The many legs of Eskom’s recovery plan

POSTED ON: June 29, 2020 IN , by Admin
Eskom Eskom

SA could see the end of loadshedding by August next year, by when Eskom hopes to have eliminated the backlog in its maintenance programme, CEO André de Ruyter told business leaders in a webcast organised by BLSA on 26 June 2020.

South Africa could see the end of loadshedding by August next year, by when Eskom hopes to have eliminated the backlog in its maintenance programme, CEO André de Ruyter told business leaders in a webcast organised by Business Leadership South Africa on Friday.

Until then, however, there is an increased risk of loadshedding as it takes generating units off grid for maintenance. “It’s still a system that’s unreliable and challenges remain,” he stressed.

Outlining the numerous legs of Eskom’s recovery plan, he said the 10-year outlook is to see 8,000MW to 10,000MW of coal-fired generation being taken out of operations, as stipulated in government’s Integrated Resource Plan. “We’ll also see additional investments coming in to gas and renewables which will add to stability,” he said, adding that the new generation would not necessarily be owned by Eskom.

Over the past two financial years the power utility had managed to achieve an energy availability factor (EAF) of only 65%, with the “low point” on December 6 last year when stage six loadshedding was imposed. The recovery programme aimed for EAF targets of 70% in 2021, 72% 2022 and 75% in 2023.

De Ruyter described the stage six loadshedding as an “all-time nadir in Eskom’s history” which spurred him to develop key action items when he became CEO in January “that we’re driving strongly”:

  • Operationally stability.
  • Address the income statement.
  • Restructuring, the first step of which had begun with the process of divisionalisation.
  • Looking after Eskom’s people: “Our employees have been browbeaten over the past 10 years. Restoring pride in working for Eskom is an important issue.”

Within each of those there was a long list of items being addressed including maintenance; avoiding loadshedding; reliability improvements in new builds; ensuring coal supply security; demand side management initiatives; addressing environmental issues; and power procurement.

“So, lots of work is being done to address operational stability but more work is also being done to drive for operational excellence. Lots of programmes including staff training are being implemented for that.”

Eskom had also identified transmission and distribution projects, with R3bn to R3.5bn needed to repair the transformer network. Older power stations were to be repurposed as they were put into retirement rather than being decommissioned. “By repurposing, we are able to turn them into assets that we can potentially use to act as equity for PPPs [public private partnerships]. Linked to that is the just energy transition.”

That transition, De Ruyter said, was driven by climate change, with many financial institutions ceasing to finance fossil fuels, which were being phased out. “At same time we’ve seen significant reductions in the cost of photovoltaic and wind: the price of producing PV has gone down by 68% in the past six years. We cannot deny the energy revolution – we have to see it as an opportunity, which is what we’re doing at Eskom, migrating to a cleaner, greener and hopefully more efficient Eskom.”

He explained that the plan was to install solar and wind power plants on vacant Eskom land where open-cast mines had to be rehabilitated and to repurpose ageing power stations. “We’re already attracting DFI funding for green projects and this presents an opportunity to attract foreign direct investment.”

He emphasised the need to ensure that as Eskom moved away from coal, “we don’t create a financial catastrophe”. The opposition to green energy, he said, was based on well-founded concerns about job losses and damage that would be inflicted on businesses that were invested in coal. “This transition is also part of their strategies.”

Eskom was also pushing for special economic zones for renewable energy producers to be set up.

To become financially sustainable, he believed Eskom needed an Ebitda margin [earnings before interest, tax, depreciation and amortisation) of 35% (it was at 18% at end-March 2019]. “We also need cost-reflective tariffs. We know we can’t ask for a subsidy and we’re working hard to drive down costs, but we’re requesting from [energy regulator] Nersa that tariffs must be on a cost-based benchmark, enabling us to be efficient.”

Municipal debt remained a significant challenge while there was a strong drive to reduce diesel consumption. He said while forced retrenchments were being avoided, headcount had come down with the exit of 184 managers through voluntary retrenchments and early retirement plans. Headcount was being gradually reduced to “the ideal” of 36,000 to 38,000 employees from 46,000 two years ago. On this aspect, he said: “We’re not on a warpath with unions, we are working with them and have a good, open relationship.”

Eskom was also in talks with the IPP Office to renegotiate some contracts secured in the early rounds of the renewable energy independent power producers’ procurement programme. “They were funded initially based on high technology risk which has now abated so we think there is an opportunity to lower costs there.”

Eskom was also paying close attention to general procurement. “I’m not at all satisfied that we’re paying competitive market-related pricing, so we’re rolling out improved management in that area plus were instituting electronic platforms for price checking – to ensure we no longer pay excessive prices even down to items such as toilet paper, which was one item we were paying excessively for,” he said.

On managing funding, “we had to intervene because of the constrained environment”. Capex was taking “a hard cut”, he said, “but we have to live within our means. We’re trying to optimise our environmental capex, we’re looking at our working capital and hoping green finance will come at a decent cost.”

On the restructuring of Eskom, “we don’t want to carve up and sell but prepare the ground for increased private sector generation. To do that we’ve set up a single market operator so all bids into the power pool will be considered along with Eskom’s generation.” Part of the divisionalisation process was to transfer about 6,500 head office employees to the different divisions.

“So carving out all these businesses is difficult and challenging, not least of which is to ensure we can take our lenders along on this journey so they don’t feel compromised.”

Areas to unlock value included selling its finance company and bids for that had been invited, while Eskom had extensive property interests which, he said, would rank second or third on the JSE’s property sector in terms of valuations. “So there are significant opportunities to unlock value from those assets.”

The end state of Eskom, De Ruyter said, would be three legal entities serviced by a shared services entity, all sitting under Eskom Holdings SOC as the holding company.

“Last, but not least, in driving Eskom’s turnaround is the people aspect. We’ve resuscitated corporate values like safety and integrity, which have been neglected in the past. We’re also being more transparent internally and trying to create a sense of urgency, a bit of carrot and stick. So we’re trying also to catch employees who are doing things right – rather than just trying to catch those doing things wrong – recognising and appreciating high performance, and have implemented a production bonus at shop floor level, not for executives. For our senior executive we’ve implemented forced rankings, moving away from the ‘country club mentality’ where all are kept happy. Now its more performance related but the costs won’t go up –we will take from the underperformers to give to the high performers.”

Summarising Eskom’s financial problems, De Ruyter said its debt of R450bn forced it to borrow to service the debt, with debt service costs of about R29bn a year. This was in the face of declining revenue, while R30bn was owed to Eskom by defaulting municipalities at end-May and a further R12bn was outstanding from Soweto.

While emphasising that tariffs did not reflect costs and Eskom was appealing to Nersa for cost-reflective tariffs, he stressed also that Eskom’s own costs had not been well maintained over the past decade and much work was being done to reduce its cost base. “Our costs render us very challenged to survive and thrive in a rapidly changing energy landscape,” he said. Apart from the work being done to cap the head count and reform procurement practices, Eskom was assessing existing contracts. However, he said most coal supplier contracts signed at excessive rates during the state capture era were expiring soon – they had between one month and less than a year to run, “so we’re not tackling those but only addressing one long-term contract where we’re speaking to the mining company”. Other barriers to lowering costs were fraud and illegal connections, to which R2.25bn was lost in the last financial year.

In the drive to improve the income statement and balance sheet, De Ruyter said: “We’re pulling every level at our disposal, particularly focusing on taking out costs wherever we can.” However, it was a time-consuming process. “You don’t undo a decade of state capture and procurement in a matter of months.”

On the impact of the Covid-19 pandemic, De Ruyter said at the start of lockdown there was a substantial drop in demand of 6.5GW during the day, with 11GW of demand lost in the mornings. “That sharp drop in demand caused challenges at nights when independent wind-powered producers continued to supply Eskom. We therefore had to declare force majeure for 200MW hours – but those hours will be added to the end of their contracts so overall there is no loss.”

“But when life hands you lemons you make lemonade,” he said. Eskom had used the lockdown to accelerate its maintenance programme and had recovered 2,000MW of generation capacity.

Then, however, SA entered its “coldest winter in 10 years, resulting in demand being higher than our forecast”. The demand outlook was now returning to normal and he expected to reach pre-lockdown levels at the beginning of September. Total lost revenue due to the decreased demand during lockdown was estimated at R3bn to R3.5bn.

Eskom was working on many fronts to ensure a sustainable recovery of the utility by focusing on drivers including financial health, maintenance and operational excellence. “We want to become a reliable operator,” he said. He outlined two scenarios:

  • Conservative outlook: assuming a steady improvement in the unplanned capacity loss factor (breakdowns), during peak times Eskom would need to continue burning diesel, which was hugely expensive “so we want to restrict it as much as possible”.
  • Aspirational outlook: Eskom contains unplanned losses in winter to drive operational reliability. “That is where our focus is.”

Generation capacity would be further stabilised with different generating units from the three mega projects of Medupi, Kusile and Ingula scheduled to come on stream at various times during this and next year, despite numerous difficulties at each including design modification wrangles with contractors.

Asked about prospects of recovering what was owed by municipalities, De Ruyter said the reasons the debt had accumulated were numerous, including lack of capacity at municipal level, for example to tackle cable theft and to act against non-paying end consumers. “This needs significant attention and support from central and provincial governments is essential. We have taken assertive steps, for example, when a municipality did not conform to a debt agreement, we attached municipal assets and that certainly concentrated their minds and we’re now negotiating a new debt agreement. However, we have payment agreements with 18 of the 20 top debt municipalities but only two of those are complying. We do have a maximum demand level agreed with each municipality and if they exceed that, we cut them off.”

The larger issue, De Ruyter said, was the question of municipal accountability. “Both appointed and elected officials should be held accountable for delivering services to residents.” On this front, he was very pleased with the level of political support, from the top down to ministerial and provincial levels. After some top government officials recently said SA could not tolerate a culture of non-payment, the payment rate in Soweto increased from 12% to 24%. “We will be rolling out a campaign on this – from a communications and political perspective – and we’ll be seeing ministers going around the country to address non-payment.”

Much headway was also being made with the programme to recover money looted during state capture, with R1bn received from McKinsey and Deloitte to repay R150m, while a claim of R5bn against Tegeta Exploration & Resources, formerly owned by the Gupta family, was in process. Because that company was in business rescue, “we’ll probably only recover R1.2bn of that”. Other claims were being pursued, including for excessive payments at Kusile where about R4bn was unlawfully overpaid to numerous companies, as well as claims against individuals involved in state capture inside and outside of Eskom. “You can expect news on this in coming months.”

By Business Leadership SA. 

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