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How can Eskom turn the lights back on?

Challenges the utility faces and possible solutions.

Struggling state-run power firm Eskom subjected South Africa to the worst power cuts in several years this week, after a decade of missteps when electricity sales stagnated and costs soared.

The outages expose the risks to Africa’s most industrialised economy from Eskom’s virtual monopoly and the failure of successive governments to take on labour unions and leftists in the ruling African National Congress (ANC) who oppose change.

President Cyril Ramaphosa appointed a new board at Eskom in 2018 and plans to split the utility, which expects to lose about R20 billion this year and next. It doesn’t even earn enough to service its mountain of debt.

Analysts say bolder steps, not just a break up, are needed to rescue a firm that supplies 90% of the nation’s power.

But South African officials have ruled out selling Eskom and more borrowing will only bury the company deeper in debt, which leaves it up to the government to step in with a bailout.

Below are the challenges Eskom faces and possible solutions.

Why are the lights going out now?

Eskom’s power station performance has deteriorated steeply in part because of delays to critical maintenance work.

This week, around a third of Eskom’s 45 000 megawatt (MW) installed capacity was out of service because of plant-related problems, diesel shortages and planned maintenance.

Eskom has a plan to improve performance, such as overhauling units that have been shut down for long periods and fixing design flaws at two major power projects, Medupi and Kusile.

The aim is to lift the Energy Availability Factor, or the level at which capacity can be used, to 77 percent by late 2020 from below 70% now.

But long-term neglect means there are no quick fixes. “It will take years to sort out the problems that have built up,” said Chris Yelland, a Johannesburg-based energy analyst.

How can Eskom fix its coal problems?

More than 80% of Eskom’s power is produced from coal dug from South African mines. But spending on primary energy, mostly coal, has more than quadrupled in the past decade, reaching R85.2 billion in the year to March 2018. It has also faced supply shortages.

“Eskom’s coal procurement needs to be sorted out, with people brought in who understand mines and the quality of coal. Bribe-taking is still a big problem,” said Xavier Prevost, a senior analyst at XMP Consulting.

Eskom’s new management acknowledges its finances have been hurt by fraud and corruption and says it has investigated hundreds of instances of alleged wrongdoing.

Eskom’s supply problems were compounded by its decision to reduce investment in “cost-plus” mines, where it contributes to costs and receives a guaranteed volume and quality of coal.

Eskom’s new management has reversed that policy, pledging to invest up to R12 billion in cost-plus mines in the next five years. It has also signed more than 40 coal supply contracts.

Is it time to cut the workforce?

Eskom employs 48 000 people, after hiring about 12 000 additional employees in the past decade. A World Bank research report published in 2016 said two-thirds of employees weren’t needed.

Cutting jobs will be politically difficult for Ramaphosa before this year’s election, when he will have to rely on unions allied to the ANC if he wants to a decisive mandate.

But analysts say it is a case of when, not if, jobs will go.

Eskom has trimmed its executive management from 21 people to nine by combining roles. Eskom executives have also told investors they hope to gradually reduce staff numbers by a third, one investor has told Reuters.

What about Eskom’s debt mountain?

Eskom’s debt pile, which stood at R419 billion at the end of September, is perhaps its greatest challenge. Eskom has been assigned a credit rating from S&P Global of CCC+, deep into “junk” territory.

The debt was largely racked up to build Medupi and Kusile, two of the largest coal-fired power stations in the world which have suffered massive cost overruns.

Read: Cost to fix Medupi, Kusile balloons to R8bn

The other side of the messy R8bn Medupi, Kusile story

Analysts say Eskom needs a bailout, a tough call for the government when its sovereign credit ratings are under pressure.

Last year, Eskom Chairman Jabu Mabuza urged the government to take on R100 billion of the utility’s debt.

Ramaphosa was initially cool on the idea but has since said the government would unveil measures to support Eskom’s balance sheet in a budget speech on February 20.

Nedbank CIB analysts estimate a bailout of R150 billion would be required to cover Eskom’s liquidity shortfall, while 190 billion rand would put it on a more sustainable path.

Why not just raise electricity prices?

Eskom has eroded its capital base by selling power for many years below production costs. That remains the case even though average power prices have risen about fourfold since 2007.

The World Bank’s 2016 report found South Africa had some of the lowest electricity tariffs on the continent.

Eskom has applied to energy regulator Nersa for tariff increases of 17.1 percent in 2019/20, 15.4 percent in 2020/21 and 15.5 percent in 2021/22. But Nersa tends to grant much smaller increases than Eskom demands.

Nersa will respond to the latest requests by mid-March.

Will splitting up Eskom help?

Ramaphosa wants to split Eskom into entities responsible for generation, transmission and distribution, although they would still operate under the same Eskom holding company.

Analysts say that doesn’t go far enough.

“Separating within Eskom means the incentive issues and monopoly mindset will remain, and any upside from internal capital allocation being more transparent within entities may be limited,” said Peter Attard Montalto, head of capital markets research at Intellidex.

Read: Splitting Eskom will protect its most strategic asset

One option would be to remove the holding structure and make the public enterprises ministry the shareholder of all three, making each unit function more independently.

Another would be to break up the generation business into several smaller companies owning a mix of old and new power stations, which would compete with independent power producers to supply the cheapest electricity to the grid.

How tangled is its distribution network?

Eskom is responsible for distribution in some areas of South Africa, while municipal distributors are responsible in others. And all of them face problems collecting payments.

Eskom is owed more than R30 billion by municipalities and customers in the sprawling Soweto township on the outskirts of Johannesburg, a debt which continues to grow.

“Municipalities are dragging Eskom down,” analyst Yelland said. “The distribution sector needs to be rationalised into a much smaller set of efficient, viable businesses.”

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They “remove” the good experienced engineers on the basis of colour , appoint “management” on the basis of politics , employ 50% more people than required and wonder why the place can neither fix its tecnical problems nor be profitable . it boggles the mind . Now they appoint experts from overseas to tell them what Ive just told you .
the Entire problem is Political & Unions & corruption.
I trust the consultants who are about to cream a fortune are BEE Compliant .

@edalsg I disagree with your statement that good engineers based on colour are removed at Eskom. If you had any idea of Eskom structures then you would know that majority of Senior engineers are white. Politics, corruption and mismanagement are the major pitfalls of Eskom. Lets not blame the technical black engineers that are qualified to be doing the jobs they were employed to do. The engineers are there based on their professional qualifications. Eskom has one of the best electrical engineers on the African continent and they are not all politically placed.

Spot on edalsg. The greedy unions are going to have to shut up and accept whatever rescue measures are implemented. Otherwise there will be no Eskom, no South Africa and NO JOBS AT ALL. Which will be awful for trade union leaders – whatever will they do without all those lovely workers’ dues rolling in? Have to switch from Johnny Walker Blue to Black?? Oh, the suffering!
The upside however is that there is now likely to be a massive upsurge in renewable power. PV panels can be installed in weeks and provide electricity at more competitive rates than coal power can. Wind turbines will take a bit longer, but far less time than it will take to fix the utterly messed-up Medupi and Kusile power stations, thanks to cadre deployment, racist policies, inept ANC management and expert corruption. Never waste a good crisis.

Sometime is life we are confronted with hard decisions. In general choosing the correct way forward requires a great deal of wisdom and testicular fortitude. Maggie had both of these characteristics. I doubt that Cyril has either but he may surprise us yet. Be that what it may, they say that a broken clock is right twice a day. Breaking up Eskom is the right thing to do and I have been saying this for years. It is a good thing the ANC are listening to sense for once in their miserable existence. Eskom needs to break up into power generation, power distribution (grid) and sales. Each power station must be sold and the money thus obtained used to retire debt. Each power station must run as a private entity and sell power to the grid on a arms length commercial basis and this includes IPPs selling solar at R2.40 per kWh. Good luck with that. Each power station must be accountable to their shareholders. The grid must be privatised and run as a regulated monopoly accountable to its shareholders. The grid company is responsible from the power station to the meter. The sales company is responsible for installing meters, connections, billing and collection. There is no reason why many sales companies cannot operate in one city competing with one another as it happens elsewhere. This drives efficiency. Those who steal power must be prosecuted to the full extent of the law. If I speed and they take a photo of me, the owner of the car is assumed to be liable and has to prove innocence. Why not do the same with illegal electricity connections? The owner of the house is assumed to be liable for theft.

The main losers will be the redundant union members, those parasites who steal electricity and corrupt municipalities that mark up electricity to run their gravy train. This is where the problem lies. All of the above are fairly and squarely in the ANC fold. This is where the fortitude bit comes in. CR needs to take on his own constituency to save the country. It’s come down to that. Hard choices, there Cyril. Will he do the popular thing or the right thing? On choosing the former, history will judge him harshly.

“The World Bank’s 2016 report found South Africa had some of the lowest electricity tariffs on the continent.”

The one-sidedness of this pronouncement never cease to amaze me… you want to charge an emerging market developed worlds prices on goods and services (even those produced locally)but you do not pay them salaries that are paid to developed countries citizens even for doing the same jobs as those in developed counties.

The madness is simply demonstrated by using the McDonald Burger prices… A teacher in the USA earns $X and a teacher in RSA earns $-13X (the Rand being 13 times less than the USD. If both buy a burger the RSA teacher is out of pocket thirteen times compared to the USA teacher. Fix pay structure first the do international pricing parity.

If I understand correctly, ESKOM needs somewhere between R150bn to R190bn to get itself in the clear or at least just sustainable. The municipalities owe R30bn. How is the municipalities identified as the primary issue for the troubles in ESKOM according to Yelland? Why doesn’t the ANC for a moment forget about the party and do the right thing and remove the two thirds of employees? Surely the good of the people is more important than the good of the party?

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