Tag: grid

Eskom: a powerless state entity

By James-Brent Styan for Fin24

A week before South Africa shut down for the December holiday, the country was hit with nationwide rolling blackouts.

Things had not been so bad electricity-wise in years.

In fact, since 2014, load shedding had disappeared as Eskom seemed to have gotten its act together.

Indeed, in May 2016 former President Jacob Zuma promised that South Africa will “never, never, ever again” have load shedding.

Alas, it turned out to be a hoax, one that could still lead to thousands of job losses and holds the very real possibility of bankrupting the country.

The Eskom disaster could not have come at a worse time as SA is struggling with high unemployment and low growth.

At the beginning of January, the World Bank released its 2019 Global Economic Prospects publication in which it stated that economic growth in sub-Saharan Africa is expected to reach 3.4% this year.

However, it’s projecting that South Africa’s economic growth will be only 1.3% in 2019.

According to the National Development Plan, in order to tackle the country’s very real socio-economic challenges, SA would need average economic growth of 5% per year by 2030.

Eskom’s problems will no doubt drive the nails even deeper into the coffin of economic growth.

In fact, while 2018 turned out to be an annus horribilis for Eskom, with stage 2 load shedding returning, 2019 may be even worse.

Eskom itself is already planning for stage 8 load shedding.

That could mean load shedding of up to 12 hours per day.

This is an unlikely scenario, but not out of the question – the level 8 load shedding schedules exist.

Eskom’s core issues

Eskom has two fundamental problems. The first is its ability to keep the power on. The second is its finances.

All the other issues – like coal problems, bad debts and political interference – simply exacerbate these two fundamental problems.

The first problem is critical for SA. If Eskom cannot guarantee that the power will remain on, SA will be unable to attract foreign investors – especially the sort we need most, those investors who want to build big factories or mines that are labour-intensive and will help create jobs.

In the past, SA managed to attract investors with the promise of cheap electricity.

Today, not only is electricity no longer cheap, it is also no longer reliable.

At the moment, Eskom has a total installed power generation capacity of roughly 45 000 Megawatts (MW).

But only about 30 000MW can be relied upon to actually work. The rest is broken or shut down.Eskom’s plant performance – or ability to keep the power on – can be measured by looking at the Electricity Availability Factor (EAF).

Ideally the number should be around 85%, with 10% kept in reserve and 5% out for maintenance.

At Eskom’s interim results for the six months to 30?September 2018, the entity stated that EAF was 75.01% to September 2018 and had dropped to 74.2% in October 2018. (Issues like poor coal and old plants contribute to the poor performance).

According to a status update from Eskom in November 2018, the number has kept plummeting to below 70%.

In response, it operates its emergency open-cycle gas turbines at ever-increasing rates to meet demand and avoid load shedding.

It is uncertain how much longer this can be kept up.

The second problem of course affects the first.

Eskom’s finances are dire. In 2008, Eskom held an A1 investment grade credit rating.

At the end of 2018, rating agency Standard & Poor’s maintained Eskom’s rating at CCC+, several levels deep into junk territory (and with a negative outlook).

This rating is unlikely to recover anytime soon and that means Eskom’s debt crisis will only deepen.

Eskom currently borrows money to repay debt. If Eskom were a private sector company it would have been closed down.

Luckily, it is owned by the government, and similar to other struggling parastatals, like SAA for example, government is still bailing Eskom out.

This, of course, comes at a cost to other vital programs.

For example, instead of providing toilets to the 4 000 schools in SA that still rely on pit toilets, the state must use money to rather keep SAA and Eskom going.

Debt is not a problem if a company makes profits and is able to service its debts timeously.

But Eskom is making record multi-billion rand losses.

Eskom suffered a net loss of R2.3bn in 2018, while the 2019 financial results will in all likelihood see the largest recorded loss in Eskom’s history.

The utility noted that a loss before tax of R11.2bn has been budgeted for the 2018/19 year to March 2019.

In September 2018, Eskom indicated that the actual final loss would be worse than budgeted.

Eskom is expecting its debt to increase from R387bn to R600bn within the next four years (as per its results presentation for the year to 31 March 2018).

In 2014, total debt was R255bn.

How are regular South Africans affected?

In 2009, Eskom was selling one kilowatt hour of electricity for 24c.

This year, it is projected to be 97c. That is a fourfold increase and excludes the added costs that municipalities levy.

These tariffs are set to continue to increase exponentially over the next few years, as it is the most viable way for Eskom to get out of its hole.

Eskom’s latest application for tariff increases is in fact happening while you read this.

Public hearings began on 14 January and will continue to 4 February.

If Eskom gets what it wants, the basic price of electricity will increase by 15% per year over the next three years, starting from April.

But even if that increase is granted, there is still no guarantee that SA will be free of load shedding over the next three years.

The increased cost of electricity will also increase municipalities’ inability to repay Eskom. Municipalities – especially in rural areas – already and increasingly cannot afford to settle their accounts with Eskom.

At the end of March 2014, total municipal debt to Eskom was R2.6bn. By the end of March last year, total municipal arrears debt had increased to R13.6bn.

The top 20 defaulting municipalities constituted 82% of total municipal arrears debt, almost 48% of which is owed by Free State municipalities.

In total, 23 municipalities of 257 in the country today have a total arrears debt of more than R100m each.

These numbers exclude the total arrears debt of Soweto. Soweto’s debt is notable because of the size and the difference in response compared to poor, rural municipalities. (It is important to note that Soweto is not a municipality and is provided with power directly by Eskom.)

The total Soweto debt, including interest, was R8.6bn in March 2015.

Total invoiced Soweto debt in March 2018 was R12bn, of which arrears debt constituted about 98%.In addition, Soweto’s debt was written off in 2003.

So this is new debt.

With SA going to the polls this year, this political hot potato will in all likelihood continue to be ignored and Eskom will be unable to collect the R12bn owed.

The crisis that’s coming

Even if Eskom gets all its ducks in a row regarding maintenance and energy availability, it cannot avoid the fact that its existing fleet is old and falling apart.

These plants were always meant to be decommissioned after 40 to 50 years, but Eskom has been running some beyond the 50-year limit.

Plans tabled in Parliament in 2015 stated that a total of 14 800MW of Eskom-owned power stations has to be decommissioned by 2030.

It appears that several units have already been taken offline at old power stations like Komati and Hendrina.

There is a chance that some of these plants could continue to operate a while longer, but at significant cost.

And it’s clear that Eskom no longer has money.

So, while it is true that a new build programme is ongoing (Medupi and Kusile), the new build programme will not be sufficient to replace the power stations that will have to be decommissioned over the next ten years.

And there is no more money to expand the build programme.IPPsOne option to address the demand for electricity is Independent Power Producers (IPPs).

IPPs go some way to reducing the country’s dependence on Eskom, which is a giant monopoly.

However, IPPs have their own problems.

Currently there is 3 774MW of IPP power operational in SA.

In April 2018, Eskom signed agreements with 27 new RE-IPP projects totalling an additional 2 405MW.

Because Eskom runs and owns the transmission grids (the power lines criss-crossing the country), Eskom buys the electricity the IPPs generate and then distributes it.

So the cost for IPP electricity must also be covered by the tariffs Eskom charges consumers.

In addition, the cost of IPP electricity is still higher than the electricity generated by Eskom.

In the 2018 financial year, Eskom purchased 9 584 GWh from IPPs at a cost of R21.3bn (March 2017: 11 529 GWh at R21.7bn).

This came in at an average cost of 222c/kWh (March 2017: 188c/kWh) that Eskom paid.

The average price that Eskom sells electricity for was 85.06c/kWh.

This means that while the IPP portion of total electricity sold by Eskom is small, it is not recoverable via the current tariffs Eskom can charge.

The other challenge with renewable power generation is availability.

In 2018, renewable IPPs in SA achieved an average load factor of 31.5% during the year.

In 2017 it was 30.7%. That means – in a nutshell – if the IPPs were needed 100% of the time, they would only have been able to provide power for 31.5% of the time.

Over the next decade, South Africans will in all likelihood enjoy very little reassurance about the state of Eskom.

But there are two final issues that may take some of the pressure off Eskom. One is the private sector, especially in terms of renewable energy, as well as businesses going off the grid as they opt not to rely on Eskom.

The other is economic growth.

If the country keeps sputtering along on 1.3% economic growth, then load shedding may be manageable, a fact that is utterly depressing.

If a miracle occurs and the economy picks up, load shedding will most certainly become a major reality moving forward.

The country simply, at this stage and for the foreseeable future, no longer has the power generation capacity to drive a growing economy.

SA has not experienced loadshedding for some time. Eskom has certainly made a major effort to improve its maintenance and to keep the lights burning.

Several renewable energy plants have also come on line. Significant electricity price increases must also have contributed to a reduction in use.

However, the main reason for the cessation in loadshedding is that economic growth has dropped to a very low level, after it had already been on a decline since 2007. Real GDP growth for 2016 is expected to be about half a percent or less – much lower than in 2015.

The low growth is due to internal and external factors including the decline in global economic growth, and a concomitant decline in demand for commodities.

Major factories in SA – including electricity-intensive operations, such as steel plants and ferro-metals smelters – have reduced production or closed their plants in response to low demand and prices. Output in both the mining and manufacturing sector declined in the fourth quarter of 2015 and the first quarter of 2016, compared with the equivalent six-month period a year earlier. This, obviously, also had a negative effect on related economic sectors.

As a result of this decline in economic growth, the amount of electricity distributed in SA (excluding electricity sold to foreign countries), as published by Statistics SA (Stats SA), also shows a decline from 2008, with the result that electricity consumed in SA in 2015 was less than that consumed in 2007.

Electricity consumed in SA in the first four months of 2016, according to Stats SA, was 2.5% down on the consumption for the same period in 2015, as a result of a further drop in economic activity in 2016.

This reduction in demand for electricity has eliminated the need for loadshedding for quite a while, and has actually led to a small surplus in electricity supply capacity.

But SA is not yet out of the woods with regard to sufficient supply of electricity. New generating plants should have been on line in 2007 already, according to the government’s white paper on energy policy, published in December 1998. Medupi’s first unit came on line about eight years late.

There is a close relationship between real GDP and electricity consumption.

Before the late 1990s, the growth rate of electricity consumption was higher than the growth rate of real GDP. However, since the late 1990s, the situation has changed and the growth rate of real GDP is now higher than the growth rate of electricity consumption. The reason for this change is the fact that the economy became less electricity-intensive after 1997, in terms of electricity consumption per unit of real GDP.

There are various reasons for this decline in electricity intensity. As any economy matures, the secondary and tertiary sectors become more dominant, and their contribution to GDP increases relative to that of the primary sectors.

The secondary and tertiary sectors use less electricity per unit of output produced compared with that of the primary sectors. Mining, for example, is much more electricity-intensive than a factory producing finished goods.

As economies develop, they become more services based, which also contributes to a reduction in electricity intensity.

High electricity prices have also had an effect on electricity intensity through, for example, encouraging the more efficient use of electricity.

The average so-called growth margin (the real GDP growth rate less the growth rate of electricity consumption) is currently equal to about two percentage points.

While the demand for electricity is depressed, mainly due to poor economic growth in the country, this relationship between electricity consumption and real GDP also implies that insufficient electricity-supply capacity will act as a constraint on economic growth.

Electricity is often referred to as an enabler of economic growth.

When the economy starts to recover again, this constraint will soon start limiting the economic growth rate, and will lead to the country missing the opportunity to capitalise on the next commodity upturn. Loadshedding will return. It could even be necessary before then, if output from some of the large generating units is lost due to technical problems.

The relationship between electricity consumption and real GDP, as demonstrated, shows that for an average real GDP growth rate of 5% per annum, an average sustainable growth in electricity-supply capacity of 2,5% to 3% per annum will be required.

This will have to be taken into account in the development of long-term electricity plans, to enable high and sustainable economic growth. What makes this challenge even bigger is the fact that, at the same time, provision will also have to be made for the replacement of a number of old power stations, which are gradually nearing the end of their life.

By Johan Prinsloo for www.bdlive.co.za

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