State-owned Eskom has a near-monopoly on power generation in South Africa. Though one might think government control would make the business of managing power supplies easier, the story of Eskom’s recent troubles shows that state ownership, in and of itself, is neither the problem nor the solution. More important than ownership structure are policy and planning decisions that take the long view. Eskom’s cautionary tale should remind those involved in the power industry anywhere in the world that — to vary a disclosure from the financial sector that too few have paid attention to — past performance is not a guarantee of future success.
January 25, 2008 — Black Friday, as South Africans know it — wasn’t the beginning. For three months straight before that summer day, the nation peopled by 47.9 million had seen widespread rolling blackouts that would plunge whole towns into darkness for as long as eight hours at a time.
Only that week, scores of tourists had been trapped midway in cable cars to and from Cape Town’s Table Mountain. And the day before, Eskom, the state-owned utility and supplier of 95% of the nation’s power, had been faced with an alarmingly low reserve margin.
In its effort to bridge the growing disconnect between demand and supply that had stretched to a staggering 4,000 MW, and to prevent a collapse of the national grid, the utility called for the worst round of load shedding South Africans had ever seen.
In desperation, Eskom declared force majeure on Jan. 25, requesting that key industrial customers implement a 10% load reduction to prevent a grid collapse. At the same time, the South African government — led by Eskom’s overseers, the Departments of Minerals and Energy (DME) and Public Enterprises (DPE) — declared a "national electricity emergency." South Africa — a country that the World Bank ranked 24th in terms of gross domestic product (GDP) in 2007, the torchbearer for all Africa — was in its darkest hour.
Some of the largest metal producers in the world — Anglo Gold Ashanti, Gold Fields, and Harmony — immediately halted operations and stayed shut for five days, claiming safety considerations. In the first quarter of this year, the country’s prized mining sector — which uses 15% of Eskom’s power — experienced a 22.1% contraction in output.
The domino effect was widespread: The plunge in industrial output sent prices of gold and platinum soaring worldwide, and with the number of exports reduced, the rand devalued. This in turn dragged down the country’s industrial and manufacturing sector, already hard hit as it consumes 38% of Eskom’s power.
Despite the government’s urgent pleas to reduce demand, and power prices that have already risen nearly 30% this year, former Public Enterprises Minister Alec Erwin admitted in September, a mere eight months after Black Friday, that consumption had decreased only 4% — far from the 10% needed to avoid a new round of widespread power cuts. And, as the National Energy Regulator of South Africa (NERSA) would later tell the nation, the damage to the economy was serious: In concrete figures, from November 2007 to January 2008, the nation had suffered a loss of 50 billion rand (US$6.07 billion). The country’s GDP growth had fallen to its lowest rate in more than six years.
By February 2008, Eskom-bashing had become a national pastime. And there was no light at the end of the tunnel. "We are going to be in this [crisis] for years," Eskom CEO Jacob Maroga had then said. "The threat of load-shedding is with us for some time."
Descending into darkness
How did things for a utility with a net generating capacity of 38,744 MW — the 13th largest in the world — deteriorate so quickly? A mere decade ago, this monolithic monopoly had excess capacity with a reserve margin of more than 25% (Figure 1) — an impressive figure, considering it supplied (and still does, according to claims on its web site) a stunning 45% of Africa’s total electricity (see sidebar, "An African powerhouse").
1. Fraying around the edges. South Africa’s net reserve margin has been steadily declining since 1999 as a result of increasing demand and lack of additional capacity being commissioned. In 2008 the reserve margin reached alarmingly low levels, forcing Eskom to implement extensive load-shedding measures to prevent partial or complete blackouts. (Note: Percentages are for winter peak.) Courtesy: Eskom
Thanks to giant coal-fired installations like the 4,116-MW Kendal Power Station (Figure 2), the electricity it sold — even if incorrectly priced, as Eskom has long argued — was the cheapest in the world, making the company popular among foreign investors and South Africans alike. For many years the government, too, treasured the utility, branding it the crown jewel of South African state-owned enterprises. And it was internationally renowned, winning several awards and honors, the most recent of which was the Financial Times Global Energy Award for Power Company of the Year in 2001.
2. African king. Since its sixth unit began operations in 1993, Eskom’s 4,116-MW Kendal Power Station stands (in terms of installed capacity) among the world’s largest coal power plants. In South Africa’s Mpumalanga province (see Figure 3), it is clustered with three mothballed (but soon-to-be-revived) plants and nine currently operating coal plants. Several are of a similar size, such as the 3,990-MW Majuba plant. Courtesy: Eskom
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