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Eskom: Regulator not buying the excuses

“Don’t do maintenance at all cost”

Throwing money at Eskom is no solution to the country’s power problems. Eskom should stop doing maintenance “at all costs”, improve the quality of maintenance and adhere to coal management protocols.

That is the view of the National Energy Regulator (Nersa) that has the final say over the money Eskom can recover through electricity tariffs from South Africans.

Following the recent load shedding and power emergencies, Eskom has been saying that it has to renew short-term power purchase agreements (STPPA) with private electricity producers to keep the lights on, but no provision was made for the expense in the budget allocated by Nersa.

Thembani Bukula, full-time member of the regulator, concurs, explaining that this is because in its tariff application Eskom stated that the first unit of its new Medupi power station would be in operation and delivering power to the grid by now. That would replace the power contracted through the STPPAs.

“Even then (late 2012) there were rumours that Medupi would be late, but Eskom did not say anything,” he said. “When it became clear that Medupi would be delayed, we asked ‘what now?’ and they told us then that the STPPAs were too expensive.”

Instead Eskom increased the usage of the open-cycle gas turbines (OCGTs) which are hugely more expensive to run. Brian Dames, outgoing CEO recently stated that R10 billion has been spent so far this year against a budget of just over R2 billion.

Bukula said the arguments that Nersa’s decision to award Eskom an average tariff increase of 8% per year for the period 2013-2018, rather than the 16% it applied for, is to blame for the utility’s problems is not correct. The reduction was largely based on lowering the return on assets allowed. “They don’t need that level of cash reserves, because they have the government as guarantor,” he said.

He said Eskom has spent more than double even the R3.2 billion it applied for on OCGTs, which casts doubt on its ability to budget accurately. “So they must not hide behind what Nersa has approved or not approved.”

He said the point is that there are many other issues that were not correct in Eskom’s application and misrepresentations were made to the regulator and the country.

Eskom stated in its tariff application that it would have 82% of availability on its power station fleet. Since then it has switched to the so-called 80:10:10 regime, with 80% fleet availability, 10% down on planned maintenance and 10% unplanned outages.

Nersa saw this and questioned it, because it does not believe it is the correct way to run the system, but Eskom just carries on, Bukula said. If they had the extra two percentage points available, they would not have needed the OCGTs to the same extent, he says. “Two percent of 40 000MW generation capacity is significant.

“We say if you continue using the OCGTs knowing that we have a hardened view on it, don’t expect that we will give you money for the over-expenditure.”

Nersa believes only that amount of capacity should be taken out of service that will still allow for the expected demand as well as the reserve margin. “Don’t say we maintain at all cost. Only take down what is critical and maintain well.”

He said many of the units that are taken out of service for routine maintenance break down again shortly after. “There is an issue with the quality and management of your maintenance.” He says Eskom should reduce the amount of maintenance done at any point in time, stop blaming contractors, find the contractors who work well and use them to fix plant so that it is reliable for the next three years.

He said currently Eskom is not even achieving the 80:10:10 ration. “It is an aspiration. Until they reduce the plant taken down for maintenance we will limit the amount we award them for OCGTs to what we consider prudently incurred costs.”

Electricity demand is now lower than in 2007. Since then, 5 000MW of generation capacity has been added when Komati, Camden and Grootvlei were brought back to service. “Where has that generation capacity disappeared to?” It is in the large amount of plant taken out of service for maintenance, he said.

He says if it is the shareholder (government through the minister of public enterprises) that demands the high rate of planned maintenance, Eskom must ask the shareholder for money. It will still be taxpayers who will cough up.

Nersa also awarded Eskom a reduced amount for demand side management (DSM). Bukula said the problem with DSM is that customers pay for programmes that encourage electricity savings. If these savings are realised, Eskom’s sales volumes decline. Tariffs are calculated by dividing sales volumes by expenses, so lower sales volumes will result in further tariff increases – an upward tariff spiral.

The Nersa methodology does make provision for unforeseen expenses through the Regulatory Clearing Account (RCA). That is a reconciliation of Eskom’s over- and under-expenditure every year. If it shows a deficit it may be recovered through a tariff increase and if it is a surplus the tariff may be decreased.

Bukula said the RCA is not there “to stop gaps that were deliberately created”, but to see to it that Eskom is not worse off after prudently incurred expenses. Nersa is currently finalising the numbers for the 2012/13 financial year, but the effect will be spread over three years starting in March 2015. So no tariff increase beyond the 8% announced earlier for this year.

Eskom has also blamed load shedding on March 6 on wet coal at its Kendal power station.

Bukula said after the power crisis in 2008, when coal stockpiles were virtually depleted at the power stations, Nersa increased the average number of required coal stock days from 21 to 40. It then gave Eskom a year to calculate the number of stock days at each power station, taking in account the specific risks like an open-cast mine exposed to rain. Finally the requirement was increased to almost 50 days.

“Now you cannot tell me that this rain that has been for two weeks depletes your 50 stock days.” There should be enough coal even if it rains for a month, he said.

“If you stack coal, water will drain to the ground. You scoop from the top, but if you don’t have enough coal, you will scoop from the ground where it is wet. What we are saying is they have not managed the stockpiling days in the way we have said”.

He said it is unacceptable that Eskom took coal directly from the mine. That is what is done when you don’t have stocks….

About Eskom’s argument that the quality of coal supplied by the mines is inadequate, Bukulu said the most supply contracts allow for quality variations within the specified range. The solution is getting coal from more than one colliery and blending lower grade coal with higher grade. “It may be complex, but just like with heart surgery I don’t expect problems when I go in, because it is a complex process. You are specialised and should do it well.”

Bukula said the regulator has in principle agreed that Eskom may spend money on STPPAs, but has still not received the formal and detailed application.

The regulator believes it has awarded Eskom enough money for demand side management. If it wants to do more, the utility should provide the detail and it will be measured for prudency.

Nersa is also awaiting detail about expenditure on OCGTs, but “have a hardened view” in this regard.

If there is still a deficit after the regulator has reviewed Eskom’s finances and allowed what it sees fit and Eskom’s sustainability is at stake, the shareholder will have to assist, said Bukula.

If for argument sake there is a deficit of R20 billion in one year, it translates into a tariff increase of 18% instead of 8%. “Is that what must be done? Is that what we want the country to get? We implement policy. If that is what the policy says, we will implement, but is that what the country needs?” he asks.

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