Tuesday, December 01, 2009

South Africa and Eskom See Dark Days Ahead

The electricity crisis: Are we making progress?

By Bryan Hadfield (Thought Leader)

Some time ago, during the days of planned and unplanned load shedding, I wrote an article, published in this forum, in which I tried to throw some light on the origins of South Africa’s electricity crisis. My aim at the time was to dispel a lot of misrepresentation about the causes and discuss what needed to be done to provide a way forward. I recently read a report on an interview with former Eskom CEO Ian McRae, published by EE Publishers, which I found alarming. McRae expresses concern that there is still no clear vision for the future of the electricity supply industry or a strategy as to how we will achieve it. He sees no evidence of the strong leadership needed to guide us through what is already a crisis but rather continuing indecision and interference by government, which is following a similar pattern to that which originally precipitated the crisis.

In the light of the current management crisis at Eskom, McRae’s opinions are not to be taken lightly. He was chief executive of Eskom from 1985 to 1994 and it was during his time as head of Eskom Generation that the current fleet of large coal-fired power stations, the Koeberg nuclear power station, the hydroelectric power stations of the Orange River, and the Drakensberg pumped water storage scheme, were built. After leaving Eskom in 1994, McRae was appointed as the first executive chairman of the National Electricity Regulator, a post he filled from 1995 to 1997. It is clear from the interview that he is deeply uneasy about progress in resolving the present crisis and the increasing movement of government, in his words, into the engine rooms of Eskom and the National Energy Regulator of South Africa (Nersa).

We were granted some breathing space by the present economic recession, which resulted in a significant reduction in electricity demand but this is a temporary reprieve. We are still in an electricity crisis with inadequate reserve capacity in both generation and transmission. It is already too late to prevent the crisis getting worse before it gets better. To resolve our problems we need strong and dynamic leadership from people with the necessary knowledge and understanding of the industry and its key role in our economy. The government must step back and allow experts the freedom to act in the country’s best interests. This is no time for ideology to trump common sense!

McRae sees the performance of Eskom management and their board of directors as seriously wanting in allowing this crisis to develop without making certain that the government, the regulator and Eskom’s customers were made aware of the consequences of delaying construction of new generating capacity. Appearances are that government has not learned from past mistakes and still believes that it knows better. Once more, no one in Eskom seems to be making it crystal clear to government that the situation is still deteriorating and we are going to face severe capacity constraints before a new plant is commissioned.

We have also been misled regarding the reasons for the massive tariff increases, which have and will continue to take place to finance Eskom’s expansion. In the past it was part of Eskom’s responsibilities to plan and ensure that electricity demand was met and the Electricity Act made provision for a Capital Development Fund into which Eskom’s surplus income was paid in order to meet the cost of new plant and equipment. The Eskom board and government were complicit in the demise of this fund and the payment of a large part of Eskom’s “profits” as dividends to its sole shareholder — government. That’s right! Year after year funds that should have been set aside and invested with the purpose of funding future expansion were siphoned off leaving Eskom in its present situation — unable to fund essential capital works without massive tariff increases.

Nersa has also come in for sharp criticism from McRae. The regulator is supposedly independent of government and should have lobbied strongly for Eskom to be allowed to undertake the capital development plan it had approved in the late 1990s. It should have made the consequences of failure to plan timeously for increasing electricity demand absolutely clear to government.

The regulator should have been more concerned about Eskom’s coal procurement policies and practices, which have impacted dramatically on the security of supply and on electricity prices. It was these policies that almost brought the mining industry to its knees in 2008. Previously Eskom had a number of very good, cost-plus, coal contracts to supply coal to power stations located at the mouth of the mines. There were no transport costs as conveyor belts carried coal directly from the mine to the pulverizers feeding crushed coal to the power station boilers. This led to substantial savings and a very efficient partnership between mines and Eskom. Under Eskom’s present management many of these contracts were not renewed and there was a breakdown in the liaison between Eskom and mine management. Eskom commenced a policy of procurement from a multitude of suppliers, many small, which resulted in increased costs and a loss of control over the quality of the coal delivered. Several stations found themselves struggling with highly abrasive, poor and variable quality coal for which their boilers had not been optimised. This led to a substantial increase in fuel costs and an increase in breakdowns and maintenance expenses. Eskom found itself spending tens of millions of rand annually on repairing roads damaged by thousands of coal trucks plying between power stations and remote supplier stockpiles. Coal stockpiles were run down from 40 to 60 days supply to sometimes as little as 10 to 20 days supply. Eskom became extremely vulnerable to external events such as industrial action, breakdowns in transport logistics, weather and exceptionally high prices for additional off-contract coal supplies, which reflect export prices of more than double the cost-plus contract prices.

Although the whole county’s electricity supply is at risk, the Western Cape is in a particularly serious situation. It seems that little progress has been made in finalising arrangements to add another large base-load power station in this region and in providing additional transmission network capacity between the coal-fired stations in the northern provinces and the Cape. The new gas turbine stations at Mossel Bay and Atlantis will provide some temporary relief for meeting peak loads at extremely high cost but another large base-load station is needed to ensure a stable network. This almost certainly must be a nuclear station because of the lack of alternative fuels in the region but government and Eskom are still dithering about signing a contract for a station that should have gone into construction 10 to 12 years ago.

Are there solutions available to us, which could help to avert the looming crisis? One person who believes so is Doug Kuni, formerly with Eskom Generation and now an independent consultant and managing director of the South African Independent Power Producers Association. In a recent interview with Chris Yelland, managing director of EE Publishers, Kuni states that Eskom does not have the resources to meet the demand for electricity on its own. He believes that in the short-term industrial co-generation could provide at least 900 MW and that in the longer term independent power producers are able to build and operate power stations faster and more cost effectively than Eskom. The problem lies with mixed signals coming from government and the clear conflict of interests in having Eskom manage the process of bringing independent power producers on board to compete with it.

Eskom has repeatedly stated that the problem is that it is extremely efficient and that independent power producers cannot compete. The reality is that Eskom compares the cost of generating power using plant bought and paid for more that 20 years ago with the cost of power from new plant. Kuni states that an independent power producer would be able to construct and commission 600 MW of conventional coal-fired power plant in 30 to 36 months at a cost of around R15 million to R16 million per MW while Eskom is currently building two coal-fired stations at a cost of about R20 million per MW. The first unit will only be commissioned in about six years’ time. While Eskom’s current cost per kWh may be too low to attract interest from independent power producers, they cannot compete with IPP’s on the price of the next kWh produced.

The full interview with Kuni may be read at http://www.eepublishers.co.za/view.php?sid=18545

To avert the looming crisis we must use all the resources available to us. Dynamic, visionary leadership and urgent action is needed now! What we are getting is indecision, anti-competitive obstruction by Eskom, political interference and meddling based on ideology. We are already too late to avoid serious economic consequences. Let us pray that it is not allowed to become a catastrophe!

2 Opinion(s):

Zarky said...

I will stick my neck out by my following statement: "The ANC is living on borrowed time, the people who elected them will take them out!"
The Army is gatvol of them even though they are useless but that is besides the point. Everybody is waiting on the promises that were made to them during the elections that we have had but nothing is happening for them, so what will the end result be? Look at history, it is bound to repeat itself yet again. In the same breath I must say I cannot wait for that day!!! Kak sal julle kak en julle eie mense gaan dit aan julle doen!!! En ek gaan lag... What happened in France during the French Revolution, if any of you NIA agents are reading this please report it to your comrade boss very quickly - ha ha ha ha!!!!

Anonymous said...

@Zarky

Sorry mate they will just create more diversions such as Bob. They might then go through the mines and nationalise it and then keep all the mielie mouths happy and content that whitey is the real enemy.