Unfortunately for our ‘statistician general’, Eskom maths just doesn’t add up (updated)

AVAILABILITY of electricity in South Africa is now at its worst in living memory. Prices are skyrocketing, tariffs are set to increase by a whopping 18.65% and the ruling party is hamstrung by its inability to unbundle Eskom into separate units. This at the same time as government insists on maintaining a facade, that the SOE will be able to provide for the entire nation’s energy needs moving forward.

Instead of examining the facts and figures, Dr Pali Lehohla, former Statistician General of South Africa, delivered a media sermon over the weekend, one whose message is painfully against privatisation and consumer choice. His comments reported by IOL, lack statistics, facts, figures, nor percentages. There is not a single prime number in a piece which rattles on about the President ‘being in the war-room’ to defund Eskom by ‘not funding maintenance in order to promote privatisation’.

Instead of examining the massive debt balloon run-up by Eskom over the course of the past decade (R401. 8 billion 2021, R396. 8 billion 2022), fruitless and wasteful expenditure compounded by tender fraud, unlawful contracts, R659 million lost in 2016 alone to a coal scam, alongside decreasing availability, (as if there were no maths problems here worthy of his academic qualifications), Lehola insists on misdirecting the public with a red-herring regarding the issue of maintenance of what is left of Eskom’s ageing fleet.

At the beginning of December, writes Ketshepaone Modise of Earthlife Africa, only 52% of Eskom’s fleet was generating electricity, and by the end of that month, the figure slipped below 50% for the first time. This means that of 48,000MW of potential capacity, less than 24,000MW was operational.  The entity posted almost a R12 billion loss for the year ended 31 March 2022.

Origin of a disaster

The seeds of the current disaster were most certainly laid during the Mbeki era, when the Mega-Coal projects began. This strategic error was compounded by embarking upon a diesel ‘peaking programme’, —  in excess of R7.7-billion was spent on diesel alone over a six month period during 2022 — all money which could have been better spent on unbundling Eskom, generating energy efficiency and building pumped storage and other storage schemes. This astonishing figure is a far cry from the conspiratorial tone of Lehola’s innumerate ruminations which seem geared towards an equally bereft opposition platform. They merely demonstrate the plan to unbundle the monopoly is being held back by ideologues and party agents.

It was in 2010 that former Minister of Public Enterprises Barbara Hogan cancelled the failed Pebble Bed Modular Reactor Programme (PBMR), having wasted in excess of R10 billion (adjusted) without so much as producing a single Watt, nor even a viable working reactor prototype. The PBMR project had been marred by controversy from the start, the least of which was that it possessed a major design flaw that resulted in the collapse of the ‘pebbles’ at the bottom of the reactor vessel.

South Africa’s mega-coal build programme by then was already well under way. Construction on the two megapower projects Medupi and Kusile began in 2007 and by 2019 journalist Sara Smit notes ‘their cost had ballooned by more than R300-billion — reaching R145-billion for Medupi and R161.4-billion for Kusile‘, while Nuclear One’s trillion rand price-tag, for the replacement of Koeberg with several nuclear plants, was seen as both unaffordable and a hard-sell following the PBMR debacle.

The diesel-based peaking-power plants that now cost our country millions whenever they are run were also commissioned during this period. This was followed by a number of renewable-energy projects such as the country’s first Concentrated Solar Project (CSP), and subsequent wind and solar projects, some of which should arrive later this year — none of these projects (except for the CSP installations), were targeted at the problem of base-load availability during peak hours.

The country at the time of Hogan’s intervention was blessed with ample electricity availability, in fact I had written a piece on ‘Access to Power‘ in a book published by the Panos Institute in 1991 noting that Eskom during the pre-1994 period, experienced a remarkable ‘oversupply of electricity’. After a dramatic rise in consumption following the advent of democracy, consumption had plateaued over the ensuing decades, before rising once more, and thus following the first decade of the new millennium, consumption remained relatively stable, yet as the government energy plans progressed, production of electricity also began to falter.

Enter the Saudis

It was thus that the utility embarked upon a series of billion rand fund-raises drawing mostly upon Saudi money, supposedly to produce more electricity in the future, notably via new bond instruments known as Sukuks. One headline from 2015 says it all: “South Africa’s Eskom to tap global markets with “a lot of sukuks””

A Sukuk is an “Islamic financial certificate that represents a portion of ownership in a portfolio of eligible existing or future assets”. Beginning in 2012 and with the last a R1 billion Sukuk in 2020, the utility raised billions, all predicated against its future assets (in which the Saudis amongst others, ostensibly owned shares) and thus a warrant over the forward supply of electricity, and all to be drawn from its mega-coal build which by now had added several new projects. All the additional builds have to date been cancelled due to climate issues.

Borrowing against the future supply of electricity and privatising assets via novel bond instruments may have seemed to be sound economics at the time, if it were not for the tragedy of the corruption and engineering failures which unfolded.

And calling the resulting shareholding structure, ‘privatisation’ is also misleading, since the Saudi Sukuks were essentially inter-state, bilateral agreements, conducted between one government and another, and subsequently released onto the bond market in addition to so-called ‘private placements’. With the blessing of trade union Cosatu (who claim to oppose privatisation), our nation’s assets are now essentially in foreign hands. The result would turn out to be toxic.

A letter by finance minister Enoch Godongwana for instance responds to a request dated 21 February 2022, on “concurrence for the increase of Eskom’s Domestic Medium Term Note programme (DMTN) from R160 billion to R167 billion”. The true size of the current Eskom bond market remains unclear, but it certainly represents a massive lien on the exchequer, since all of the bonds are essentially unsecured debt treated as if they are gilt debentures guaranteed by treasury.

The manner in which subsequent cost-overruns and tenders were irregularly awarded under the tenure of Jacob Zuma, are all the subject of a damning report produced by the Zondo Commission into State Capture. One can only conclude, in the face of a fire-hose of cash emanating from the Saudis and the related Eskom bond market, organised crime was literally incentivised and allowed to flourish.

Further this type of crime was allowed to run rampant, as state-owned enterprises were allowed to issue bonds as if they were underwritten by the sovereign, and generally accepted practices of accounting were ‘a mere afterthought’, with the only motive for existence, to raise more bonds in order to roll-over more debt?  Another R33-billion is still needed to complete Medupi and Kusile.

Any other public company allowed to operate in this manner would have gone bankrupt. In fact the company is forced to increase tariffs over and above 18%pa merely in order to stay afloat. Instead of focusing on the bare essentials needed to guarantee capacity within an open market, providing South Africa with a smart grid, tied to communications infrastructure, and opening up the market to competition, Eskom failed to embrace the future.

This didn’t have to happen

Eskom could have created resilience via battery storage and other storage schemes, rolled out demand-side reduction strategies that reduce the need to build new plants and facilitated the wheeling of electricity by third parties via its extensive power grid, instead the SOE has proceeded to lay waste to the entire economy. Regions of Durban were without power for 40 hours resulting in food spoilage. In other areas, farmers were forced to dump milk, eggs and hundreds of rotting chicken carcuses. Cape Town itself experienced over 16 hours of load-shedding this weekend within the space of 48 hours, with other parts of the country seeing 18 hours.

As pronouncements by both the DA and ANC demonstrate, political parties are engaged in a shell-game of protectionism and obfuscation — protecting regional energy monopolies which benefit Metros and provide the National government with revenue from the bulk sale of electricity to Munis. They have both failed to deliver electricity as the pyramid scheme fails. This past weekend would have been a real test-case to demonstrate Cape Town’s third-party purchase programme actually works, instead it was a massive failure. None of the promises made over the past 12 months have borne out.

The only innovations introduced by the national government to date, have been the lifting of the cap on private electricity supply projects over 100Mw, with the introduction of a few IPPs to the mix. These initiatives are all geared to the supply-side, with absolutely nothing being done to alleviate pressure when it comes to overall demand.

Governments are notoriously inefficient allocators of capital, they are even worse suppliers of goods and services, and the more so when it comes to electricity. You can read my piece on why our future needs are best met by opening the market to consumer choice, and my response to finance minister Pravin Gordhan — Eskom is a Public Bad not a Public Good. Our bills should not originate from a government entity mired in debt and unable to pay its bills.

NOTES

Click to access OCR_version_-State_Capture_Commission_Report_Part_IV_Vol_III-_Eskom.pdf

Click to access OCR_version_-State_Capture_Commission_Report_Part_IV_Vol_IV-_Eskom.pdf

SEE: Everything you know about the Palestinian Struggle is Wrong

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