Charles Lee Mathews

The power crisis

Eskom’s management mess comes as no surprise, given the state of the operation, regulatory rot and the leadership crisis at other parastatals.

The leadership crisis that’s shaken Eskom is symptomatic of the deep rot that lives within that organisation, and most parastatals that have enjoyed the privilege of government regulation.

That Eskom’s management has reached an impasse is just a metaphor for the organisation’s Catch-22, and the struggle the utility is experiencing as it tries to climb out of the deep, dark pit it has dug for itself.

To get an idea of just how much trouble Eskom is in, let’s rewind to Bobby Godsell’s appointment as chairman in mid-2008. It didn’t take too long for Godsell to go on record at an industry function and declare that this country’s power utility was run no better than a “spaza shop”.

Public utilities all over the world struggle to develop or maintain a business model that funds current operations, the replacement of plant and future growth, Godsell said at the industry function hosted by EE Publishers earlier this year.

“The problem with cashbook accounting is that it provides neither for yesterday, nor for tomorrow,” said Godsell, explaining that Eskom couldn’t effect meaningful long-term funding or planning, and even had to battle for short-term revenue. “We screwed up!” Godsell said at the same event. “We at Eskom need to follow the example of the new US president and simply say we screwed up.”

Dire consequences

The screw up is that the public utility that supplies 90% of SA’s power hasn’t invested in infrastructure and has sold electricity at sub-economic prices. South Africans have benefited from cheap electricity, as has industry. And then there are legacy deals that the mining industry has with Eskom that offer energy at ridiculous low or subsidised prices. By doing this, Eskom has effectively run a financially unfeasible operation and disallowed the accumulation of any wealth for capital investment.

At the same time, Eskom has mismanaged coal supplies, plunged the country into wide-scale blackouts, disrupted the mining industry for the first time since the Anglo-Boer War and shut out meaningful competition.

This regulation and control of the power industry has been done hand in hand with government, and is akin to the ineffective and damning manner that the telecommunications industry was regulated. Just as government interference in the telecommunications sector hurt and hampered SA’s economic well-being, so too the over-regulation of the power industry is damaging our country’s economy, and will continue to do so for the foreseeable future.

The leadership debacle is yet another symptom of an organisation that has gifted SA a power mess, bungled load-shedding, mismanaged coal stockpiling, seriously affected the mining industry, costing our country billions.

From a regional perspective, Eskom has been no better than a bully boy that has enjoyed the fruits of a cartel-like structure. The result of this regulation is the energy Catch-22 SA finds itself in. This while management is afforded bonuses and housing loans, and allowed to squabble and deconstruct in full public and global view ahead of 2010.

Oncoming train?

Fortunately there is light at the end of the tunnel. Eskom’s price applications to the National Energy Regulator and the South Africa Renewable Energy Feed-in Tariff mean consumers will start paying more cost-reflective prices for electricity.

Entities that buy power from renewable energy generators will have to do so at a higher cost. This could lead to a more realistic power economy and stimulate the creation of independent power plants.

However, Eskom and government will have its hands full managing the impact of competition, and the effect rising prices will have on the poor. Strongly differentiated tariffs will need to be used to ensure the poor aren’t further marginalised.

More positive is the news that independent power producers are organising to take the utility on in an effort to level the playing fields. The newly formed South African Independent Power Producers Association now offers independents a coherent singular voice to lobby government, the regulator and Eskom.

Eskom says it is resolving the capital expansion problem and will spend R385 billion in nominal terms on capacity expansion during the next five years. It says the financing of Eskom’s capital expansion plan will come from three main sources: a shareholder loan, external debt and revenue.

Government has made a significant contribution through a R60 billion loan, which means the plan will largely be financed by the South African taxpayer who will also be burdened by increasing energy prices.

As a national utility that supplies the bulk of SA’s power, Eskom’s brand and reputation is intimately tied to that of SA’s. If Eskom “screws up”, South Africa is significantly affected.

It’s time for the board to maturely realise a greater good and understand the ineffable harm its egotistical power struggles are causing this country.

The future is fraught but what is sure is that like the telecoms industry, competition is desperately needed in the energy industry. Eskom’s grip on our regional power economy must end, independent power plants must be enabled and the management crisis must be effectively resolved.

  • Dave Harris

    Well written article. While mismanagement in Eskom has dire immediate short term implications, the government telecoms monopoly industry not only “hurt and hampered SA’s economic well-being”, it is severely detrimental to SA’s long-term global competitiveness and growth. The sad thing about the telecoms industry is that there does not seem to be any plans, at least I haven’t heard any, to rectify this under the present government apart from attempts at fostering more competition among cell providers – another long overdue initiative.

  • Mohamed Khan

    A very well written piece and I find myself agreeing with most points raised. However I feel these words,

    “The leadership crisis that’s shaken Eskom is symptomatic of the deep rot that lives within that organisation”

    although nicely worded are a bit harsh. The leadership struggle at the top is embarrassing but ESKOM, especially on the engineering front, have a team of very good engineers. There will be those that joke at that statement but running a grid as large as ours, as effectively as is done is impressive.

    The leadership debacle is political as have been most decisions that have affected the electricity industry in South Africa eg.
    – Goverment ignored the white paper of 1998
    – The report that predicted the coal crisis was tarned into a racial fracas.

    Had Eskom been managed properly, it would have remained an untarnished, positive brand in this country.

  • ian shaw

    Mohammed, you are misinformed. The talented and experienced group of electrical engineers that used to run ESKOM has long departed and were replaced by… but why do I need to even mention this? I used to be a contractor at ESKOM and personally experienced the lack of technical depth.

  • Lionel Byrne

    I’m but a senior citizen of our beautiful country and I see it going too the dogs,some of our utility leaders are but politic emplacements who just don’t know what the hell is happening.why don’t they take advice from experienced people.what did mr Godsell say ‘we have screwed up ‘surely, put our heads together and sort out this damn mess.I say too ESKOM team come on you guys pull your bloody finger out ,lets get back on track ,we the public know you can do it

  • MLH

    I think this may be too simplistic. I would have agreed with you until I saw a couple of pieces that made me sit up…very, very straight.

    They make the point that electricity can be produced far more cheaply and that politics is strangling our SOEs and power will strangle the SA mining industry.
    We get into the habit of believing that if the big guns want us to pay, pay we must. I don’t believe the proposed increases are realistic. It isn’t just the poor who will suffer. We will never recover from the recession if Eskom (allowed by government) goes its own merry way.

  • MK

    Having lived the life before it certainly to many of us watching from Africa that we have watched this movie before. i am reading Peter Drucker’s Managing in the next society and recommend it as well as Incredible Wealth, Alvin and Heidi Toffler. On pg 202 Drucker concludes “whenever in the last 200 years political passions and nation-state politics collided with economic rationality, political passions and nation-state have won”.

    I read Jacobs article and i must say i have to agree with the man and so do a large population of black professionals. if some of the issues he addresses are not faced square, we have wathed the movie before.

  • Rory Short

    @mandy I enjoyed your article. During the past week I listened to Barabara Hogan being interviewed on 702 re the Eskom Board situation. She was straight forward and direct in her answers to John Robbie’s questions. When the interview was over I felt a spirit of elation sweep over me. This happened because here at last was someone in authority speaking nothing but the truth with no hidden racial resentments or spin.
    The fact is South Africa has been bedevilled by racism for centuries. The elimination of racism from a society like ours is not a simple task however. Racist behaviour by individuals and institutions needs to be, and should be, addressed by the Justice system and this will need to happen long term. Racism enshrined in Statutes however can and should be eliminated immediately by revising the Statutes. Unfortunately the ANC has removed Apartheid style laws from the Statute book, which is excellent, but installed in their place its own kind of racist legislation such as Affirmative Action. Racism can never be eliminated from any society which mantains racist legislation, no matter how this retention is rationalised.

  • http://Bloghome chris2

    I might have missed important points regarding the Eskom story, especially regarding the sudden increase in tarrifs as proposed. During the 1990s there was considerable generation over-capacity which resulted from higher growth projections during the previous decade. Since that time the planning for future demand has apparently been completely neglected, and apparently even the question of long-term coal contracts, which used to be a hallmark of Eskom business. It would seem that the recent crisis was greatly due to mismanaged coal supplies and insufficient spare generating capacity to allow for regular maintenance outages. Eskom seems to imply that their pricing for electricity would have to rise to be equal to the offers they have received from independent suppliers to augment their base capacity. I seem to remember reports that Eskom had been blowing hot and cold to these potential contributors, failing to make reliable and binding offers required for proper planning.
    To my amateur mind, Eskom would have to stabilise its coal supply medium to long term and calculate its reliable generating capacity and the cost of such. It then can determine the shorfall, if any, now and projected into the future when economic activity accelerates. The potential for buying in electricity from independent suppliers should be assessed, including the price per unit from each source. Presumably these ‘expensive’ sources would together constitute a small percentage of Eskom’s capacity and the overall cost would be a weighted average including their own contribution. This could include ‘green’ sources.

  • Peter Joffe

    Dear Mandy you seem to have forgotten that we needed arms more than we need new power stations? The current crisis is a small price to pay for jets that cannot be armed, submarines that remain in the docks and a gravy train that needs to be funded. Warnings that were ingnored and comrades who were appointed to positions that they knew nothing about and now “Eisch it’s broken” and ‘eisch we did not think Eskom needed to be maintained as with hospitals, roads, schools etc etc. Whose to blame? Apartheid of course.
    Viva ANC Viva.

  • Peter L

    Capital intensive public utilities such as electricity organisations are “natural monopolies” that need to be properly regulated and funded.
    Long-term infrastructure should be fininaced thorough long term debt and equity instruments, not from current operation income – a basic accounting principle.

    The cause of Eskom’s malaise is much worse than political shenanigins – coal inventories were deliberatly allowed to run down in order to articifially improve the balance sheet and income statement, resulting in executives qualifying for large bonuses.

    Eskom’s own report confirms that 80% of electricity users in Soweto do not pay a cent.
    How can you expect to keep a busiess running when your customers do not pay you?
    There is no political will to recover significant amounts due from certain customers and sectors.
    Eskom already applies severly differentiated tariffs – both within the domestic residential customer base and between their largest customers – businesses and across our borders.

    Many SA domestic consumers already heavily subsidise the “free” basic electricity supplied to some domestic users as well as the electricity exported to neighbouring countries, which is sold at a fraction of the price domestic consumers pay.

    Rising electricity prices will have no effect on the very poor – the ANC will see to that (this is their voting fodder, after all). The burden will be transferred to the middle classes and some business consumers.

    Government’s loan of 60bn is 15.6% of the total 385bn required – peanuts!

  • Perry Curling-Hope

    Fair analysis.

    It is only politicians and the constituency they manage to delude who believe that sub economic pricing mandated by government fiat ‘benefits’ the country.

    Government cannot ‘make something cheaper’ than its true cost, nor ‘create an environment for future prosperity’ by expanding public debt now.

    All that is achieved is to shift the point at which the true cost must be born to some time in the future.

    When Eskom offered energy at “ridiculous low” prices, South Africans and industry were not ‘benefiting’, they were trading future viability for present easement.

    One cannot evade the economic pain resulting from politically motivated resource misappropriations.
    Seeing the cost of primary energy increase by 45% per annum whilst claiming that CPI and PPI should simultaneously lie within manageable limits of 6% to 7% is an absurd fantasy, devious political footwork, plain lies or all three.

  • Free Speech

    Well, there you have it – even Gospell has seen the light and decided to leave Eskom to the Dark.
    Next thing we will have even more rot at Eskom which has become unmanageable – 41 late reports to the Board in 12 months by the Exco – so who is actually doing any work at Eskom?

  • Richard Catto

    Thank you for this informative article. I hope you write more on this subject.

    I blame the Mbeki years for the crises that South Africa is currently dealing with. In my view, Mbeki was the worst thing to happen to this country.

    Zuma and his cabinet are proving far more capable and rational, despite the many (mostly white South Africans) people who were so opposed to Zuma being elected.