Serial Head-butting At Eskom Is Poor Advertising For Investment - Africa’s premier report on the oil, gas and energy landscape.

Serial Head-butting At Eskom Is Poor Advertising For Investment

By Toyin Akinosho
FIVE AND A HALF YEARS AFTER Jacob Maroga and Bobby Godsell wrestled themselves out of the headship and chairmanship of Eskom respectively, we have been presented with another case of head-butting at Africa’s largest power utility.

South Africa’s power monopoly gets a lot of bad press, masking the country’s great potential by giving the impression that everything is wrong about the electricity investment environment. But the political and business elites seem intent on this poor branding.

Zola Tsotsi abruptly resigned as the chairman of the electricity company on March 31, nineteen days after his board sent CEO Tshediso Matona and three other executives on suspension. Finance Director Tsholofelo Molefe, Group Capital Executive Dan Morokane and Commercial and Technology Executive Matshela Koko were asked to step aside to allow for a probe into the state of the business, including under-performance of generation plants, delays in starting up new facilities, high costs and cash-flow problems.

This leadership tussle has happened against the background of crippling power outage, the most serious economic challenge to South Africa in twenty one years of freedom.

Eskom generates about 95% of South Africa’s power. The company’s nameplate capacity is about 45,000MW, but it actually generates slightly less than 30,000MW. The utility has implemented some rolling blackouts in the first three months of 2015, as demand overwhelms supply, with maintenance overdue at its aging power plants.

Tsotsi was the second chairman of Eskom’s board after Godsell’s walk out. He was appointed to succeed Mpho Makwana, who succeeded Godsell.

SOUTH AFRICA’S ENERGY CRISIS PEAKED seven years ago. Jacob Maroga took charge as Eskom’s CEO in January 2008 after competing with 269 other candidates in an intensive search process, but from almost the first day, the company he superintended was faltering.  In February 2008, Eskom declared ‘force majeure’, as the system moved to the brink of collapse.  In the space of two weeks some 8,500MW, or 24% of available capacity, were shut out of the grid.  In the event, Mr. Maroga presided over South Africa’s worst ever bout of rolling blackouts.

Whereas Chairman Godsell and CEO Maroga, in 2009, differed on philosophy of keeping the lights on in Africa’s most industrialised economy, Chairman Tsotsi was apparently distrustful of Matsona and his team, in 2015.

Godsell disagreed with Maroga’s idea of a long term solution to the crisis: to continue a vast infrastructure expansion, focused on building coal fired generating plants of up to 10,000MW capacity within five years and constructing more in the medium to long term, including, possibly, some nuclear power plants.  This required a capex of over $35 Billion in less than five years.

This philosophy has been largely maintained in the years after Maroga. Brian Dames, from whom Matona took over, presided over the continuation of the new-build programme  which ran three years late under him. The generation capacity crisis forced him to invoke emergency protocols on three occasions between November 2013 and his exit in June 2014, in order to head off a national power blackout. In the event,  Eskom’s largest industrial customers – 32 of whom consume some 45% of the electricity generated by the utility- embarked on regular mandatory load curtailments.

Dames was aware of looming shortage of supply of coal to Eskom’s power plant but didn’t confront it headlong; his high tolerance for deferring maintenance at the plants, because of the generation capacity shortages, has aided the surge in levels of unplanned outages under his successor’s watch.
In spite of the growing population and the expansion in the economy, electricity generation by Eskom has been relatively flat for the past 10 years. Indeed, Electricity produced in South Africa fell by 0.2% year-on-year in March 2015 to levels last seen in 2005, “following a trend that has seen electricity production consistently contract on a yearly basis since early 2014”, according to the Investment bank Investec.

MATONA WAS ONLY SIX MONTHS at his job when he was asked to step aside for a probe into issues, some of which predated his tenure. But as Judge Benita Whitchers, who presided over the hearing of his challenge of the suspension at South Africa’s Labour Court noted, the new CEO might have been fingered because he had not removed himself from the problem.  Eskom had resolved to conduct an independent inquiry because there may have been wrongdoing by Matona and his executive committee. The Eskom board believed Matona and the exco had provided unreliable information on the strategy to fix the crisis, and inconsistent financial information.

It’s hard to dismiss the misgivings that the resignations, suspensions, and indeed, whatever happens at the leadership of Eskom is a reflection of Government’s close marking of the utility. Five and half years ago, Godsell resigned because the ANC government chose the CEO’s vision over the board’s vision, which he championed. At the time of Matona’s suspension, there was (and still is) a government sanctioned war room composed of cabinet level appointees trying to sort out both Eskom’s problems and provide a direction for the resolution of the country’s energy crisis.

But what is really happening is that Eskom is playing too much of a role in the country’s electricity and the South African political and business elite have not decisively determined to flesh out a landscape in which the utility is only just one of the many players, even if an important one.

SOUTH AFRICA BADLY NEEDS A MARKET-based legal and regulatory framework with level playing fields for Independent Power Producers. Eskom is so big, busy, unsustainably indebted and so confused that it even ditches contracts with Independent Power Plants that could take so much load off her back.  Just why can’t the country pass into law an Independent System and Market Operator legislation and open up the electricity supply industry?

The success of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), in which 5,243 MW had been, or was in the process of being, procured from 79 mostly solar and wind projects, without a single tax payer dollar required to be spent, hints at the allure of South Africa as an investment destination. This has come as a result of four bid rounds and represented a collective private investment into the country’s electricity sector of $14.09-billion. The government is proposing an additional 6,300 MW allocation. And yet the key challenge in getting this capacity across to consumers will be Eskom.

Government realizes that constraints of South Africa’s distribution and transmission system (which is in the purview of Eskom) have to be taken into account. These constraints had been held up as being largely responsible for recent delays to the conclusion of some of the bid rounds. With this in mind, Eskom itself is encouraging the emerging IPPs to “self-build” electrical substations that would provide connection points to the national transmission network.

But that is not enough. Indeed, at best, it’s an indication again, that Eskom is an unwieldy power monopoly, which keeps on being asked to do even more, whereas, all that needs to happen is the setting up of several parallel and interrelated routes to market. These parallel and interrelated routes have to be grounded in legislation that frees Eskom itself from the shackle created by its notion of itself as the once and future provider of all of South Africa’s electrical energy needs. The idea that Eskom is the representative of the cure all developmental state in electricity provision requires a very robust interrogation.

This piece was originally published in the April /May 2015 issue of the Africa Oil+Gas Report-print/e-copy edition.


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