Eskom has a massive problem - beyond corruption and errant CEOs

6 July 2017

Background

So much media attention has been paid to widespread allegations of fraud at Eskom and to the antics of some of its recent permanent and acting CEOs, that its difficulties in simply keeping the business going, seem to have disappeared from sight.  Briefly put, Eskom has a huge problem in that it has a steadily growing surplus of available electricity.  The gap between supply and demand is widening to the extent that it is not clear how Eskom can survive financially unless it changes course very abruptly or unless the Government (and by implication, the taxpayer) bails it out.

Some recent articles have dealt with these issues in detail, [1] but they have not received the attention they deserve.  Maybe it’s all just too complicated for an easy read.  Without going into too much detail, we therefore thought that we should try to present the essentials in a digestible manner. 

Summary of the current situation

The then acting CEO of Eskom, Matshela Koko, set out in a presentation in January 2017 that Eskom has an average of 5 600MW of surplus capacity, which is sufficient to cover the capacity currently supplied by renewables and the required reserve margin. [2]  Eskom is moreover contractually obliged to pay the Independent Power Producers (IPPs) that form part of the Government’s renewable power programme, whilst it is able to cover that electricity demand from its own generating plants.   Eskom has made this point in public and it is well known that many IPP power purchase agreements have not yet been signed by Eskom, leading to a stand-off between the two groups.  At the same time, Eskom shouldn’t overdo acting as the injured innocent bystander, as we would assume that these IPP tariffs are nevertheless included in the currently approved NERSA tariffs which regulate Eskom’s pricing to the market.  It must be kept in mind in this context that the initial IPP tariffs (included in the approved NERSA tariffs), are much higher than the newer ones.  Nevertheless, Eskom is effectively paying for the purchase of outside electricity which it is itself producing, at a lower cost. 

But it gets worse:  Eskom’s current installed capacity of 45 086MW is due to increase to 54 189MW in 2022, as set out in Matshela Koko’s presentation, referred to above.  This represents the additional power generated by the new Medupi, Kusile and Ingula power stations, amounting to an increase in installed capacity of 20% (these numbers exclude the IPP contribution, currently at approximately 3 400MW).  Unfortunately, forecast demand is not going to take up much of this electricity.  Given current economic growth of around 0.6% and growth forecasts starting from 1.1% in 2018 and ending at 2.0% in 2022, [3] we find ourselves very clearly on the lowest trajectory of electricity forecasts which were prepared for the Department of Energy’s Draft Integrated Resource Plan (IRP) of 2016. [4]  This low trajectory forecasts a 10% increase in demand up to 2022.  The disparity over the next 5 years is glaring: an increase in demand of 10% is therefore to face an increase in generating capacity of 20%.  This will compound Eskom’s current surplus capacity.  It will also add to Eskom’s cashflow problems, since the debt which has funded the huge cost of the new plants, will have to start being repaid whilst a large part of the power that they generate, is not purchased.  It also needs to be added that the low demand growth forecast of 10% over 5 years is probably optimistic in itself, since we are all aware of the fact that consumers are not only doing their best to use less electricity, but are also actively looking at alternatives to Eskom power. 

Questions that arise

In this situation, what is Eskom going to do?  It will surely not be able to fund the ever-increasing gap between expenditure and income simply by fleecing consumers?

Another question also arises:  what degree of joint planning took place between the Department of Energy and Eskom on the question of the IPP programme and its financial implications?  Was there any joint planning at all?  One might have expected some consultation  -  when we last looked, Government was Eskom’s 100% shareholder.

And how about the much-vaunted nuclear new build programme?  The Department of Energy’s draft 2016 IRP included a nuclear new build option, made possible only by placing obviously artificial limits on much cheaper renewable options.  In addition to such artificial constraints, how can any nuclear power programme in the foreseeable future now be justified on the back of the changed economic growth assumptions and the growing Eskom surplus capacity?  In these circumstances, the irrationality in continuing to punt additional nuclear power just becomes too obvious.  It is unclear when the final approved version of the IRP is to be published and the suspicion is that further delays may, quite apart from other issues, also have something to do with the changed economic circumstances.

By Anton van Dalsen, Legal Counsellor, and Charles Collocott, Researcher, HSF, 6 July 2017

Notes:

[1] See, in particular, the articles by Ted Blom of OUTA and Piet van Staden of Sasol, published here  and here.

[2] See here.

[3] See here.

[4] IRP Annexure B Demand Forecasts Report CSIR Jan 2016