South Africa’s state-owned utility faces recent generation shortages, plant construction problems, load shedding, and uncertainty at the African continent’s only nuclear power plant. And that’s just on the generation side. Moves on the business planning and regulatory side are painfully slow and could, some argue, be writing the utility’s obituary.
Eskom, South Africa’s state-owned monopoly utility—according to some assessments, the largest on the African continent and clearly the dominant electric utility in sub-Saharan Africa—in recent years has seen chronic generation shortages, plant construction problems, rolling blackouts, and uncertainty over maintenance at the African continent’s aging and only nuclear power plant.
For graybeard U.S. electric utility analysts, Eskom has similarities to the U.S. electric utility industry at the end of the final two decades of the 20th century, as the generating monopoly model began crumbling, the forces of competition exposed operating and reliability problems, and the concept of electricity as a natural monopoly became increasingly hazy. So it is today with Eskom.
The Johannesburg-based utility generates 95% of the electricity used in the country of 53 million people (17 million customers) and meets 45% of the African continent’s demand. Eskom buys a tiny amount of renewable energy from independent power producers as well as power from other countries. The role of renewables has become a point of contention between the utility and renewable energy advocates as the company continues to rely on coal and nuclear for baseload power, with diesel-fueled combustion turbines and hydro pumped storage to follow load.
The utility—many describe it as “parastatal”—has been a central government-owned monopoly since its founding in 1922. The South African government for more than a decade has been trying to privatize Eskom, with no success. Parastatal is a term common in Africa to describe state-owned enterprises that the state would like to unload on private investors but for whom it has found no buyers. In South Africa (SA), the state-owned airline, SAA, is another example. In 2002, South Africa converted Eskom from a “statutory” body into a public company, Eskom Holdings Ltd., with the government as the sole shareholder.
South Africa is the most economically developed of the sub-Saharan countries, yet Eskom has many of the attributes and problems of a monopoly utility in a developing country. South Africa has large coal resources, the basis of Eskom’s generating fleet (see sidebar, “Eskom’s Generation Profile”). The utility has made huge coal investments over the years and continues to develop large-scale, largely mine-mouth coal-fired plants. The utility also owns and operates the only nuclear power plant in Africa, the 1,800-MW two-unit Koeberg plant on the Atlantic coast outside of Cape Town (Figure 1), generally a good performer.
1. Standing alone. South Africa’s 1,800-MW Koeberg Nuclear Power Station is the only nuclear plant on the continent. Courtesy: Eskom/Bjorn Rudner
On August 10, South African media reported that a Koeberg Nuclear Power Station safety officer was suspended “as a precautionary measure” after an unauthorized drone (which did no damage) crashed at the site on some unspecified date.
Suspensions appear to be Eskom’s first response to controversy, as the Koeberg station manager and plant manager were also suspended in August in an unrelated matter involving “unauthorized distribution of documentation containing facts and assumptions about Koeberg’s Production Plan, and in particular, its steam generator replacements,” as POWER reported.
Four senior executives had previously been suspended in March to allow for an independent investigation into “the poor performance of generation plants, delays in bringing the new generation plant on stream, the high costs of primary energy and cash-flow challenges,” according to a Business Day story. The executives were cleared of any wrongdoing in mid-July. There were no news reports regarding the fate of the Koeberg managers as of September 9.
Reliability and Rate Challenges
In recent years, driven by sporadic economic growth and poor utility maintenance practices, Eskom suffered significant generation problems—rolling “load shedding” or scheduled blackouts designed to prevent the entire southern African grid from collapsing. The utility in those years was running its expensive diesel-fired combustion turbines at full capacity and still scheduling blackouts.
The reliability problems reached a peak in 2008. The New York Times reported, “At first, the power blackouts seemed a mere nuisance, the electricity suddenly dead for two or three hours at a time, two or three times a day. Radio announcers jocularly advised listeners to make their morning toast by vigorously rubbing two pieces of bread together and wisecracked about amorous uses for the extra darkness.
“But after three weeks of chronic failures—after regularly irregular vexations with lifeless computers, stove tops and stoplights—public forbearance has given way to outrage. This nation, long a reliable repository of cheap, plentiful electricity, finds itself pitifully short of juice.”
Since then, Eskom has scrambled to restore a reliable system and win customer support. The utility in 2008 sought enormous rate increases—some 60% annually—to finance new capacity. The country’s utility regulator, the National Energy Regulator (Nersa), scaled back the utility’s request, but granted hefty 22% annual rate increases for seven years. Earlier this year, Nersa granted Eskom another 9.4% rate hike, but a court in Johannesburg set it aside this summer, ruling that Eskom had not followed the proper procedures in seeking the increase.
In late August, as this story was being finalized, Pretoria’s High Court ruled that Nersa’s approval of even that rate hike was unlawful because correct procedures were not followed. On August 25, the regulator said it would appeal the ruling because the tariff can’t be adjusted at this stage. Meanwhile, Eskom recently submitted applications to Nersa for an additional 22% rate increase.
The court’s ruling was based upon both procedural and timing problems. South Africa’s Moneyweb reported on August 25 that Nersa regulator Thembani Bukula told the news outlet that “Eskom also failed to submit quarterly reports during 2014/15 and 2015/16. These reports were supposed to be assessed by Nersa and communicated to Eskom’s customers as a regular pricing signal for them to be able to plan for possible future tariff increases.”
The 2008–2009 slowdown of the world’s economy, which hammered South Africa’s crucial mineral industries output, reduced demand to the point where Eskom was able to avoid new rolling blackouts. But last year, with world demand for minerals rising, and after a collapse of the coal storage silos at a major power plant in 2014, rolling blackouts reappeared. Eskom beefed up its maintenance program and also worked with the municipalities that distribute much of its power to reduce meter bypass and power theft.
According to the most recent update by new CEO Brian Molefe, “Energy availability reached record highs of 81% for the month of June. This was last achieved in July 2013.” He added that “Eskom has been able to meet demand this financial year even during the week where demand was higher than last year.” Except for 2 hours and 20 minutes, noted Molefe, “No load shedding has been implemented since August 2015.” Eskom also was able to cut output from its diesel-fired gas turbines from 1,801 GWh to 16 GWh, slashing its expenditures for diesel fuel by 98%.
The utility and its critics disagree over how to credit the recent increased reliability. Eskom points to the utility’s actions. The Mail & Guardian newspaper disagrees, commenting, “But, when it comes to Eskom, even such seemingly good news can be bad. Industry experts say the reprieve the power grid and the utility have been afforded is largely compliments of an economy in the doldrums.”
The newspaper quoted “an independent energy consultant” saying that “what we are seeing are the effects of a rather deep downturn in the economy. ArcelorMittal South Africa has closed some mills; Lonmin is not producing in many of its mines, Highveld Steel shut down. Thousands of megawatts have become available.”
Eskom’s Matshela Koko, group executive for generation, rejected that analysis. “There should be no denying of the fact that Eskom performance has improved over the last 10 months,” he said. “This performance improvement is easily visible to the naked eye, but not to ideologues in whose eyes a state-owned company is incapable of delivering basic services as effectively as Eskom currently does. The improved performance is a result of strong leadership from the top and hard work by Eskom employees.”
Koko added, “The assertion that it is not Eskom’s performance but rather the economic slowdown that has kept the lights on for the past 10 months is disputed. The facts speak for themselves. The peak demand so far in 2016 was 34,899 MW, which is 418 MW higher than peak demand experienced in 2015. To put this in context, 418 MW is almost equivalent to one unit at the Kriel [coal-fired] power station. Peak demand for electricity in South Africa is during winter and is driven predominantly by the cold weather conditions.”
Work in Progress
Eskom is working to increase generating capacity, with two major coal projects under way. The utility also has two new pumped storage projects in the works, although one is on hold.
Eskom is building the six-unit, 4,800-MW Medupi supercritical coal-fired plant; the first unit, Unit 6, was commissioned in 2015. The utility announced the plant in 2007, at an estimated price tag of R80 billion (roughly $6 billion). The most recent cost estimate is R105 billion, and the plant is several years behind schedule. The next unit, says Eskom, will be in service in early 2018 and the final unit commercialized in 2020.
The Medupi project has a $500 million loan from the African Development Bank and $3 billion from the World Bank, approved in 2010. The New York Times reported that the Obama administration, which had pressured the World Bank to eschew investments in coal generation, abstained on the vote for the loan. The U.S. warned that the bank should not bring coal-generation loans forward in the future “without a plan to ensure there is no net increase in carbon emissions.”
Eskom is building another six-unit, 4,800-MW supercritical coal-fired plant, Kusile, in the same coal region as Medupi, with the first unit planned for 2018. Kusile has also seen large cost increases and schedule delays (Figure 4). Its current cost estimate is R119 billion. The original schedule saw Kusile in service by 2013. This plant also has a $500 million commitment from the African Development Bank and an $805 million loan from the Export-Import Bank of the U.S. to “support Eskom’s purchase of engineering and construction management services from Black & Veatch International,” according to the bank.
4. Delayed. The six-unit, 4,800-MW supercritical coal-fired Kusile plant was to be providing power to capacity-strapped South Africa by 2013. The latest revised plan has it coming online in 2018. This is the most recent, undated project photo on Eskom’s website. Courtesy: Eskom
Strong whiffs of corruption have accompanied Kusile and Medupi. The U.S. Securities and Exchange Commission (SEC) a year ago forced Hitachi of Japan to pay a $19 million penalty for essentially bribing the African National Congress (ANC), South Africa’s dominant and ruling political party, in 2005 for contracts for the two coal-fired projects. According to the SEC, Hitachi sold a 25% stake in its African business unit to an ANC front group in return for favorable equipment supply contracts for the two coal plants.
Eskom also has a four-unit, 1,332-MW Ingula hydro pumped storage project under construction that is, predictably, behind schedule and over budget (Figure 5). The South African investigative news project Carte Blanche reported that the plant “is more than R27 billion over budget and will be at least four years late when it finally comes online, in 2017.” In an August 24 press release, the company said a second unit, Unit 2, had gone into commercial operation and that the first, Unit 4, was commissioned in June, “six months ahead of schedule.” The other two units are scheduled to go commercial in the first half of 2017, the company says. CEO Molefe has countered that the Carte Blanche report is baseless.
5. Late. This image of the Ingula pumped hydro storage plant, the latest dated one on Eskom’s site as of August, is dated December 2010 and is identified as the “outlet channel.” Eskom disputes multiple sources that claim the project is behind schedule and over budget. Courtesy: Eskom
Eskom has put another pumped hydro project on hold since 2009. The 1,500-MW Tubatse project on the Limpopo River won approval from the Eskom board in 2008, with a 2015 target for operation. The economic slowdown cooled Eskom management’s desire to proceed with the project. Additional large-scale, dispatchable storage would, of course, support the addition of variable renewable capacity.
As POWER reported in March, Eskom has also applied to the country’s nuclear regulator for site licenses in both the Eastern Cape and Western Cape provinces. That article noted, “Although the plant type and technology have not yet been selected, Eskom made clear its intention to construct and operate multiple nuclear reactors at each site.” Further developments are years away, although being a state-owned company should mean a somewhat smooth regulatory path.
National Debate About Fuels of the Future
Eskom’s conventional road toward spreading electricity access in the country—much of which is not served by reliable electricity—and the region, where even fewer have access to power (see “THE BIG PICTURE: Still in the Dark” in this issue’s Global Monitor department), has drawn criticism. Renewable energy advocates have challenged the utility’s reliance on coal and nuclear for the future. Supporters of increased competition have argued for a restructured South African electricity industry, with independent power producers (IPPs) competing for markets with Eskom.
South African electricity industry analyst Johan van den Berg argues, “The debate about Eskom and independent power ultimately revolves around two main starting points where the disputants are at odds. The one paradigm is the centralization of political and economic power as opposed to the democratization thereof. The other is the opposition between traditional thinking trusting in rigid and manipulable power sources and the modern move towards a flexible and diverse energy system.” He opts for the competitive model, which he notes “has been settled for more than a decade in more progressive countries like Germany.”
An analysis from South Africa’s Council for Scientific & Industrial Research (CSIR) suggests that the country would be better off focusing on renewables than on coal and nuclear for future generation. The Financial Mail,the country’s equivalent of the Financial Times or the Wall Street Journal, opined, “Senior CSIR researcher Tobias Bischof-Niemz argued that ‘at present, solar and wind power is, per unit, cheaper than coal-generated power from newly built coal plants.’ Another benefit was that the sector was funded not by taxpayers but by the private sector. This meant that ‘the consumer pays only for the power that’s been delivered, avoiding having to pay any subsidy for capital spent,’ said Bischof-Niemz.”
Financial Mail columnist Peter Bruce is the most dogged Eskom critic, often verging into personal attacks on the leadership of the company. Bruce recently argued that “Eskom puts SA economy in danger” by its focus on coal and nuclear generation. “Eskom, whoever runs it, is a vital cog in our economy but it is just madness to allow it to crowd out the private sector like this,” he wrote. “Renewable energy provides much cheaper power than Eskom can with its current fleet.”
Writing in Business Daily, economist Rob Jeffrey argued the case for Eskom’s resource strategy. “The discussion about energy and electricity is one of the most important debates in SA,” he wrote. “Urgently tackling inequality, unemployment and poverty cannot be achieved by the redistribution of wealth alone. It can only be achieved by raising the economic growth rate—which is dependent on having the correct public policies in place and having an adequate and growing supply of affordable electricity.”
Molefe’s push for coal and nuclear, said Jeffrey, makes sense. Molefe “accurately described the fallacy and weakness of the primary renewables, wind and solar. These supply power when it is not needed and do not supply power when it is needed. As a result, they are expensive forms of energy production, yet the supply must be bought in terms of the purchase agreements at set prices.
“Germany sells unwanted electricity at a loss to other countries and purchases the required supply from them at a premium. These prices are in effect financial subsidies for wind and solar. Germany has other major electricity-generating countries nearby. It can tap into electricity provided by nuclear power plants in France, coal-generated electricity in Poland or hydro-electricity from Scandinavia; SA is not in that enviable position.”
POWER reached out to Eskom for executive comment for this story four times but did not receive a response.
The future direction for power generation in South Africa is entangled in issues that intertwine technology choices, competition, and competence. In an August 8 opinion piece on South African online news site IOL, Richard Halsey, identified as a member of Project 90’s policy and research team, which advocates for a low-carbon society, noted that Eskom itself has publicly delivered mixed messages about renewables. The company’s chair, Dr. Baldwin Ngubane, has said, “South Africa’s energy mix is expected to shift considerably towards renewables over the next two decades.” CEO Molefe appeared to contradict that position by saying renewable power “just raises Eskom’s costs.”
Then, shortly after Eskom announced it would stop signing new contracts with IPPs, Koko said, “Eskom embraces renewable energy,” and added that “renewable energy projects are not a threat to the Eskom business case, they complement what Eskom is already doing.” Halsey concluded, “Evidently Molefe and Koko don’t have the same spin doctor.”
Koko acknowledged that South Africa requires a cleaner baseload solution than coal, given its COP21 commitments, but whereas he sees nuclear as the answer, Halsey and others see renewables plus gas as a better option.
As for the IPP view, that was recently presented in an August 24 City Press editorial by Sisa Njikelana, chairman of the South African Independent Power Producers’ Association, which represents electricity producers regardless of technology. Though he expressed concern about Eskom’s decision in July that “it would suspend the signing of any new contracts with IPPs until it had consulted the department of energy—because it was concerned about being forced to buy energy from IPPs at prices it did not negotiate and that these prices would constrain its revenue stream,” Njikelana also cautioned against creating “unnecessary tension.” Delays and changes in the power market affect not just IPPs but the country’s overall recovery, he argued.
To be fair, it appears that Eskom is not the only player in the energy arena missing deadlines. Njikelana also commented on the government’s “persistent silence about the review of the Integrated Resource Plan [IRP], a long-term energy plan for the economy that projects demand and analysis costs of competing technologies,” Though the IRP is to be revised every two years, he said, “the last update was conducted in 2010.”
Stand Still and Risk Getting Run Over
Whether the focus is adequate supply, reliable supply, or cleaner supply to meet domestic and COP21 low-carbon goals, the evidence suggests that Eskom’s “generation transition” is happening far too slowly. The utility’s history of tardy action (arguably abetted by lack of timely government regulatory and policy support) has put it in a position from which it could be difficult to recover.
Even the financial and regulatory tangle over rates mentioned at the top of this article has broader implications. In the Moneyweb story previously cited, economist Mike Schüssler noted that Eskom is one of the country’s best-paying employers and raised the question of whether “its procurement practices are really aimed at best value for money.” A 22% rate increase could add 0.8% to consumer inflation, according to Schüssler, who concluded, “Eskom is alienating its customers by raising its tariffs to unaffordable levels. More and more people are looking at alternative sources of energy and defecting from the grid. If this continues, Eskom might cease to exist in another 15 years.” ■
—Kennedy Maize is a long-time energy journalist and frequent contributor to POWER. Editor Gail Reitenbach contributed to this story.