Only firm steps can save Eskom

Three months ago, Eskom was begging people to buy more electricity because it had too much. Now, electricity is again in short supply and Eskom has appealed to customers to save again. Unfortunately for the consumer, no matter the balance between supply and demand, the price of electricity continues to rise.

In times of excess, Eskom cannot sell enough to generate the revenue it needs and it wants higher prices. In times of scarcity, it is compelled to fire up the open cycle gas turbines to meet demand, burning diesel, which is as good as burning money.

The latest problem is brought on by a shortage of coal. The last time this happened, in 2008, the country went into load-shedding mode, which was to last on and off until 2015. Back then the central problem was wet coal brought about by unusual rainfall.

This time, the shortage of coal is because Eskom’s “tied mines”, which are mines developed and owned by Eskom in conjunction with mining companies many years ago, cannot deliver as expected. This is because they require new capital investment to reach unmined coal. Eskom, in its present state of debt overextension, has not been able to make these investments, resulting in dwindling coal supply from tied mines.

In the days of the Brian Molefe-Matshela Koko regime at Eskom, this way of doing business was seen as a good thing. It provided the rationale to truck in coal from other mines, meaning lots of tenders doled out, from which a fee could be skimmed.

In addition to the tied mines problem, today’s coal problem is also due to the poor quality and low quantity supplied by the Guptas’ Tegeta, the owner of the Optimum mine, now back in business rescue. This, too, is part of the Molefe-Koko legacy. The result is that coal stock levels are now below the required target of 20 days at seven of Eskom’s power stations. While Eskom tried to assure the public in a statement issued on Wednesday that it has made alternative arrangements to procure coal, it has not shared with the public any information on how this will affect costs. It has also been slow and vague in its answers on the extent to which diesel is being used as a supplementary power source.

To the consumer, this must appear a chaotic situation brought about by a management unable to balance supply and demand. While it might have been possible to blame the 2008 wet coal problem on ineptness, this time the problem is deeper and more fundamental. At the root is the overriding cause of all Eskom’s woes: its large, expensive build programme — the simultaneous construction of two of the largest coal-fired power stations in the world — has crippled the company with debt. As a result it has not been able to commit to the capital expenditure necessary to keep production at the tied mines going.

At Eskom’s interim results presentation in February, new chairman Jabu Mabuza made the point that Eskom could not be saved unless its capital structure was fundamentally reformed. The coal shortage of the past few weeks is a sign that this problem is urgent and can no longer be left hanging.

Mabuza and CE Phakamani Hadebe have spoken about persuading lenders to swap debt for equity. This sounds ideal but will be hard to achieve. What Eskom needs to do now is look at scaling down its capital spend on Kusile power station, where possible, and disposing of the most inefficient power stations. This will help it to begin a permanent alteration of its cost structure.

A recent modelling exercise presented at a National Energy Regulator of SA hearing by Meridian Economics made the case for retiring three power stations early and delaying the completion of Kusile 5 and 6. At the same time, the system could meet the same demand over the same period by using more efficient energy sources, particularly wind and solar.

While the new management at Eskom came in and did well to steady the ship, it is now time to put the big problems and possible solutions on the table.

ESKOM CANNOT BE SAVED UNLESS ITS CAPITAL STRUCTURE IS FUNDAMENTALLY REFORMED