Picture: Pixabay
Picture: Pixabay

Our darkest hour: gear up Eskom!

By Ryk de Klerk Time of article published Mar 22, 2019

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JOHANNESBURG – Everybody knows our beloved country’s citizens, businesses and economy are literally and figuratively plunged in darkness and communication channels are severely interrupted - ask yours truly. I sniff the dark angels at play, but is there a way out?

I do not want to speculate about any allegations of malfeasance by some of the company’s executives and possible state capture but we all know in what deep trouble the state-owned enterprises are, financially and operatively. The deep question is whether Eskom can survive in its current form.

A former colleague, Chris Logan, a well-respected analyst and fund manager, taught me one principle: look out for companies where management makes the assets sweat.

By that he meant to look out for those companies that continuously record high returns on capital even in ex-growth or out-of-fashion industries as they tend to set the trends or pace in the industry.

Not only that, look out for companies where valuable assets are underutilised due to poor management and where a change at the helm by upshot business people can unlock significant value.

Does coal have a role to play in electricity generation in the future? According to the Chamber of Mines of South Africa (COM) in their Coal Strategy 2018, coal power has managed to lift millions of people in China out of electricity poverty - out of a population of 1.3billion people a mere 3million people do not have access. A total of 1139 HELE (high efficiency, low emissions) power generation plants across Asia are planned or under construction compared with the 716 plants in operation.

As in South Africa, electricity supply in India has not kept pace with growth in demand. India’s electricity market is dominated by coal, which accounts for more than 75percent of total electricity generation. In India, 395 HELE power generation plants are planned or under construction.

Coal exports to India account for nearly 50percent of South Africa’s total coal exports and nearly 25percent of India’s coal imports. We have committed ourselves to the challenge of climate change by ratifying the Paris Agreement, which came into effect in November 2016, but it is clear that we are just shifting the emissions or smoke to somewhere else on the planet.

We find ourselves in India’s space.

However, we act as if everyone in this country has access to electricity and the greens are arguing that coal mining and/or the use of coal should be phased out or even stopped immediately. We are a developing economy - some will say a Third World country - but we are endowed with 3.5percent of the world’s total coal reserves.

I agree with the chamber’s statement that: “Environmental policies and regulations aimed at reducing the country’s carbon emissions are welcome but must take into account South Africa’s developmental exigencies - in terms of affordable and reliable power and energy security - vis a vis that of South Africa’s global trade and investment competitors.”

Coal is and should be the core of the energy mix in this country. According to the chamber, in 2016 more than 77000 people were employed in the coal industry and indirectly created more than 170000 extra jobs in the economy.

In total more than 1.2million livelihoods depend on these jobs.

Sweat the coal assets. Eskom can use the abundance of coal it has for its own benefit by building HELE power generation plants or, even better, partner with our BRICS members and/or private sector to embark on it? As the chamber said: “The World Bank and the International Monetary Fund have been loath to lend funds to utilities and governments that want to build coal power plants.”

Sweat older plants. According to the chamber, over the next 10 years Eskom will close four power stations, or 8800MW of installed capacity, which will cost 30000 jobs directly and with the multiplier effect probably another 70000 indirectly in other sectors of the economy and mainly in the transport and storage sectors. Surely, these assets can be sweat to produce for longer and keep jobs for longer?

Sweat the power grid. One major asset that should not be underestimated is the value of the power grid or the distribution network. The network has been paid for by Eskom, whether with debt or cash, but it is the company’s asset. If another company wants to use it to distribute its product, whether wind energy or other renewable energy, surely they must pay for it.

If Spar wants to use Shoprite’s distribution network, it will need to pay for it - no freebees. Why must Eskom be forced to buy their competitor’s product unless it runs short of its own?

Sweat the competitors. Eskom must also be allowed to develop its own renewable energy resources in competition with others operating in the same field.

If the government wants to subsidise renewable energy, Eskom should get the same advantage.

Sweat the consumers. Get rid of the onerous contracts signed in the past when they come up for renegotiation specifically those lucrative contracts of the aluminium smelters. The amount of coal used to provide those smelters with electricity could amount to more than 8million tons a year and could be exported at a margin of nearly R3billion a year.

Sweat your pricing. According to the chamber, Eskom applies a cost-plus model in procuring over 50percent of its coal. This means Eskom directly invests in coal operations, which allows it to procure coal on a cost-plus basis. This model effectively benchmarks the extent to which other market players can sell coal to the utility.

Sweat your executives: appoint a competent board of independent directors with excellent skills in the industry and get your business models and structures right.

Although there is no quick-fix except the optimising the performance of current resources (assets, labour and capital) there are vast opportunities for the state utility to grow out of its current quagmire, but it will take a lot of sweat and guts.

Ryk de Klerk is an independent analyst. Email him at [email protected] His views expressed here are his own. Consult your broker and/or investment adviser for advice.


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