Eskom’s SA power play not entirely of its own making

ESKOM’S claims to have beaten the energy crisis in South Africa are, to a large extent, true, but only partly of its own making.

The utility’s CEO, Brian Molefe, at a recent quarterly update in parliament, announced a complete reversal of the power crisis that had crippled the economy for some years.

He said Eskom has not only overcome South Africa’s power shortage, but that it would have sufficient excess capacity to make additional revenue from electricity exports within a few years. He expected no blackouts in the near future.

According to Molefe, the turnaround had everything to do with a better maintenance performance by Eskom and increased capacity, with some help from Independent Power Producers (IPPs) and renewable projects.

Eskom denied that sluggish demand played a role. Molefe said the reasons were increased capacity and better system maintenance rather than “unscientific speculation”.

But with the economy stagnating and industrial and mining companies under increasing strain with many reducing production, the stabilisation of the grid has as much to do with the economy as it does with Eskom’s progress.

It has improved maintenance, although this is partly because the sluggish economy has reduced the pressure to pump out electricity at the expense of maintaining ailing power stations.

Its build programme is years behind schedule, although Molefe, obviously referring to a revised schedule, said it was ahead. Had the economy shown any promise of meeting the expectations of the National Development Plan, power shortages would have killed any planned development.

Molefe said in May that Eskom has increased capacity by 2,599MW (or 3,279MW including the Medupi power station) and availability from 70% to 76% due to a decrease in breakdowns and additional supply.

However, according to its 2015 annual report, energy availability was 73.73% in financial 2015, but was, according to its own figures, 85% five years before, so the improvement has not been as significant as it should have been.

Eskom’s final regular system status update on May 21 last year showed capacity at 30,050MW (including open cycle gas turbines) and forecast demand of 32,821MW. Current planned maintenance stood at 5,358MW and unplanned outages were 5,675MW.

Eskom’s graph at its parliamentary update showed demand for May 2016 at between 30,000MW and 32,000MW, indicating there has been no increase in demand since a year ago.

More specifically on May 12, however, available capacity was 35,387MW and the load forecast 32,943MW. Planned maintenance was 4,015MW and unplanned outages 3,060MW, indicating that there has been an improvement in available capacity and in unplanned outages.

Other official figures reveal a different scenario. The latest figures (March) from Stats SA show that electricity generation (production) dropped 4.3% year-on-year, following a 1.1% increase in February and 1.3% decline in January. This includes Eskom and IPPs.

Electricity consumption, according to Stats SA, decreased by 5.7% year-on-year in March.

Looking at Eskom’s most recent annual figures, in financial 2015, total electricity sales were 216,274 Gigawatt hours (GWh), down from 217,903GWh in 2014 and 218,59GWh five years previously. Total electricity generation was 226,300GWh, down from 231,199GWh in 2014 and 232,812GWh in 2010.

Despite Molefe’s confidence, any growth in South Africa’s economy going forward will need to be accompanied by faster capacity growth than at present, where construction of the 4,764MW Medupi, 4,800MW Kusile and 1,332MW Ingula plants is proceeding at a snail’s pace against projections.

While there is evidence of improved maintenance, the actual power situation seems to vary according to which figures one uses.

There are positive signs. Eskom had increased coal stockpiles from around 40 days to 51 days by the 2015 financial year-end and Molefe said at the recent briefing that Eskom has “contracted all the coal we need for the next five years.”

There is, nevertheless, concern about Eskom’s coal supply, coal quality and coal contracts. Eskom did not renew a contract with Exxaro Resources, which supplied the Arnot power station, and the mine has since been closed.

It fined Glencore R2bn for poor coal quality at Optimim Coal, which supplies the Hendrina power station. Optimum, which was supplying coal to Eskom at a fraction of break-even, has since been bought by the Gupta/Zuma-led company Tegeta Exploration.

Optimum and Tegeta also supply the Komati plant (from the Koornfontein colliery) and Majuba (from Brakfontein) and Tegeta is also temporarily supplying Arnot.

Eskom, which uses over 60% of South Africa’s total coal production, has indicated it is in a comfortable position on coal supplies.

But reports from a recent coal exports conference indicate it is not that simple. Eskom is, according to the reports, trying to move from “cost plus” contracts, which are for a set fee with annual increases, currently escalating at 17% a year, to buying on the open market.

However, by moving to market-related prices, Eskom would face price volatility and encounter reluctance by mining companies to invest in their mines or provide coal without a long term contract.

They may also look for new customers, leaving Eskom to have to import its coal. There would also be higher transport costs and quality issues if it does not source coal from nearby mines.

The biggest future risk and the elephant in the room, however, is South Africa’s nuclear plan.

It is planning a 9,600MW nuclear power station, which is widely understood to be a done deal with Russia’s Rosatom, a deal, already tainted with allegations of corruption and secret side deals and that could cause Eskom to sink the South African economy for the second time.

The price, expectations of a ‘user pays’ principle, much like e-tolls, and suspicions of side deals to the benefit of companies and individuals and the expense of South Africa, have plagued this deal even before it has got off the starting blocks.

Molefe has been vocal in singing nuclear’s praises while playing down the role renewables can play in South Africa’s energy mix.

Depending on how this plays out, it has the potential to undo all the work that has been done to get the country out of its current power crisis