The cost of Eskom’s three power station headaches

Six billion wasted and years lost fixing three damaged power stations.

Eskom is quick to blame lower than applied for electricity tariffs for its financial woes and doesn’t hesitate to remind consumers of this fact. It’s urgently looking for R3 billion extra to augment its depeleted diesel budget, and warns of regular load shedding if it doesn’t get it.

The National energy regulator of South Africa (Nersa) is however mandated to only grant the revenue if an efficient operator needs to provide electricty for the country.

Nersa has long been of the opinion that Eskom can work more efficiently and has shaped the tariff increases it granted accordingly.

Instead of taking Nersa’s criticism on board, Eskom persists with its argument that there is a R225 billion revenue shortfall over the current tariff period  and that the regulator must be “aligned” with Eskom’s realities.

Moneyweb looked at three recent Eskom events, their effect on Eskom’s generation capacity and financial state and what it says about Eskom’s efficiency.

Duvha Unit 3:

On March 30 last year the boiler at unit 3 of Eskom’s Duvha power station exploded, rendering the unit inoperable.

Eskom in December reported:

“Following damage to the conveyer belt between Middelburg mine and Duvha in December 2013 Duvha changed its coal source resulting in a different type, grade and quality of coal being fed into the boiler. When put into the boiler, this coal resulted in more and different residue. The build-up of residue in the boiler was being managed by the power station. However in conjunction with this there was a build-up of unburnt fuel and insufficient oxygen levels in the boiler. This factor, coupled with the condition of the boiler and operating practice resulted in the failure.”

Eskom did not expand on the problematic “operating practice”.

The boiler has to be rebuilt completely. Eskom says it will be funded by the insurance claim.

Commentators are however sceptical about the willingness of insurers to pay for a failure in operating procedure.

Eskom hopes to place contracts for the repairs by June this year and is not able to estimate the cost. It does say the reconstruction could take 36 to 48 months. That is three to four years!

Sources close to the process told Moneyweb it could cost at least R4.5 billion.

Majuba:

The collapse of the central coal silo at Majuba early in November last year has disrupted the power station’s entire coal feeder system.

While the findings of the investigation have not yet been made public, Eskom group executive for technology and commercial Matshela Koko disclosed to Moneyweb that the investigation is focusing on the design. The Majuba silos, unlike all the other Eskom coal silos, were not lined. This, it is suspected, led to increased corrosion and the subsequent collapse.

He said indications are that the silo was built correctly and according to the design.

Koko could not say why it was not lined, but if that is the issue, one would like to know why Eskom signed off on the design.

The investigation should be completed by March and reconstruction is scheduled to begin in April. The target date for completion is March 2018 – another four years.

The cost of interim measures to mitigate the loss of the feeder system and implementing a permanent solution is estimated at R1.3 billion. This does not include the cost of mitigating the real risk posed by fine wet coal that, in the absence of the automatic feeder system, is being trucked in.

Eskom says available funds have been “reprioritized” for Majuba. “In addition, an insurance claim has been lodged for this incident and we anticipate that most of the funds will be recovered.”

That remains to be seen.

Lethabo:

Also in November a lightning strike set in motion events that saw Eskom’s Lethabo power station drown in ash.

Serious questions have been asked about Eskom’s response to the lightning strike and why ash build-up was allowed to reach such levels. Eskom spokesperson Andrew Etzinger explained that as a result of the Majuba collapse, Lethabo was run very hard. A lack of maintenance and ash clearance backlog set the scene for serious problems. The lighting strike was only the last straw…

The ash has since been cleared, with the exception of the emergency off-loading area which is expected to be cleared by the end of March. This, Eskom says, does not impact on operations.

The cleaning cost amounted to R9 million and the cost to repair the precipitator fields that were damaged as a result of the ash build-up inside the precipitators is estimated at R20 million.

Eskom says some of the work will be executed during the station’s planned outage and are provided for in the outage budgets. “The additional amount required will be funded from the operations budget of the station.”

It should be completed by the end of March.

These three incidents have cost Eskom dearly in money and in power output. At the time of the incidents both the Majuba and Lethabo power stations were completely out of service for a few days. Lethabo is now back at full capacity, but Majuba will be running at half of its capacity until the feeder systym has been rebuilt.

Eskom CEO Tshediso Matona in December linked the unavailability of Duvha unit 3 and restricted capacity at Majuba directly to load shedding. Etzinger also says that load shedding would be unlikely in the absence of those two incidents.

If the diesel budget might have lasted, Eskom would have maintained electricity sales and as a result its revenues would be looking better.

It is no wonder Nersa didn’t allow Eskom the full additional diesel cost it applied for in its recent interim price adjustment relating to 2012/13. Nersa argued with Eskom that less costly coal-fired stations should have been available. Therefore it only compensated it for the extra power generation necessary to keep the lights on at the cost Eskom would have incurred if its coal-fired stations were not on unplanned outages. Eskom is now admitting that it was a mistake to neglect maintenance and its own policy to keep the lights on at all costs led to the increase in unplanned maintenance.

It is a pity that Nersa is timid in its communication. It is hardly being heard in the public domain, while Eskom gets its message across efficiently.

While the cost of load shedding to the economy is huge, government’s war room will be well advised to ask Nersa to speak up a bit, lest it pays up and reinforces an inefficient operator.

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