More madness: Eskom's woes

Last night Hubby and I had dinner with a friend who works for the Ministry of Trade and Industry. She, like many of us, is concerned about the power outages. I gleaned some very interesting insights from their conversation.

Eskom has made the news again with the announcement that it has reduced its headcount by half in the last twelve years and now it is suffering from a critical skills shortage which is negatively impacting its ability to resolve the present power shortfall. The citizenry, predictably, is outraged, ignorant of (or ignoring) the pragmatic reasons for such a situation having come to pass. The government, hypocritically, is calling Eskom on the carpet, tasking the company with resolving the problem that is, in truth, one of government’s own making.

Eskom has known for years that this power crisis was looming. Over the past decade or so, Eskom has quietly recommissioned mothballed power plants, converting its excess generating capacity over to active use to serve increasing power demands country-wide. But, due to short-sightedness on the part of government (by refusing to authorize the funds to build new plants), Eskom was unable to build new power plants to replace the excess capacity and over time, Eskom came to have no reserves of any significance.

According to President Mbeki, Eskom repeatedly asked for authorization of the funds to build new power plants and they were refused because the plans were for building “excess capacity.” This is immensely short-sighted because an electric power plant isn’t like a litre of milk…you can’t just run down to the store to get another one when you run out of power. The gas-fired plants in Atlantis and Mossel Bay are quick to build…18 months or so…but they cost THIRTY TIMES what a conventional plant costs to run! They cannot be run at a profit unless the rates you and I pay for electricity go up. WAY up.

So, Eskom found itself on the horns of a dilemma: government won’t turn loose of funds to build new power plants, the company is expected to generate a profit along with its electricity, and there are a lot of employees…in particular, the guys ordinarily involved in the planning, designing, and building of new power plants…who have nothing to do. Eskom can’t raise its rates, can’t build new power plants…so what does it do? Well, it cuts the unnecessary staff, of course. What else could it do?

When a company is mandated to be profitable but is prevented from raising its rates to accommodate inflation or salary increases to its employees or the increase in the costs of goods and services it must use, what steps can it take to fulfil its mandate? Obviously, if it cannot increase its rates, it has only two possible paths: increase sales or reduce overhead…or both. Eskom has done both…and now the whole of South Africa is paying for it.

With the country’s annual growth rate presently at 4%, Eskom has increased its sales, because a growth in the economy requires additional electricity to support it: it sold more electricity, so it made more money. To sustain that rate of growth, however, Eskom needs to add 1600MW to the grid annually. Until recently, it has done so by bringing its mothballed excess capacity power plants…the “back ups”… back on line…but what happens when we run out of back up plants just sitting out there on the veld, waiting for their turn to go onto the grid? We get power shortages.

Eskom has reduced its overhead as well, but a corporation’s ability to do that is limited. Eskom doesn’t have warehouses full of electricity they can divest themselves of, they can’t sell their assets. The easiest and most cost-effective way to trim the budget and reduce overhead is to reduce personnel and reduce salaries, increases, and benefits to the personnel who remain. This, of course, has a knock on effect of the remaining personnel being dissatisfied with their reduced circumstances and sends them off looking for new jobs, further reducing the overhead. In America we call this “downsizing,” and Eskom has downsized its human overhead by 50% in the last twelve years. So, while the demand on its product has been growing, Eskom has been shrinking…but it has managed to meet its mandate from its sole shareholder, government, to be profitable.

Well, now it has come back to bite us in the butt. The excess capacity is used up and because government specifically refused to allow Eskom to build excess capacity to replace that which was converted to active service, we have no back up, no reserve generating capacity. Now that government has recognized its error and reversed itself, tasking Eskom with building 20 new power plants over the next 20 years, Eskom no longer has the trained personnel…or even, in some cases, the training programs…to effect a rapid remedy of the situation.

Worst of all, due to alarmist media stories, people are angry with Eskom for a situation not of its making. Even government, the actual perpetrator of this fiasco, is holding Eskom’s feet to the fire…talk about blaming the victim! Essentially government is saying “Yeah, we refused to give you the money to avert this disaster, but that is your fault because you didn’t make us listen.”

So, today Eskom is chasing a moving target. Eskom needs to add 1600MW annually to the grid in order to sustain a growth rate of 4%. Government is pushing for a target growth rate of 6% growth, which will require Eskom to add 2400MW to the grid annually, just to keep up with growth, never mind putting in excess capacity. It takes about eight years to build a conventional power plant, with the cost in the BILLIONS; it takes longer and costs more to build nukes, presently the only viable solution for the Cape and other places that don’t have immediate access to coal beds.

The gas-fired plants in Atlantis and Mossel Bay are just fingers in the dike. They added 1000MW to the grid last year (but we needed 1600), and they took 18 months to build. Eskom is hard at work building more gas-fired generating capacity in these locations, but at the end of the build they will have added 2000MW to the grid and a 4% growth rate will have required 4800 in the same time frame. Eskom is chasing a moving target and while they can catch up, it’s going to get worse here for a while before it gets better.

Don’t be surprised if Eskom begins reporting operating at a loss over the next few years. But don’t take it as further proof of management incompetence, take it as proof that Eskom will sacrifice whatever necessary…including profits…to keep your lights on at a reasonable price. You see, the only short-term solution to the power shortage is to build those gas-fired plants. Nothing else can go from bare dirt to fully operational in such a short time. But the cost to operate these plants is 30x higher than a conventional plant because they burn diesel fuel. Under normal circumstances these plants would only operate two or three hours per day, during peak demand times, and remain idle the rest of the time. Due to the government’s refusal to allow Eskom to replace the excess generating capacity that was pressed into service to support the country’s growth, these expensive peak time generators are running up to 20 hours a day to supply much needed capacity to the grid. When put into service only a few hours a day, their high cost of operation is not an important factor. But running flat out for extended periods of time is going to have a significant deleterious effect on Eskom’s bottom line…it is likely to eat up all of the company’s profits and then some. Eskom can prevent those losses by raising its rates, but I don’t think the customers would like that as much as the company failing to post profits for a while. Remember, Eskom’s sole shareholder is government, so a rate increase that could restore Eskom to profitability…well those profits go into the government’s pocket, just as an operating loss comes out of it.

I hope not to hear any more cries about replacing Eskom’s management. The fault is much less with management than with an owner…government…that will not allow those managers to do what is necessary to keep the lights on. Cries to replace the management are just stupid…is there anyone here in South Africa who knows more about running a parastatal power utility than the guys who are doing it now? How does replacement = improvement?

Here’s hoping that we put on our thinking caps before we open our mouths. Eskom really is running as fast as it can, building new power plants and looking at new technologies to implement once the crisis is over. Tell the next anti-nuke nutjob who harangues you that we, in the Cape, are right now faced with three choices: noisy diesel generators running 20 hours a day and pumping pollutants into the atmosphere, clean, quiet nukes, or no power for half or more of each day (and that power to come from the existing nuke).

Once the Koeberg reactor that is presently down for refuelling comes back on the grid, the present crunch should be eased a bit. But make no mistake, Eskom is behind the curve now, thanks to government’s failure to heed timely warnings, and it is going to get worse before it gets better. It WILL get better, but it’s gonna take some time.