Eskom, Independent Power Producers, and the future of power generation in SA
In December 1998, the government of the Republic of South Africa released a White Paper on Energy Policy. This White Paper set out the government’s vision for the electricity-supply industry. The White Paper stripped Eskom of its status as supplier of the last resort and effectively removed the mandate for deciding on new generation capacity from Eskom and gave it to the Department of Minerals and Energy (DME).
The White Paper established key priorities for the electricity supply industry. The priorities included the introduction of competition in the industry especially the generation sector, non-discriminatory access to the transmission system, encouraging private sector participation in the industry and giving customers the right to choose their electricity supplier.
In August 2000, the Department of Public Enterprises published ‘A Policy Framework: An Accelerated Agenda towards the Restructuring of State-Owned Enterprises’, which directed Eskom to divest more than 30% of its power stations. It encouraged the introduction of private strategic equity partners at business units’ level and envisaged the partial privatisation of Eskom’s operating assets although not at the Eskom Holdings Company level.
Eskom was directed to form different clusters of power stations that would promote internal competition prior to the introduction of private sector participation in the generation sector. Generation Business started exploring opportunities in the areas of trading and bidding via clusters. Trading and bidding via clusters, became part of the everyday business and continued to be refined in preparation for the partial privatisation of Eskom power stations.
Consistent with the Policy Framework of August 2000, government was determined to establish a separate state-owned transmission company that will be independent of generation and distribution businesses, with ring-fenced systems and market operation functions. It was envisaged that this transmission company would be a subsidiary of Eskom and would eventually be established as a separate state-owned transmission company before any private investments could be made in the existing or new generation capacity.
There was no basis for the radical restructuring of Eskom. The reasons were purely ideological. Then Eskom CEO Thulani Gcabashe was correct when he questioned why government wanted to radically restructure Eskom and to partially privatise some its core assets. Eskom had the lowest electricity prices in the world, and an excellent technical performance when benchmarked against the rest of the world.
It was named the Financial Times Global Power Company of the Year in 2001 at the Global Energy Awards Ceremony in New York. My submission is that government was scratching where it was not itching and as it would be shown later, it pushed Eskom over the cliff because of its interference.
In May 2001, the Cabinet approved proposals for the reform of the electricity supply industry. In terms of these proposals, Eskom was expected to shed a portion of its market share through the sale of 30% of its generation assets to private equity partners. The process was going to be led by government and it was going to start with the sale of an initial 10% to Black Economic Empowerment companies, and a further 20% to local and foreign private sector operators.
The Cabinet approved proposals which included the establishment of a separate state-owned transmission company. This transmission company was going to be a subsidiary of Eskom and eventually would be established as a separate state-owned transmission company. This was necessary to ensure a non-discriminatory and open access to the transmission grid for independent power producers.
In parallel with the government led restructuring of Eskom, the electricity reserve margin was declining. Eskom estimated that excess peaking capacity would be depleted by the year 2007 and excess baseload capacity would be depleted by 2010. The mandate for deciding on new generation capacity had been removed from Eskom to DME through the energy White Paper of 1998.
Eskom advised government that decisions on the new build had to be made soonest to avoid load shedding in the future. Government was not persuaded. Instead, it was determined to divest 30% of Eskom generation assets within 2003-2007. By 2004 the quality and reliability of supply were deteriorating leading up to the six major blackout incidents in the Western Cape between December 2005 and March 2006.
On the eve of the 52nd National Conference of the African National Congress (ANC) at the fundraising dinner in Bloemfontein on 11 December 2007, former President Thabo Mbeki admitted that, "Eskom was right and government was wrong". This after he indicated that government was asked earlier to invest more in electricity infrastructure to keep-up with the country's growth and it failed to do so.
The convergence of a diminished reserve margin and coal supply constraints forced Eskom into an undesirable position of having to interrupt the supply of electricity once again between October 2007 and February 2008. To avoid a potential overall nationwide blackout, a national electricity emergency was declared on 24 January 2008 until 4 February 2008. The energy that was not served between October 2007 and February 2008 was 494 gigawatt-hours (GWh).
On 1 November 2014, a coal storage silo at Majuba Power Station collapsed. The generating capacity was reduced to just over 600 megawatts, down from a full load of 3 843 megawatts. Coal supply to the boilers of five of the units was interrupted. Load shedding was again implemented on 2 November 2014 to prevent a total blackout. The root cause of the coal silo collapse was construction related.
In May 2015, coal supply to Majuba power station was fully restored, enabling the station to operate at 100% load. The load shedding that started on 2 November 2014 was stopped on 8 August 2015. The energy that was not served between 2 November 2014 and 8 August 2015 was 1096 GWh. On 8 August 2015 when load shedding stopped, the only unit at Medupi power station that was in commercial operation was unit 6. There were no units at Kusile and Ingula Power plants that were in commercial operation.
Between August 2015 and February 2018, Eskom experienced the most improved operational performance since 2001. The interim results of 2017 demonstrated a solid performance which was world class; generation plant performance improved with energy availability factor of 83.2% (Sept 2016: 78.4%), the transmission system minutes loss of 1.04 (Sept 2016: 2.74) with no major incidents, a significant improvement in environmental performance with particulate emissions of 0.25kg per megawatt-hour sent out (Sept 2016: 0.29) and water usage of 1.29 litres per kilowatt-hour sent out (Sept 2016: 1.43), the increase in costs per tonne of coal purchased were limited to below inflation at 3.8%(2016: 3.5%) and most importantly, Eskom nuclear performance was given a rating of 2 by the World Association of Nuclear Operators and that is the highest performance rating in the history of Koeberg Nuclear Power Plant.
Mr Cyril Ramaphosa was elected the President of the ANC in December 2017.
On 20 January 2018 and on the day, he was due to travel to World Economic Forum in Davos, he dismissed the Eskom Board and appointed Mr Jabu Mabuza as Chairman. Mr Phakamani Hadebe was appointed the Interim Group Chief Executive. Four Executive Committee members subsequently resigned and the other eight members of the Executive Committee were retrenched. Only the Human Resource Executive remained at Eskom.
After these government interventions, Eskom Operational performance significantly declined. The power system became constrained overnight with the drop in energy availability factor from 83% to 59%. Regrettably, Eskom had to start with load shedding in November 2018 to protect the power system from complete collapse. The power system continues to be constrained to this day and the energy availability factor remains below 70%. Eskom cannot provide assurance that the power system will be stable in the next 18 months.
192 GWh and 1352 GWh of energy was not served in 2018 and 2019, respectively. The cost to the economy based on the unserved energy cost of R95 per kilowatt-hour is R18 billion and R128 billion for 2018 and 2019. Phakamani Hadebe resigned as chief executive of Eskom effective from 31 July 2019. The 17 months Hadebe spent at Eskom revealed operational inefficiencies leading to the conclusion that Hadebe was not the right man for the job.
Jabu Mabuza resigned on 10 January 2020 after Eskom’s board experienced severe political pressure over Eskom’s inability to keep the lights on. In his resignation letter Jabu Mabuza “apologised for Eskom’s inability to meet the commitment it made to the president, deputy president and the relevant ministers at a meeting of 11 December 2019 to avoid load-shedding”.
In part 2 of this series, I will submit that government has given up on fixing Eskom. It is the government’s view if not that of the ANC that “consumers should not put their eggs in one basket called Eskom”. At the same time, the independent power producers (IPP) have a crowding effect on Eskom sales volumes.
Eskom sales volumes continue to decline by more than 1% a year. Its operating expenses are driven by the primary energy costs which include coal, diesel and IPP costs; and have increased by 30% in 5 years. This signals a death spiral for Eskom.
I foresee Eskom Lite by 2030. Post 2030, Eskom as we know it today will cease to exist because government, in a very dogmatic way remains committed to the Energy White Paper of 1998.
* Matshela Koko is the Managing Director of Matshela Energy and a former Eskom CEO.