Eskom’s CEO, Andre de Ruyter, says the power utility understands that it has a critical role to play in enabling South Africa’s economic recovery efforts, for, without reliable electricity, there can be no sustainable economic recovery.
Speaking at the recent Joburg Indaba, de Ruyter said that Eskom is focussing on achieving operational stability and significantly reducing the risk of load shedding. This will be achieved by spurring midlife refurbishment and conducting reliability maintenance to improve the energy availability factor (EAF). By April of next year, de Ruyter said, the first benefits of this enhanced maintenance will be evident, and by September of next year, the risk load shedding will have been significantly reduced.
A stable supply system brings confidence for business to start investing in new opportunities and the expansion of existing ones. South Africa needs additional generation capacity to serve both existing demand and to cater for a growing economy. The Department of Mineral Resources and Energy’s ministerial determination for the procurement of an additional 11 873 MW of infrastructure over the coming years, and the ongoing progress in the emergency procurement of another 2000 MW of generation capacity, is therefore good news for all South Africans.
De Ruyter said that Eskom needs cost-reflective tariffs, not to subsidise its inefficiencies, but to cover reasonably incurred costs. At the same time, he said, the utility is optimising primary energy costs, reprioritising capital expenditure and optimising contract management, and has begun a process of renegotiating coal contracts.
The debt owed to Eskom by municipalities, which continues to increase, is an undisputed threat to Eskom’s financial sustainability. According to de Ruyter, as at the end of August 2020, the arrear debt by municipalities was at R31,4-billion. He stressed that all South Africans who use electricity must pay for it.
Eskom, he said, can only achieve independent financial sustainability if its debt balance is reduced from its current R488-billion to R200-billion, a closing cash balance of R30-billion, and an EBITDA margin of 35%.
Eskom is one of the last remaining vertically integrated electricity utilities in the world, de Ruyter said. As the structure of the global electricity industry is fundamentally and rapidly changing owing to new technologies, increased pressure to reduce emissions, distributed generation, and capital constraints, Eskom too needs to embrace this change.
Eskom has embarked on a decisive journey towards restructuring itself into Generation, Distribution, and Transmission, with divisionalisation as the first step. Notable progress has been made on the 2019/20 targets of this crucial phase towards the legal separation of Eskom’s three main businesses, in line with government’s “Roadmap for Eskom in a Reformed Electricity Supply Industry”, released in October 2019. It is also accelerating its efforts to establish a separate legal entity for Transmission and has approached DPE and National Treasury for the necessary approvals under the PFMA to create a new wholly owned subsidiary under Eskom Holdings SOC for this purpose.
Through its Transmission Development Plan (TDP), the utility aims to increase the transmission infrastructure by approximately 6700 km of high-voltage lines and 41 000 MVA of transformer capacity in the next ten years. Coupled with the maintenance of its distribution network and improved generation performance, this will significantly support its efforts to ensure a secure supply of electricity in the long term. Eskom, de Ruyter said, also continues to strengthen the grid to accommodate the new power plants and fulfil its current role as the single buyer of power produced by the independent power producers (IPPs).
Conversion of older coal-fired stations
De Ruyter explained that Eskom plans to convert some of its older coal-fired power stations to natural gas, renewables, and biomass-to-energy, among other options, to boost capacity. Eskom has already issued a request for expressions of interest and proposals for the repurposing of the Komati, Hendrina, and Grootvlei Power Stations, he said.
Eskom has recently taken some bold decisions to restructure its staff. These decisions have included, inter alia, the movement and rotation of staff, the reconfiguration and integration of certain functions, and the implementation of consequence management and disciplinary action for the failure to discharge critical duties in a quality manner.
While dealing with the issue of performance and building a business culture embedded in Eskom’s six values (namely Zero Harm, Innovation, Integrity, Sinobuntu, Customer Satisfaction and Excellence), we have also made efforts to reverse the rot of corruption and corruption. The issuing of summonses against 12 defendants (in this case, former Eskom employees and Board members) associated with state capture is a critical step in this effort. This is another example of steps we are taking to rebuild trust amongst our employees and customers and restore public confidence in Eskom. We will continue to pursue those who have sought to enrich themselves at the expense of Eskom and are about to step up our legal processes to deliver these outcomes.
The impact of Covid-19
Eskom has seen on lower sales, resulting in lost revenue of approximately 7% of revenue for the period to August. By Year End (YE) this is expected to reduce to 5% due to the relaxing of the lockdown levels and the re-opening of the economy.
On the maintenance front, the Generation Reliability Maintenance Programme (which focuses on long-term, detailed maintenance), was significantly affected during the higher alert levels of the lockdown with stringent restrictions. Instead of idling and taking a back seat during this time, the Generation division used the hard lockdown period to execute short-term maintenance.
According to de Ruyter, Eskom’s coal procurement strategy is based on pursuing long-term contracts to achieve the optimal volume mix over the life of the power stations. However, coal has also been secured to meet its needs in the short term. The utility is in the process of implementing a long-term coal strategy, which will ensure a predictable coal price path and security of coal supply. The strategy will give preference to dedicated long-term coal contracts, where coal is delivered by means of conveyor belts.
Reduction of road transportation of coal
Eskom will recapitalise the cost-plus mines to alleviate contractual shortages. The process to extend the cost-plus contracts to match the life of the reserve and the power stations has already begun. This will limit road transportation, as the coal is delivered via existing conveyor infrastructure. Road transportation of coal has been associated with several accidents and deaths over the years, which is unacceptable.
The utility has also initiated the means to extend the existing long-term fixed-price contracts for designated power stations, capitalising on the proximity of the colliery and the conveyor mode of delivery. In addition, it is engaging in a robust open tender process to source coal for the remaining life of the power stations. Four invitations have apparently been extended to the market to tender for the supply of approximately 250 million tonnes of coal to several power stations over 20 years and approximately 13 million tonnes of coal to supply Camden Power Station over five years.
The coal procurement strategy also entails incentivising suppliers to develop new mines with a predictable long-term Eskom offtake and a potential to export the balance of coal to earn premium returns. Eskom and the cost-plus mines are currently exploring technical options and conducting studies to determine the most economically feasible options.
De Ruyter says South Africa’s commercial and industrial electricity tariffs are competitive by international standards. In a study undertaken by Statista in 2018, results indicated that Eskom’s and even South African (including municipalities) average electricity prices are relatively low, when compared to other countries in the world. He referred to studies by NOVA Economics, and the World bank which report that Eskom’s electricity price is relatively low.
The utility, de Ruyter said, is resolute in its intention to achieve operational and financial sustainability and rebuild its reputation as South Africa’s trusted and credible electricity supplier.
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