Moody’s. “On the cost side, Eskom has so far struggled to contain its expenditure, given the company’s significant workforce and an increase in primary energy costs related to the poor performance of the company’s ageing fleet, with energy availability factor falling below 70%.”

Because of these capacity issues, alongside the need for maintenance, the gas turbines are needed. And hundreds of millions of rand for diesel to run them.

This planned expenditure comes as Eskom’s financial statements recorded a loss of R20.7bn in the financial year ending 31 March 2019. It’s a record in many ways and comes on the back of debts ballooning to R450bn.

Eskom
Size Matters (Eskom). More of Zapiro’s magic available at www.zapiro.com.

Also, courtesy of Eskom, no money is available should a disaster strike. In late March 2019, Mboweni had to invoke the emergency funding provisions to extend R17.52bn when Eskom couldn’t meet its obligations after miscalculating on a R7bn draw-down on a Chinese Development Bank loan. The amount Mboweni authorised is equivalent to the statutorily permissible maximum of 2% of the national revenue, meaning nothing is left in the national purse for any other emergency.

Business Unit South Africa (Busa) President Sipho Pityana, in its August members’ newsletter, did not mince his words, even if he did not name Eskom.

“One of our biggest fears is that there may be increasing coercion of financial institutions to extend credit to SOEs (state-owned entities) that are already up to their necks in debt. That will present a systemic risk to our banking and financial services sector and compromise one of the few remaining pillars of our economic system that makes South Africa an attractive investment destination,” he said, adding later with reference to the country’s poor economy:

In this environment, asking consumers to pay more for electricity can only increase the chance of a jobs bloodbath. Business will increasingly be unable to afford the cost of power and is more likely going to have to shed even more jobs”.

There was no choice but for the government to confront the “current malaise and the crises in SOEs” – only the Post Office has recorded a positive cash balance — or face the consequences. And for Pityana, that’s the need for an International Monetary Fund (IMF) bailout.

The risk of needing an IMF bailout is already a very real one. And if that happens, decisions will be taken beyond our control and out of our control.”

October’s Medium-Term Budget Policy Statement (MTBPS), or mini-Budget, may signal further tax increases alongside government spending cuts. But the scope for this is limited in South Africa’s persistent low-growth, high-unemployment economic environments.

Unless hard political decisions are taken – and executed – Eskom remains the perfect storm threatening South Africa. DM