Adjusted for inflation, the current Eskom tariff is the highest it has ever been and yet the regulator is being asked to allow increases of about 50% over the next three years. Motivation for this request is the fact that Eskom cannot fund its current and future expenditure at current revenue levels. This is the immediate problem.
The solution offered by the Presidential Eskom Sustainability Task Team is to split Eskom into three parts under a holding company. The reason given is that this would, at some time in the future, enable areas where excessive expenditure arises to be identified.
Scepticism about the effectiveness of this solution and a suspicion that it is the prelude to the piecemeal break up and privatisation of Eskom is probably justified. Why this would be a disastrous move is the subject of another article. The purpose of this one is briefly to set out the real causes of the conditions now being experienced by Eskom. The objective is to guide what should be done to recover the situation in the near term.
Informed observers of the Eskom crisis identify five strategic errors made by the government and by Eskom management over the last 20 years. These were, in order of importance:
- Changing the coal supply strategy from using tied collieries, owned and operated by large mining houses, to a system of the open-market purchases
- Concluding power purchase agreements with renewable energy suppliers at prices far in excess of the value to Eskom of the electricity supplied
- Building Medupi and Kusile to nonstandard designs rather than the proven, well-tried design used in previous power stations
- Allowing the condition of Eskom plant to deteriorate to the point where some 30%, rather than the more normal 10%, of generating plant is out of commission at any time
- Agreeing to salary and wage increases that have increased the income of the average Eskom employee 50% more than the increase in the CPI.
The most efficient way of supplying a power station with fuel is to cut coal from a coal-seam, load it onto a conveyor which carries it directly into the station coal mills. From there it is blown into the boiler. Imbalances in the rates of supply or usage are covered by adding to or drawing from stockpiles at the station. The economics are further improved by using low-grade coal that cannot profitably be exported or used by local industry and is therefore worthless to any other user.
For this to work the power station needs to be built in the immediate vicinity of a suitable coal deposit. It then needs either to own and operate the mine itself or have it owned and operated by a substantial mining company that is willing and able to enter into a cooperative arrangement over the combined lives of both the mine and the power station.
This was the Eskom coal supply strategy in the past and was responsible for it being one of the cheapest electricity suppliers in the world.
The excess cost of the current strategy amounts to about R37bn per year.
Renewables such as solar or wind are what is known as nonfirm power. This means that the utility must own and continuously operate base-load generating plant to cover periods when the supply of renewable energy fails. The only value in a nonfirm supply is the cost of the fuel not used. Eskom is paying R29.5bn for renewables that have a value of only R2.5bn. The loss is, therefore, R27bn per year.
Mismanagement of the Medupi and Kusile projects appears to have been a disaster of considerable dimensions. The costs involved have reduced Eskom to a state of insolvency and would have bankrupted the organisation had the government not come to the rescue on several occasions.
Regrettably little can be done about that now, beyond managing the excess debt that has been created as a result.
Deferring planned maintenance on power stations in response to financial pressures was a serious policy error. The result has been an increase in costs associated with the use of less efficient plant and a loss in revenues from an inability to supply the total system demand.
The result has been the loss of 20% of Eskom effective generating capacity.
Overstaffing is not the cause of the excessive wage bill. While there are, no doubt, people on the Eskom payroll who do not have enough to do or are doing things that have no value to the electricity consumer, the numbers involved are not notably out of line with what should be expected in Eskom, all things considered. The problem is the levels of salaries and wages that are being paid. The excess over and above what would be reasonable amounts to about R7bn per year.
In summary, therefore, strategic and policy errors made over the past two decades which can be reversed in the short to medium term would reduce the Eskom costs of operation by R37bn for coal, R27bn for renewables and R7bn for salaries and wages for a total of at least R71bn per year. This is probably something of an under estimate. These are the problems that need to be addressed immediately.
Separating generation from transmission, as is now planned, would be another gross strategic mistake with catastrophic economic consequences.
• Joubert, formerly a corporate economic consultant at Eskom, is now with Econometrix. Van Dam was formerly head of the management consulting unit at Eskom and is now an independent corporate strategy consultant. All figures quoted in in this article were deduced from published Eskom documents.
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