Lies, damned lies, and Eskom numbers

A worker operates near coal stores in the coal yard at the Grootvlei power station, operated by Eskom. A former adviser to Eskom says the company has done little or nothing to secure future coal supplies in Mpumalanga. Photo: Bloomberg

A worker operates near coal stores in the coal yard at the Grootvlei power station, operated by Eskom. A former adviser to Eskom says the company has done little or nothing to secure future coal supplies in Mpumalanga. Photo: Bloomberg

Published May 15, 2015

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In apparent desperation Eskom has made a last-gasp application to the National Energy Regulator of SA (Nersa) for a massive tariff hike, bringing into sharp focus the sorry state of affairs that threaten this country’s very fabric.

Fortunately, Nersa has refused to be bullied into a hurried decision and postponed their decision for six weeks to permit proper interrogation of Eskom’s claim, no matter how outrageous.

Eskom’s numbers simply do not stack up in support of their claim and appear to be without real substance. A large part of the claim is stated as compensation for contracting 800 megawatts from independent power producers (IPPs) for three years, a total of R20 billion. But this power is resold to the nation at much the same price as its purchase, which means that any loss to Eskom is, at best, only marginal. In fact, with price inflation, the deal with the IPPs could quickly become profitable.

No credit

Another part of Eskom’s demand is to reclaim the cost of supplying diesel fuel to the notorious simple-cycle gas turbines. For unknown reasons, the cost is stated as a three-year total while we cannot predict the cost of diesel six-months hence, much less three years down the road. Even if the diesel is expensive, it still generates considerable revenue for which Eskom apparently gives no credit in their submission.

Apart from the costs of diesel and IPP power, Eskom’s annual revenue target (R130bn) is understated. Based on present levels of power generation and a selling price of 74c per kilowatt-hour (kWh), revenue is under-estimated by some 30 percent, that is unless Eskom is selling far more discounted power than is public knowledge. Are there more power contracts of the BHP Billiton style hiding in the woodwork?

Their claim simply lacks credibility – a blatant attempt to have the public restore cash flow that Eskom have themselves destroyed. What’s more, they are fully aware of it, otherwise why was Nersa only allowed a week to approve the claim?

In recent weeks Eskom have announced, with impossible precision (five significant figures), their daily forecasts of power demand and supply for the following week. How they do this is beyond belief: maybe they have a crystal ball. In the real world there is absolutely no way that an accurate forecast can be made for power demand from a national grid; one can only refer to histories of measured demand, make an educated guess, and then watch the meters carefully.

As for predicting available power supply, Eskom’s principal problem is that of unplanned, that is unpredictable, generator outages. If Eskom has invented a means of predicting the unpredictable, they should join the circus as a fortune-telling act: whatever, an enormous amount of time and energy is spent on this worthless exercise instead of providing the public with the truth, even if this is a display of abject failure.

On the matter of the IPPs, they are vital to the economy. They are the likes of Sappi, Mondi and Tongaat-Hulett who generate major amounts of power from bio-waste in pulp and sugar mills, plus other industries that apply heat recovery and co-generation technologies to various large-scale processes. We understand (from the Treasury) that IPPs now supply some 5 gigawatts to Eskom, around 15 percent of Eskom’s present capacity, but why all or some of this is contracted short-term is not known. It’s very much in the country’s interests for this to be long term, as Eskom’s generator outage is worse than we knew.

It’s common cause that the Department of Energy (DoE) and Eskom dislike IPPs because they are private and, God forbid, they make profit. So Eskom adds insult to injury, recently revealing that all prospective IPPs must design and supply their own export connections to the southern Africa grid. The power is available, but Eskom and its monopolistic regime have now placed another obstacle in the way of it being made available to the grid, instead of actively encouraging more IPPs to participate in the region’s power supply.

Of course, all of this is irrelevant if Eskom has no coal supply. Recent revelations by Ted Blom (a former adviser to Eskom) inform that Eskom has done little or nothing to secure future coal supplies in Mpumalanga, the home of around 80 percent of its power generation. Not that Eskom mines the coal themselves: they place long-term contracts with the likes of Exxaro and Glencore to mine the coal for them in suitable locations, while Eskom must plan the logistics of transporting the coal to at least four major power stations, which are due to be starved of fuel over the next few years.

The logistics involve railway lines and/or very long conveyor systems, not the massive coal trucks that destroy roads and endanger the public. Instead, like a bunch of naughty kids at the back of the classroom, they have spent their energies on qualifying black economic empowerment (BEE) suppliers who are largely incapable of the necessary large-scale mining and who deliver by truck.

Meanwhile, Sasol consumes coal on much the same scale as Eskom, literally within sight of three major power stations. Sasol has just announced the completion of its R15bn project to create four new underground mines to assure the future supply of coal to their Secunda complex, a project which has probably been in progress for the last 10 to 15 years. This style of planning is clearly beyond Eskom’s imagination, much less its capabilities.

Finally, Eskom has exposed itself to all sorts of criticism, both right and wrong, relative to construction management at its infamous Medupi site. Unlike any other entity of its type, Eskom prefers to do its own project management, rather than leaving this critical and complex task to professionals working within and over the various contractors. This explains why ex-chief financial officer Paul O’Flaherty spent over half his time at Medupi on project management, which then might explain why both Eskom’s finances and the Medupi project are in equal disarray.

Medupi is now so late that it could almost have been built twice over, only due to Eskom’s ineptitude in projectmanagement. And they paid ex-chief executive Brian Dames a golden handshake of R15m for overseeing this shambles of his own creation, clearly indicating zero sense of value for money, even if Dames did have the courage to occasionally face the public.

In the real world Eskom should be a major net contributor to the fiscus rather than a leech sucking away at the nation’s life-blood. Right now a conservative estimate of R40bn annual revenue is missing from Eskom’s accounts, revenue which would be generated if only their employees were able to do the work for which they are clearly over-paid, to simply keep power stations in operation.

Profit would be considerable as coal prices collapse and the mining giants scrabble for customers, while power prices are high after the massive escalation of recent years; municipal power debts would be chicken-feed by comparison.

However, Eskom prefers to create fact out of fantasy. If they are serious about the fantasy business they should take themselves off to Disneyland to learn from the experts. They would quickly learn that Disney is only in it for the profit and that management of a make-believe world is hard work, much harder than the simple business of extracting power from coal.

* Roger Toms is a professional mechanical engineer, holding an MSc from UMIST, Manchester, with many years of experience in heavy plant engineering.

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