Eskom: How it turned from world’s best to basket case in 15 years

If you were to inherit ownership of a large company, there are two options. The smart way is respect the complexity of something with many moving parts; leave existing management in place, but gradually change them as suitable replacements emerge. The dumb approach is to kick out the incumbents and bring in pals whose only qualification is loyalty to you – and blame the old regime as the company goes belly up. It’s obvious which option the ANC chose after acquiring control of SA Inc in 1994. But even with so many examples of the consequences, its ill-conceived strategy of Cadre Deployment continues. What adds to the problem is how easily these inexperienced appointees get influenced by lobbyists with obvious agendas. At a time when the cost of renewable power generation is plunging and Moore’s Law is also being seen in energy storage, SA’s Government keeps pushing Eskom into an outdated agenda, convinced of the need to secure “baseload” from antiquated options like nuclear and coal. If only someone in the portals of power would tap alternative sources on the subject like Peter Diamandis or celebrated SA expat Elon Musk.  – Alec Hogg
 
A classic on the subject of fossil fuels from Zapiro SA's top cartoonist. More at Zapiro.com
A classic on Eskom’s obsession for fossil fuels from Zapiro SA’s top cartoonist. More at Zapiro.com

     

By Mike Cohen and Paul Burkhardt

(Bloomberg) — A week after taking the helm at Eskom Holdings SOC Ltd., Brian Molefe was grilled by lawmakers over why the South African power utility, once ranked the world’s best-run, couldn’t keep the lights on.

Molefe, who was head-hunted from state-transport company Transnet SOC Ltd. to become Eskom’s sixth chief executive officer within a decade, was blunt: the company didn’t get the capital or tariff increases it needed to expand generation in time to meet surging demand and had run its plants into the ground.

“It’s spilt milk,” he said. “We are in the situation that we are in. We have to build the power stations that are going to take us into the future.”

Molefe will have to address more than a funding squeeze and moribund plants to end blackouts that are throttling Africa’s most industrialized economy. He’ll also have to overcome the legacy of years of state dithering over energy policy, a dearth of skilled personnel and strikes and technical glitches that have repeatedly delayed the construction of the first new coal- fired facilities Eskom has built in a quarter century.

Founded in 1923, the utility was known as the Electricity Supply Commission before changing its name to Eskom in 1987. It built its first hydropower station in 1925 and commissioned its first two coal-fired plants two years later.

Apartheid Beneficiaries

Dozens more facilities followed over the next six decades, turning Eskom into the world’s fourth-largest power utility. Expansion peaked in the 1970s and early 1980s when about 20,000 megawatts of power, or almost half of Eskom’s current capacity, was installed. Segregationist rule ensured factories, mines and white households were the primary beneficiaries.

Eskom’s expansion was curtailed in 1985, as sanctions were instituted against the apartheid regime, foreign loans dried up and the economy stagnated, along with electricity demand. By the time the African National Congress took power under Nelson Mandela in the first multiracial elections in 1994, the utility’s reserve margin, or the amount by which generating capacity exceeds peak demand, was more than double the international norm of 15 percent.

The ANC’s energy policy initially focused on connecting the more than 40 percent of households and tens of thousands of schools and clinics in black areas to the electricity grid. The broadening of access to power coupled with resurgent growth as the economy opened up and began to consume Eskom’s excess capacity.

Alarm Bells

“In the 1980s and early 1990s, Eskom had a huge degree of autonomy,” Anton Eberhard, a professor at the University of Cape Town’s Graduate School of Business, said by e-mail. “That gradually got eroded. There was a time when the government stopped Eskom from building new power stations.”

The first alarm bells were sounded publicly in 1998, when the Department of Minerals and Energy released a policy paper warning that the country could run short of energy by 2007 and a decision on expansion would be needed by the end of the next year. It advocated allowing private investment in the industry.

With no imminent crisis in sight, the government took no immediate action.

In 2000, Thulani Gcabashe replaced Allen Morgan as CEO. In 2001, the utility was named power company of the year at the Financial Times Global Energy Awards in New York. All of its 78 production units were considered to be in good working condition.

Low Prices

Potential investors in the power industry were deterred by some of the world’s lowest electricity prices and the bankruptcy of Enron Corp. in the U.S., and in 2003 South Africa placed its privatization plans on hold. That year, Eskom announced a program to restart three idled coal-fired plants.

The post-apartheid government was confronted with a plethora of problems and energy shortages weren’t on the list, said Jacob Maroga, who succeeded Gcabashe in May 2007.

“Eskom looked like a stable company, providing cheap electricity,” he said in an interview in Johannesburg. “Eskom almost became an unintended victim of that era.”

In late 2004, the government awakened to the looming energy crunch as economic growth and power demand surged, and Eskom announced it would spend 50 billion rand ($4.1 billion) on expansion over five years. In 2005, the five-year investment budget was more than doubled to 102.8 billion rand.

Nationwide Blackouts

The first power cuts struck the Western Cape province in late 2005, when a generator at the nation’s sole nuclear plant near Cape Town was damaged by a loose bolt. The coastal city and Johannesburg experienced further blackouts in 2006.

In May 2007, Eskom approved its biggest five-year investment program yet — the construction of the Medupi and Kusile coal-fired plants and 11 other generation projects, worth 203.6 billion rand. The targeted completion date was December 2015. South Africa’s then president Thabo Mbeki apologized to the nation for poor planning.

In October 2007, countrywide rolling blackouts began. The crisis intensified and a national electricity emergency was declared in January 2008 as the grid neared collapse, shutting most mines and factories for five days.

“We underestimated the scale of demand,” Alec Erwin, who served as South Africa’s public enterprises minister from 2004 to 2008, said in a May 22 interview at his Cape Town home. “Our planning was two or three years behind.”

Maintenance Deficit

Blackouts were suspended in February 2008 as Eskom brought more of its idled plants’ units back into service and delayed maintenance to comply with a government instruction to ensure power supply wasn’t disrupted in the run-up to the staging of the 2010 soccer World Cup.

Maroga resigned as CEO in 2009 and was replaced by Brian Dames, who headed Eskom’s generation business.

The outage reprieve lasted until last year, when a lack of upkeep took its toll on Eskom’s plants. In 2015, just 49 of its 121 generating units were in good working order, 32 were in poor condition and the balance were somewhere in between. Kendal, Eskom’s biggest facility at 4,166 megawatts, has six units.

Regular breakdowns ensued. Load-shedding, as scheduled blackouts are known in South Africa, has taken place on average every third day this year.

Dames quit in March 2014 and Collin Matjila served as acting CEO for six months until Tshediso Matona, the director- general of the Department of Public Enterprises, was appointed to the post. Matona was suspended amid a probe into the company’s performance after just six months and agreed to resign on May 18 this year after losing a bid to be reinstated. Three other senior officials were also suspended.

Rating Cuts

Moody’s Investors Service cut its rating for Eskom to non- investment grade, or junk, on Nov. 7 last year and Standard & Poor’s followed suit in March, with the management upheaval cited as one of the reasons.

Molefe, who presided over an improvement in rail and port services at Transnet and formerly ran the state pension fund manager, was named acting CEO on April 17 and tasked with sorting out the energy crisis.

With the Medupi and Kusile plants running four years behind schedule, Eskom has limited scope to boost output and Molefe is focusing on optimizing output from existing plants.

“We have been delinquent with maintenance,” Molefe said. “We have to catch up. It’s not a permanent situation.”

The government, which expects power shortages to persist for two to three years, has revived the idea it first floated in 1998 of selling off a stake in Eskom or disposing of some of its plants. It’s also contracting private companies to supply it with 17,000 megawatts of renewable energy and electricity generated from coal and gas by 2022. The utility currently supplies about 95 percent of South Africa’s power.

“South Africa’s lack of timely coordination of our planning, alignment and implementation of our country’s energy programs has created serious challenges for us,” Energy Minister Tina Joemat-Pettersson told lawmakers on May 19.

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