Opera Assessment Report

Revision 2

Matimba power plant, source: Eskom

Independent Assessment of Eskom’s Operational Situation

August 2023

CONFIDENTIAL – FOR NATIONAL TREASURY ONLY

1  Executive Summary

Against the background of electricity shortages and load shedding, the National Treasury of the Republic of South Africa assigned the vgbe consortium to conduct an independent assessment of Eskom’s operational situation.

The scope of work comprised a review of the operational situation of the coal fleet, an assessment of the power plant maintenance budgets, a skill-level assessment of power plant personnel, as well as a transmission grid assessment. The consortium was led by vgbe and included teams from the other partners: Dornier, KWS, RWE and STEAG. These partners have decades of experience in the operation and maintenance (O&M) of coal fired power plants.

The project started on 27 February 2023 and was completed within a period of 4.5 months. Documentation, interviews, and site visits at Eskom’s Megawatt Park, at all coal-fired power plants, as well as at grid facilities, formed the information basis for the investigation. The Eskom teams at the sites and at Megawatt Park supported this assessment in every way they could – in a very responsive and co-operative manner.

1.1  Eskom Generation – Coal Fleet

The main objective of the coal fleet investigation was to find out reasons for the low Energy Availability Factor (EAF) of the coal fleet – 50.83% as of April 2023 – and to develop measures to improve the situation. Most of the issues relating to the low EAF can be attributed to a single root cause, namely:

The management system with its governance, structure and processes is dysfunctional and too complex.

− Too many organisational layers and opaque decision-making processes generate a tremendous amount of red tape, with lengthy procedures and a lack of accountability. In many cases the decision-making is delegated to committees, of which there are too many at all levels of the hierarchy.

− The coal fleet is managed centrally, and very limited authority is given to the plant management. The plant management has to follow complex procedures and is therefore unable to manage day-to-day operations and maintenance challenges in a timely and effective manner.

− Eskom generation has been trapped within this complex management system for so long that it is no longer able to maintain or improve the technical performance of the coal-fired power plants.

− Although the problems and their solutions are known, the Eskom management has not been able to implement appropriate measures in a sustainable and successful manner. The solutions can be summarised in one sentence:

Operation and Maintenance (O&M) must be improved and conducted according to industry standards.

− The plant management, with its limited authority and high level of interference from headquarters, is unable to focus its attention on its primary responsibility: reliable plant O&M. Currently, even a mediocre level of performance (e.g. EAF) is accepted as sufficient.

− Since O&M procedures have not been carried out correctly for years, the overall condition of plant health is in many cases mediocre to poor.

− In O&M management, many deficits were identified. The quality of operations has suffered from a lack of ownership and leadership, as well as a lack of training and high staff turnover. The planning and execution of maintenance work need to be more stringent, more goal-oriented and more carefully executed.

− Furthermore, the complete outsourcing of maintenance has contributed to low plant reliability – the personnel is unfamiliar with plant requirements, reaction time and administrative interface efforts.

− The extent of the deficits in O&M competence is also reflected in the amount of severe plant damage that has occurred over the past years, leading to the long-term unavailability of entire plant units, e.g. Duvha Unit 3, Medupi Unit 4, Kusile Units 1 to 3. All of these incidents were related to deviations from prudent plant O&M practices.

− In particular, the complicated procurement policy and processes proved to be a bottleneck in supporting the plants with timely provision of spare parts and qualified services by third parties. In addition to its impact on plant performance, the procurement process is also a significant contributor to high service and supply costs.

Moreover, it is important to note that the assessment of the maintenance budget figures for the last ten years, and the current mid-term planning resulted in the following statement:

Compared to international benchmarks, the maintenance budgets of Eskom’s coal fleet are higher – although the EAF is much lower.

− Maintenance budget figures from coal-fired power plants operated in Europe, America and Asia were used to define an international benchmark.

− For the period 2013 to 2027, Eskom’s budgets for plant maintenance are well above the international benchmark. Hence, the money spent by Eskom should have been sufficient to execute proper maintenance and to keep the power plants in good condition.

− The EAF of Eskom’s coal fleet is currently at about 51% whereas international benchmarks are in the range of 78%¹. The only way to improve the EAF is to ensure the execution of thorough operation and maintenance practices and procedures.

The fixation on the EAF is a dead end and leads to poorer plant performance.

− Outage and maintenance activities have been deferred over the last months and years to lift – or at least to maintain – the EAF.

− The priority of the Eskom coal fleet operation has been to quickly fix the actual bottlenecks in generation capacities rather than to restore the plants to “as new conditions” after an outage.

− The plants have been forced to continue operating at the expense of their technical condition. The consequences are reflected in the high number of incidents, trips and partial load losses (PLL).

− This cycle has now gained so much momentum that it could lead to the collapse of plants or to further capacity losses. It must be stopped immediately by executing proper maintenance and outage work – even if this means a higher level of load shedding for a limited period of time.

− Moreover, up to 6 000 MW in partial load losses (PLL) could be reactivated by fixing the plants’ defects and applying prudent operation and maintenance practice.

The capacity constraint risks – especially for newer plants – need to be addressed immediately.

− The Kusile power plant is soon expected to become an important contributor to generation capacity, with Unit 5 starting within the next few months and Units 1 to 3 starting once construction of the temporary chimney has been completed. However, it should be noted that the achievable capacity is limited, due to the incomplete coal handling system, restrictions in water supply and the ash discharge situation. These restrictions result in a very high risk that the Kusile site cannot be operated with more than three units at any one time – hence, only 2 400 MW instead of 4 800 MW would be available.

− The Medupi and Matimba sites share the raw water treatment plant. This plant urgently requires at least maintenance and upgrading. If the existing plant fails, 12 units – 9 800 MW – would go off grid. Moreover, the current raw water supply is not sufficient to install the wet flue gas desulfurization plant that needs to be built for the Medupi and Matimba sites by 2025, in order to meet legislative requirements.

− The water treatment plant at Kendal is in a very poor condition and needs urgent maintenance and refurbishment. If the existing plant fails, six units – 3 840 MW – would be off the grid.

People can make the difference – good performance should be rewarded.

− As a result of the continuous crisis mode, many employees are frustrated and demotivated. In many areas, a working atmosphere characterised by indifference, ignorance and blame-shifting has been fostered. Salaries have not been increased for several years and there is no system in which good performance is rewarded.

− To lift spirits, the Eskom performance culture needs to change. The vgbe team recommends implementing an incentive scheme for good performance on both an individual and institutional level. For example, power plants should receive a bonus if they are able to reduce their losses by a defined percentage rate. Another incentive could be to provide accommodation for Eskom staff – e.g. free of charge – near the power plant.

The way forward: Empower the power plants

− The current electricity crisis can only be overcome in the power plants, which is why it is imperative that they are empowered right away to manage the technical turnaround, without being hampered by lengthy company procedures. This empowerment includes full budget responsibility and accountability of the Power Station General Manager (PSGM). Moreover, and at least for a limited period of time – e.g. 1.5 to

2           years, the power plants should be allowed to apply fast-track procurement processes under the supervision of the National Treasury.

− This change in governance requires changes in the management structure of the Generation Division. The vgbe team proposes decoupling the coal fleet from the rest of the generation business. The sole objective of this coal division should be the revitalization of the existing power plants.

− For the newer plants, Kusile and Medupi, the focus should be on improving operational management and risk mitigation related to capacity constraints. For the other plants, the primary aim is to eliminate the existing load losses through carefully executed maintenance and outages.

Immediate intervention is required.

− Unless there is immediate intervention, the situation will continue to escalate.

Besides empowering the power plant management, the vgbe team recommends engaging an interim external expert team which reports directly to the National Treasury. Member(s) of the expert team should be permanently situated at each site to follow up key risk areas and intervene if required. The assignment should be limited to a defined period, e.g. 1.5 to 2 years.

− If these measures are taken and appropriate budgets are provided, it can be assumed that plant performance and reliability will improve significantly. When it comes to budgets, it should be considered that the current unavailable capacity of about 17 419.5 MW corresponds to financial losses of about R 152 billion per year² – not taking the cost of diesel into account. Against this background, even significant investments, e.g. for a life-time extension, will pay off within the short term.

− In parallel to the turnaround activities, a concept for the long-term business model of the coal division should be developed. There are several options to be considered – they range from expert support through to concessions for individual power plants and privatization.

− In order to ensure a best-practice transfer for O&M of power plants and to support a continuous improvement process the experience exchange at expert as well as at management level – especially with international peers – should be intensified.

1.2   Skills at the Power Plants

Our assessment of the skills at the power plants focused on evaluating the competencies of the technical managers – plant manager, operating manager, maintenance manager, engineering and outage manager, as well as the training manager. Training progress and implemented training, as well as staff development and factors affecting staff performance were also reviewed. In addition to the management interviews, the assessment also included input from written online tests.

Throughout the assessment, the impact of the current situation on the workforce was clear to see low morale, lack of motivation, heavy workload with long working hours in a demanding working atmosphere, as well as the deferral or interruption of training programmes.

The competencies of the technical managers seem to be at a reasonable level, but there is greater potential for improvement.

− Within the scope of the evaluations, we repeatedly noticed that there is a high degree of theoretical knowledge. However, its application is made very difficult by the complex management system, as mentioned in the previous chapter.

− In general, leadership competencies are not at the required level. In the past, suitable leadership development programmes existed and these need to be re-established.

Training should focus on turning skills and knowledge into competencies.

− In order to ensure continuous improvement, a sound plan for the further development of technical and non-technical competencies should be developed and implemented.

In addition to this, the vgbe team recommends the following measures:

− Eskom needs to develop a work ethic model that details the expected work ethic and aims at integrity and clear accountability.

− Recognition of personal performance should play a decisive role in human resource management. Regular performance reviews and feedback need to be of a high standard. To this end, managers should conduct regular employee appraisals and set common goals that can then be verified and serve as a basis for further feedback. Money or other rewards are needed as performance bonuses.

− Particularly in the area of training, there should be regular contact and exchange of information between central training and on-site training facilities. Their objectives and programmes should be coordinated and aligned with each other. Communication is going to play a key role in this regard.

− Unit 4 at the Kusile plant achieves an EAF of > 90%. This unit is currently operated by the boiler OEM. This team has successfully demonstrated that it is possible to achieve a high EAF in the newer plant units. It is a perfect opportunity for knowledge and best practice transfer to the future O&M team of Eskom. This learning opportunity should be seized immediately.

1.3  Transmission Grid Assessment

The multiple load shedding that occurs every day is not the result of the transmission system being in poor condition.

− The load disconnections result from insufficient available power plant capacity, even though sufficient power plant capacity has been installed. The lack of required power plant capacity is not the responsibility of the transmission system operator (TSO).

− The power shortage is managed by the TSO, with the planned load shedding in an excellent way and thus ensures the secure and available grid operation within the scope of the possibilities.

− The danger of a blackout is largely excluded by this network operation method.

Compared to European transmission systems, a high proportion of the transmission system's facilities are relatively old, and an above-average proportion have reached the end of their operating life.

− Despite the high proportion of old equipment, the overall condition is excellent due to intensive maintenance measures. Nevertheless, it is essential to continue the modernisation process of these outdated plant components, which has been underway for several years.

− If this modernisation is neglected, an accumulation of equipment failures can be expected within a short space of time in the near future. This could lead to a critical situation in the operation of the transmission system. Sufficient financial resources must be made available for these modernisation measures, to ensure the safe and reliable operation of the transmission system in the future.

− The urgent need for these measures has already been recognised by management and has led to an increase in approved investment budgets in recent years. It has also been included in the Transmission System Development Plan (TDP).

The good overall condition of all parts of the transmission system is mainly due to excellent maintenance.

− This maintenance status is based on well-trained and highly motivated personnel.

− The management of the transmission system is very well organised and the cooperation between top and middle management down to the working staff is very good.

− All relevant processes are laid down in work instructions and are stringently applied.

This efficient work environment should be secured through sufficient qualification measures, competitive wages, recruitment of young staff and knowledge-transfer to newly hired employees.

The transmission system development plan is a very good tool for planning the transmission system.

− The plan will be updated annually for the next ten years, thus ensuring continuous revision and adaptation to changing conditions.

− The current TDP is based on the status of the Integrated Resource Plan (IRP) as of 2019. It is recommended to use more up-to-date sources of information for the update of the TDP in addition to the IRP in order to be able to react more quickly to new requirements for network expansion.

− It will include modernisation measures that take the condition and age of the plants into consideration. The development of the grid will include grid expansions that reflect additional demand and new power plant connections in the area of renewables and independent power producers (IPP).

− Transmission System Operator (TSO) stakeholders should use the measures described in the transmission system development plan as a guide for their decisions on how to manage the company.

In order to connect additional renewable generation capacities, a significant grid expansion is required.

− The grid expansion projects are included in the budget planning. By FY2028,

R 74.2 billion of financial resources are planned for upgrading and expanding the network. The network expansion budget will increase from R 2 billion in FY2024 to

R 10.1 billion in FY2026.

− The budget for the grid expansion, as well as for sustaining the grid, seems to roughly reflect the requirements of the renewable capacity increase.

− Implementing the associated expansion measures is a major challenge for Eskom Transmission and requires sufficient internal human resources.