Business

More trouble for Eskom as defaulting municipalities gain new powers to not pay

2019-03-25 22:15

Eskom’s financial black hole, and its inability to contain the growing power crisis, could be exacerbated from yet another quarter – with defaulting municipalities gaining new powers to not pay for power, without immediate consequences.

The power utility is planning to appeal a little-noticed court ruling, barring it from its previous practice of cutting power for extended periods to municipalities that have defaulted on their bulk power payments.

Eskom is already owed more than R20 billion in arrears debt by defaulting municipalities – a problem that predates democracy, but that has reached dangerous proportions given the utility’s dicey financial position.

Three small regional chambers of commerce have taken Eskom to the high court to stop it from cutting power to the Thaba Chweu Local Municipality in Mpumalanga.

The court ruled earlier this month that Eskom was in the wrong and had to follow a process set out in the Intergovernmental Relations Framework Act, rather than the unilateral blackouts it has implemented to date.

This could set the stage for defaulting municipalities to cynically withhold further payments.

On the other hand, it could be a saving grace for households and businesses in these municipalities that experience normal load shedding on top of default-related cutoffs.

The chambers of commerce that took Eskom to court are members of the Small Business Institute (SBI).

“We hope Eskom and the Thaba Chweu municipality will do the right thing and not appeal the high court’s judgment,” SBI’s executive director, Bernard Swanepoel, told City Press.

EVERYONE LOSES

The crippling power crisis is hurting everyone, including Eskom itself.

It is impossible to say what load shedding costs in terms of industrial down time, although Goldman Sachs estimates a loss of 0.3 percentage points off first-quarter 2019 GDP growth.

If power cuts persist at current levels, it could subtract up to 0.9 percentage points from annual growth, according to Reuters.

On the other hand, Michael Jacks, head of equity research in Johannesburg at Bank of America Merrill Lynch, believes that load shedding could take South Africa into a technical recession.

A technical recession is two quarters of negative GDP growth.

The impact is massively uneven in some sectors.

Eskom itself is not being spared as the load shedding caused in part by its strained finances ironically leads to yet more strain on its finances.

A day of Stage 4 load shedding, where up to 4 000 megawatts of capacity is cut, costs Eskom roughly R100 million in lost revenue.

The bigger problem is the massive amount of diesel it has to burn in its open gas cycle turbines, which were meant to be emergency “peaker” plants.

This cost massively outstrips the impact of lost revenue, Eskom CEO Phakamani Hadebe told City Press last week.

In 2015, the last time things were this bad, Eskom burnt 1.2 billion litres of diesel, which would cost about R16 billion at current fuel prices.

With the extra costs, Eskom is also smarting from new tariff hikes far below what it said it needed from the National Energy Regulator of SA (Nersa).

Earlier this month, Nersa awarded Eskom three annual tariff increases – 13.8% this year, followed by 8.1% for next year and then 5.22% for 2021. These are far less than Eskom had banked on.

Hadebe said that Nersa’s tariff decision “does not make sense”.

Added to that, Eskom only succeeded in getting R69 billion in assistance from government over the next three years, after asking for R100 billion.

Eskom would more likely than not be approaching the courts to force Nersa to better explain its decision, which leaves the power utility R150 billion short of the revenue it said it wanted from Nersa and the government over the next three years.

The diesel used this year means that Eskom has already overspent on one of the items Nersa uses to determine tariffs.

THE ROOT OF IT ALL

The new power stations, Medupi and Kusile, are showing a “continued decline” in performance, and boiler tubes are developing leaks across the rest of the ageing station fleet, Eskom said.

The scale of plant breakdowns has reached catastrophic proportions, with some stations last week managing to generate only slightly more than 30% of their nominal capacity.

Most concerning is the performance of the two new coal-fired stations, which have five and three of their six units online, respectively.

Medupi units were running at 52% capacity early last week, according to data in the Eskom presentation.

Read: Want clarity on Eskom? We'll get back to you in 2 weeks: Ghordan

Kusile, which has three operational units, was providing 47% of what it theoretically could.

Between the two stations, full production could single-handedly end load shedding even after the collapse of transmission lines from the Cahora Bassa hydroelectric plant in Mozambique, where Cyclone Idai has wreaked havoc.

The youngest station, before Medupi and Kusile, is Majuba, which was also performing at 59% of its nominal capacity last week.

Only the Koeberg nuclear power station was running at full steam (see graphic).

SAME OLD STORY

There was a sense of déjà vu about last Tuesday’s briefing. The blame was put on old stations being run too hard without sufficient maintenance under the previous leadership of Brian Molefe.

In January 2015, at the beginning of the last comparable power crisis, Eskom also announced that overworked stations were to blame.

Then CEO Tshediso Matona said that the “lights on at all costs” policy was being abandoned and load shedding was necessarily being instituted in order for necessary maintenance to take place.

Last week, Eskom chair Jabu Mabuza said that Eskom under Molefe had actually done the opposite and continued running the stations at full tilt without sufficient maintenance.

Minister of Public Enterprises Pravin Gordhan pointed a finger at state capture without specifically blaming the blackouts on former president Jacob Zuma and the former leaders of Eskom.

Eskom is scrambling to fix stations as they break down, but this is not always successful or feasible.

WHAT COULD HAVE BEEN

The reason load shedding was so severe last week was the cyclone in Mozambique.

The reality is, however, that the power system would have held up if the now-infamous Medupi and Kusile stations had been completed on time.

The multibillion-rand stations are both years behind schedule, astronomically over budget and now tragically underperforming because of a number of design problems.

When Medupi got the go-ahead in 2007, it was meant to be built in four years and cost R70 billion.

It is still not complete and will now cost an estimated R170 billion. Kusile was meant to cost the same and has similarly missed the mark.

Even if Medupi had been completed on time, it would have been too late to stave off the first power crisis in 2008, which introduced South Africans to load shedding.

This catastrophic development had been predicted in the 1990s by the government itself.

The now-forgotten White Paper on Energy Policy had predicted the crisis with incredible accuracy.

“Although growth in electricity demand is only projected to exceed generation capacity by approximately the year 2007, long capacity-expansion lead times require strategies to be in place in the mid-term, in order to meet the needs of the growing economy,” read the prescient document.

“The next decision on supply-side investments will probably have to be taken by the end of 1999,” it added.

Medupi was approved in 2007 after vacillation in government about whether Eskom or the private sector should be building new stations.

eskom
Eskom power price increases-2006-2022

WHAT IS STAGE 5?

Many South Africans were horrified to learn last week that there are load shedding stages worse than Stage 4.

Stages 5 to 8 load shedding are meant to be contingency plans in the event of a system emergency.

At Stage 5 it becomes 5 000MW and so on, until Stage 8 requires 8 000MW, which would essentially be Stage 4 with the interruptions lasting twice as long.

This month’s plant breakdowns have brought South Africa very close to Stage 5, but for the use of the costly diesel peaking plants, which are running out of fuel that Eskom is struggling to procure at short notice.

On Monday, the system had been short by over 7 000MW.

Only 4 000MW of that was managed with load shedding, while the diesel plants had to make up the difference. Diesel has been the only thing restricting load shedding to Stage 4.

During the 2015 crisis, South Africa’s diesel imports shot up 40% to almost 2 trillion litres in the second quarter of the year.

At last Tuesday’s briefing, Hadebe said that there simply was no supply at hand on the scale Eskom requires.

– Additional reporting by Antoinette Slabbert

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January 26 2020