Author
Date
February 10, 2020

Businesses, locals, and travelers in South Africa will likely continue to face long-term, short-notice power supply disruptions due to load-shedding throughout 2020, as a result of Eskom, the country’s state-owned power supplier, being unable to meet the demand for electricity. Load-shedding entails the daily removal of 1,000-6,000 MW of capacity (out of an available 28,000 MW). The country’s government, led by President Cyril Ramaphosa and the African National Congress (ANC), has committed to repairing Eskom’s ailing infrastructure, addressing maladministration and mismanagement within the company, finalizing long-running and costly large-scale power projects, and combating corruption at the state-owned utility. These issues have been presented as the primary causes of the current crisis, which culminated in the country’s latest round of load-shedding, which began in late 2019. Authorities will likely continue to face significant challenges on multiple fronts to address the vast array of issues facing the state-owned enterprise (SOE).

 

How Supply Constraints Have Grown

Eskom has not always faced supply constraints. In the early 2000s, South Africa’s economy was growing. Demand for electricity was high, and Eskom was managing the country’s demand. The surge in demand was not unexpected, with members of Eskom and government issuing requests as early as the late 1990s for additional resources to expand its power generation capabilities to meet future demand. The requests were ignored and came to a head in late 2007 and early 2008 with South Africa’s first significant bout of power outages due to generation shortfalls. President Thabo Mbeki apologized for the delay in responding to the requests and earmarked around ZAR 200 billion (approximately 28.5 billion USD at the time) for new large power projects to double generation capacity by 2015. The two primary projects were the coal-fired Medupi and Kusile power plants. As of 2020, both major projects remain unfinished with anticipated completion dates ranging from early to mid-2020s. The price tag has also ballooned enormously to approximately ZAR 450 billion (USD 29.8 billion), which is equivalent to the utility’s current debt of ZAR 441 billion (USD 29,2 billion), representing another enormous burden to the government, as a guarantor of a significant amount of the debt, should the utility default on its debt repayment obligations.

Mismanagement at Eskom has added to the company’s woes. Impacted by political intrigue and corruption, Eskom’s board has taken on various guises over the years. With 11 CEOs since 2007, the company has effectively had no strong and decisive leadership or direction. Members of the board have also largely been business-focused and have had little-to-no expertise within the energy sector. Further complicating matters, corruption within Eskom is endemic; Eskom has regularly reported hundreds of millions of rands in irregular expenditure. This has been starkly highlighted during the ongoing Zondo Commission on State Capture. The commission – established to uncover the capture and looting of the South African economy by politically connected individuals – has uncovered severe irregularities in procurements, particularly of coal. It has also implicated board members in corrupt dealings, including with the now-infamous Gupta family – which was allied to and facilitated and directed widescale corruption during and, allegedly with, President Jacob Zuma’s administration (2009-2017).

 

Selected Eskom Indicators Highlighting the Firm’s Struggles

 

 

2007

2019

Debt *

 

40.5

440.6

Employee Costs *

 

9.5

33.3

Total Employees

 

32,674

46,665

Coal Costs *

 

10

58.5

Average Selling Price (c/kWh)

18

90

* in billions (ZAR)


 

Government’s Response to the Electricity Generation Shortfall

Coal-Power

To the government’s credit, the current administration has taken steps to address the current crisis. In early 2019, President Ramaphosa suggested that Eskom would be sub-divided into separate entities so that the utility’s recovery could be better managed. On Jan. 31, 2020, new CEO Andre de Ruyter, a high-profile businessman and former CEO of Nampak, was hired to reverse Eskom’s fortunes. He has indicated that he is in the process of establishing boards for the new branches, namely generation, transmission, and distribution. The breakup falls in line with international best practice, and it is hoped that each division will focus on its revenues and costs, thereby driving efficiency. Creating these new entities and transferring resources to each will likely take several more months.

The government has committed to injecting approximately ZAR 23 billion (USD 1.5 billion) per year into Eskom over the next ten years, and the National Energy Regulator of South Africa (NERSA) has approved additional tariff increases for 2020 to bolster Eskom coffers further, while authorities have increasingly clamped down on nonpaying customers, particularly those in Soweto, Johannesburg. Chronic refusal by residents in this area to pay outstanding accounts has seen that area’s debt balloon to approximately ZAR 16 billion (USD 1.1 billion). 

The government and the new Eskom CEO have been vocal about addressing corruption within the organization. They are working with authorities to identify and prosecute individuals involved in illegalities in recent years. The process will likely take the majority of 2020, and prosecutions could continue for several years. The damage to Eskom’s culture and work ethic will almost certainly take years to repair, and there are no indications of a “quick-fix,” despite the positive rhetoric coming from the new CEO and the government.

 

Potential Stumbling Blocks

Several issues could hamper authorities’ attempts to restore full capacity and end load-shedding, or which could have secondary security and/or political impacts over the short-to-medium term.

 

Unions Concerned About Changes to Eskom

Unions representing Eskom workers are opposed to the government’s plans to split up Eskom. Unions are concerned that these developments will lead to job losses and have already held a public demonstration against the proposals in mid-January. Meanwhile, the Congress of South African Trade Unions (COSATU), a member of the Tripartite Alliance with the ANC and South African Communist Party (SACP), has suggested using public sector worker’s pension funds to assist in bailing out the country’s SOEs, including Eskom, if it can be guaranteed that no job losses will be forthcoming. The proposal is controversial, and it is unclear if it is workable. Should Eskom persist with its restructuring, and if this leads to job losses, which is anticipated, a reaction from unions is almost certain and will take the form of strike action or protests at Eskom facilities – this could result in further disruption to Eskom operations. Other unions could also become involved if workers are laid off, if the power outages worsen or if the government takes decisions that could impact workers’ pension funds. Such action could include protests near Eskom, government sites, and city centers, or wide-ranging, multi-sectoral strike action.

 

Political Interference

With an SOE, political interference is ever-present. Despite much fanfare and optimism regarding de Ruyter’s appointment, the government has already allegedly begun planning separately from the Eskom board. Minister of Mineral Resources and Energy Gwede Mantashe stated Feb. 3 that the government was seeking to create a generation company to compete with Eskom. De Ruyter was unaware of this. These comments come on the back of another government promise by President Ramaphosa in December 2019 that there would be no load-shedding until Jan. 13. Subsequent load-shedding led Deputy President David Mabuza to say that Eskom had misled Ramaphosa. The Eskom chairman at the time, Jabu Mabuza, resigned in early January over this issue. 

 

Weather Conditions Affect Coal Mining Operations

Eskom’s primary fuel source is coal, and during periods of intense rainfall, available coal stocks become increasingly unreliable. This is a particular risk during the end and start of the year, when most of the center and north of South Africa receives its annual rainfall. Most coal-powered stations are located in this area. One of the causes of the severe load-shedding in late December was directly due to intense rain near coal mines and coal-powered stations in the north – wet coal is harder to process – and led to a decrease in generational capacity. Furthermore, while coal-fired stations are located near coal mines, lack of investment at these sites has led to the utility relying on independent suppliers, at a higher cost (see table). 

 

Power Stations Under Strain

Eskom’s aging power stations are likely to continue to experience breakdowns, and with its two new large capacity stations only due to be completed by 2022-2024, the load-shedding threat timeline could be much longer than the 18 months that the new CEO recently announced. Two aging plants, Grootvlei and Komati power stations, which provide 2,100 MW to the grid, are scheduled to be decommissioned by 2020, but this remains unlikely given the power supply shortfall.

During outages, Eskom has also relied on its open-cycle gas turbines (OCGTs) to support its capacity. These are expensive to run due to high diesel costs. Furthermore, the OCGTs are not designed for continuous use and could, in turn, break down.

 

Customers Explore Alternative Power Supply Options

Businesses in South Africa are aware of the challenges, and most, if not all, have already incorporated electricity disruption into their basic contingency plans. Diesel generators and uninterrupted power supply (UPS) systems are commonplace in most mid- to large-sized businesses. Companies across the spectrum are also increasingly investing in off-grid power sources, such as solar photovoltaic systems. Seasoned travelers and locals are aware of the risks, and have invested in solar power lights, mobile phone power banks, and mobile apps warning of imminent outages. The issue has, over the years, been ”normalized.”

 

Advice

  • Develop or review your business continuity plan (BCP) sections regarding utility outages.
  • Identify business-critical functions that require a power supply.
  • Invest in generators and, if applicable, UPS units to ensure seamless continuity of operations.
  • Power laptops, tablets, mobile phones, and other business or travel-critical appliances regularly.
  • Invest in a personal power bank for mobile phones and other business-essential electronic devices, and regularly charge this/these device(s).
  • Download available warning apps covering planned or unplanned power outages and monitor announcements from the utility
  • Plan for business disruptions and travel delays due to traffic congestion during periods of load-shedding.

 

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