Problem
Case Study: South Africa's troubled power utility is being reset: ceo sets out how eskom, south africa's state-owned power utility, is facing a litany of challenges. The conversation Africa asked professor anton eberhard, director of the power futures lab at the university of cape town's graduate school of business, to pose questions to the power utility's ceo, andré de ruyter.
Anton eberhard: the performance and availability of eskom's power stations has declined from above 90% in the early 2000s to an average of 64% in the 2021 financial year. is this long-term, historical trend inevitable as eskom's kit ages? obviously, eskom should d-oall it can to improve operations, but what is a realistic expectation of future performance? will we see energy availability factors above 75% again, or will average power plant availability now remain in the 60s%?
André de ruyter: eskom's fleet of coal fired power stations, excluding medupi and kusile, are on average 41 years old. these power stations have been run far harder than international norms, and have not been maintained as they should have been. in addition, the new generation plants, medupi and kusile, have design defects that will take time and money to address. we therefore have a generation system that is challenging to operate.
As one would therefore expect, the long term trend in energy availability factor has been downward. in january 2020, when i had just started, we took the decision to embark on a campaign to ramp up our maintenance in order to increase the energy availability factor. at the time, we made it clear that catching up on the maintenance backlog would mean an increased risk of load-shedding, as we took units down for outages typically lasting up to 100 days each. the energy availability factor therefore has been even more depressed than one would expect by extrapolating the long term trend, because planned maintenance is deducted from the energy availability factor.
We have recently seen some major units returning to service after long outages at duvha and tutuka, which have played a significant role in alleviating the pressure caused by the incidents at medupi 4 and kendal 1. in the medium term, we should therefore expect some recovery in the energy availability factor as our planned maintenance returns to a more typical level. we are working hard to get the energy availability factor above 70%, but given the age of the fleet, it would be unrealistic to expect a sustained performance above 75%. this is the reason why we have welcomed policy interventions to increase the available generation capacity for the country, as ultimately, we need more power to enable south africa to grow.
Anton eberhard: declining power station performance is one reason for load-shedding and power cuts which south africa experienced in 2007, 2008, 2014, 2015 and every year since 2018. but you have pointed out that south africa is also short of power. these shortages will increase as old power stations reach their end of life. you said recently that 22gw will need to be decommissioned by 2035. the integrated resource plan 2019 indicated around 33gw of new power generating capacity has to be added by 2030. that will require well over a trillion rand (over us$68 billion) in new investment. in a number of speeches you have made the point that because of eskom's high levels of debt, and a fiscally constrained state, most of this investment will need to come from the private sector. it's unprecedented for an eskom ceo to speak in this way, effectively encouraging private competition, but i guess you are alerting us to the urgency and the magnitude of the challenge if we are to keep the lights on. can you elaborate on what needs to be done to restore electricity supply security?
andré de ruyter: eskom has publicly stated that the country currently has a generation capacity deficit of 4,000mw. and that is at the current levels of economic activity and available generation capacity. this gap will obviously increase should economic activity rise without commensurate investments in generation capacity, which result in increased load-shedding. this need not be the case. south africa should never have been forced to choose between protecting eskom and having electricity.
We are pleased that today everyone acknowledges the solutions to south africa's electricity deficit cannot be left to eskom and the government alone. it is as much in private capital's interest to increase available generation capacity as it is in the government's interests. while the state has a very limited ability to make any further significant investments, the private sector has indicated its willingness to invest in generation capacity to solve the single most important factor holding back the country. and that is electricity. in this context, we were very pleased with the lifting of the licensing requirement from 1mw to 100mw, as we believe that this step will enable substantial new capacity to be added in the short term.
Anton eberhard: i've been interested to see that you have been floating the idea that eskom should start investing in renewable energy. in many ways this makes sense. solar and wind energy are now the cheapest grid connected sources of energy. and as the ceo of eskom you need to offer an alternative vision and future for eskom staff as the old coal fleet comes offline. but how will eskom be able to raise finance for new power generation with your current unsustainable levels of debt and limited headroom for further state guarantees? i know there are discussions around concessionary climate related finance leading up to cop26 (the 2021 united nations climate change conference) but surely even these funders would be worried that eskom is currently technically insolvent?
Andrr de ruyter: eskom continues to explore its funding options. it is important to separate the legacy debt that eskom carries from its growth opportunities, not only in generation, but also in vital investments in transmission and distribution, to enable private investors in generation to access the grid. for this, we need to borrow new money - these investments are inevitable and will have to be made regardless. we are in regular engagements with the key financial stakeholders, including developmental financing and multilateral institutions. these entities have expressed a keen interest to enable and assist the accelerated decarbonisation of the sa electricity supply industry by making highly concessional funding available to eskom.
Various funding methods are being explored. one thing we d-onot repeat often enough is that the solution to the country's energy problems does not belong to eskom and the government alone. everyone has a stake in the solution. we therefore have to find ways to energise the private sector to roll up its sleeves and get involved. for this to happen, investors need a decent return on investment, while assuming an appropriate degree of risk, just as any investor would d-owhen building a factory. this could be a win-win solution: investors get their return - which increases the tax pool for the government - and the country regains energy security and grows job opportunities. it's a no-brainer.
for eskom's part, within its ability, we have started with a pilot programme to repurpose the komati power station, which has reached the end of its operational life. this will allow eskom to use the existing infrastructure and save some jobs for the local community, instead of leaving behind a ghost town. we have three other power stations on which we have invited investors to give us partnership proposals to repurpose the stations. we can all share the responsibility, and harvest the fruits together.
Anton eberhard: recent regulatory reforms have removed ministerial and national energy regulator permissions for power market access and we are likely to see a flood of new privately funded and developed power generation projects. the focus will now shift to grid constraints. you have highlighted that around r180 billion needs to be spent on transmission and distribution. how will eskom in its current form be able to raise this finance? will the new transmission subsidiary company of eskom holdings not still be exposed to the credit ratings and financial contagion of the eskom group? you have said that sophisticated governance arrangements can be put in place to ensure the independence of the transmission subsidiary company. but why stick with this option? transmission comprises only 10% of eskom's assets. it is entirely possible to negotiate with lenders and over the next few years move the independent transmission system and market operator outside eskom, with the prospect of migrating back to investment grade and accessing competitively priced debt. one hundred and six countries around the world have gone this route, which also enables a fair and transparent platform for contracting and dispatching least cost power. so what are the advantages of keeping the independent transmission system and market operator within the eskom group?
Andre De Ruyter: eventually, the independent transmission system and market operator may operate outside of the eskom fold, which will be a policy decision. legal separation of transmission could be seen as the first step on that road. i am mindful at the moment that we need to contain cost. setting up an entirely independent new entity will inevitably lead to an increase in functional cost by duplicating services currently rendered by eskom corporate. for the moment, we are therefore content to proceed with legal separation, with appropriate governance structures to ensure independence in decision-making by the independent transmission system and market operator, while keeping costs down. nothing that we are doing rules out a completely independent entity, and when the time comes, we will be ready to implement upon the instruction of our shareholder.
Task
Determining future capacity requirements can be a somewhat complicated process - one based in large part on future demand. If demand for electricity can be forecast with a reasonable degree of precision, then determining capacity requirements can be straightforward. The capacity of an operating unit is important for planning purposes. It enables eskom's managers to quantify generation capability in terms of either inputs or outputs.
Identify the factors that determine effective capacity and explain how eskom could use the determinants to solve the electricity crisis in South Africa.