How can Eskom turn the lights on?

OVERBURDENED: TOO MUCH DEBT, TOO MANY EMPLOYEES

Eskom has hired over 12 000 employees in the past decade.

Struggling state-run power firm Eskom subjected SA to the worst power cuts in years this week, after a decade of missteps when electricity sales stagnated and costs soared.

The outages expose the risks to Africa’s most industrialised economy from Eskom’s virtual monopoly and the failure of successive governments to take on labour unions and leftists in the ruling ANC who oppose change.

President Cyril Ramaphosa appointed a new board at Eskom in 2018 and plans to split the utility, which expects to lose about R20 billion this year and next.

Below are the challenges Eskom faces and possible solutions:

How can it fix coal problems?

More than 80% of Eskom’s power is produced from coal dug from SA mines. But spending on mostly coal has more than quadrupled in the past decade, reaching R85.2 billion in the year to March 2018. It has also faced supply shortages.

“Eskom’s coal procurement needs to be sorted out, with people brought in who understand mines and the quality of coal. Bribe-taking is still a problem,” said Xavier Prevost, a senior analyst at XMP Consulting.

Eskom’s supply problems were compounded by its decision to reduce investment in “cost-plus” mines, where it contributes to costs and receives a guaranteed volume and quality of coal.

Eskom’s new management has reversed that policy, pledging to invest up to R12 billion in cost-plus mines in the next five years. It has also signed more than 40 coal supply contracts.

Is it time to cut the workforce?

Eskom employs 48 000 people, after hiring about 12 000 additional employees in the past decade. A World Bank research report in 2016 said two-thirds of employees weren’t needed.

Eskom has trimmed its executive management from 21 people to nine by combining roles.

What about its debt mountain?

Eskom’s debt pile, which stood at R419 billion at the end of September, is perhaps its greatest challenge. Eskom has been assigned a credit rating from S&P Global of CCC+, deep into “junk” territory.

The debt was largely racked up to build Medupi and Kusile, two of the largest coal-fired power stations in the world which have suffered massive cost overruns.

Analysts say Eskom needs a bailout. Nedbank CIB analysts estimate a bailout of R150 billion would be required to cover Eskom’s liquidity shortfall.

Will spli ing up Eskom help?

New management will invest R12bn in cost-plus mines

Ramaphosa wants to split Eskom into entities responsible for generation, transmission and distribution, although they would still operate under the same Eskom holding company.

“Separating within Eskom means the incentive issues and monopoly mindset will remain,” said Peter Attard Montalto, head of capital markets research at Intellidex. One option would be to remove the holding structure and make the public enterprises ministry the shareholder of all three, making each unit function more independently.

Another would be to break up the generation business into several smaller companies, which would compete with independent power producers to supply the cheapest electricity. – Reuters