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.