A leaked Eskom vision and strategy document, apparently prepared by the Boston Consulting Group for Eskom, has revealed the next steps of a long-awaited restructuring and turnaround plan for the embattled utility.

The document was presented on 22 August 2019 to the Eskom Executive Forum, a group of about 600 senior Eskom managers and executives, by acting Eskom CEO Jabu Mabuza.

In the presentation, Mabuza admits that Eskom is in a utility death spiral with an outdated and unsustainable business model, operational and structural inefficiencies, and a lack of transparency, in a rapidly changing energy landscape.

The presentation further states that “Eskom ran out of cash and came close to complete collapse on multiple occasions in 2019”, and warns that if nothing is done “Eskom will collapse and bring down South Africa”.

The restructuring process revealed so far
The first step of the restructuring of Eskom was announced by the President of South Africa, Cyril Ramaphosa, in his state-of-the-nation address on 7 February 2019. He indicated that the generation, transmission and distribution activities of Eskom will be split into three separate subsidiary companies owned by Eskom Holdings SOC Ltd.

The next step revealed by Mabuza in the presentation of 22 August will be to carve the transmission company out of Eskom Holdings into a separate, independent, state-owned company under the Department of Public Enterprises (DPE), to form an independent transmission system and market operator, or ITSMO.

After these first two steps, which the document indicates would have a timeframe of five years, Eskom would retain two of its major activities, namely generation and distribution, with each activity housed in a separate subsidiary company.

Thus, from the vision and strategy outlined in the document, it would appear that Eskom sees itself in the future as an electricity generation and distribution company, and not a transmission company.
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Further restructuring that may still follow
However, this would surely not be the end of the restructuring process, as the electricity generation and distribution activities of Eskom and municipalities are the two most troublesome and toxic hotspots that are in most need of restructuring.

Generation and distribution are also facing the biggest threats from disruptive technologies, in the form of utility-scale renewable energy, distributed embedded small-scale generation, and pervasive, consumer-empowering information and communication technologies (ICT).

In contrast, the current Eskom transmission group does not carry a lot of debt, arrear payments receivable, or people. Eskom’s transmission activities and assets are generally considered to be relatively well-managed, well-maintained and reliable, and this is the only part of Eskom that is seen to be functioning reasonably well.

So, to leave Eskom with the troublesome activities, toxic debt and municipal arrear payments of its un-restructured generation and distribution activities, with the crown jewels of transmission carved out and no longer forming part of its business, would be a fundamentally flawed and misguided vision and strategy.

It would perhaps be more rational and preferable for Eskom to morph from being primarily a generation company (as it is now), to becoming the state-owned ITSMO itself, and divesting from its problematic generation and distribution activities.

Thus, the as-yet unannounced end-state for the power generation and electricity distribution industries could perhaps comprise Steps 1 and 2 as already announced, but with Steps 3 and 4 still to follow, as detailed below.

Step 3 would be the creation of a competitive generation sector. This could be in the form of a handful of unbundled former Eskom generators, a limited number of public-private partnership (PPP) generators, a few hundred renewable energy and other independent power producers (IPPs), and several thousand distributed, small-scale, embedded generators.

This diverse group of generators would deliver generation capacity and energy to the ITSMO (in the form of a “new” rejuvenated Eskom), with the generators competing for access to the grid on level playing fields and on economic grounds via an electricity market managed by the ITSMO.

There could also be bilateral contracts between generators and customers, wheeling power through the grid, and paying wheeling fees to the ITSMO.

The final Step 4 of the restructuring process would surely have to be the rationalisation of the dysfunctional electricity distribution sector into a handful of financially viable and better resourced, independent, state-owned, regional electricity distributors (REDs), formed from the remnants of the current 185 municipal and six Eskom electricity distributors.

A competitive retail electricity sector selling electricity to consumers should also form part of the restructured electricity distribution industry, offering all manner of bundled retail pricing packages, as we see in other jurisdictions and sectors, such as for smartphone voice and data airtime.

Getting stakeholders on board.

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F​inancially-constrained power utility Eskom has signed a $180 million loan agreement with the New Development Bank (NDB) for a renewable energy integration and transmission augmentation project.

Under the agreement, the NDB will provide a loan with sovereign guarantee to Eskom. The NDB was established by Brazil, Russia, India, China and SA to mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.

The loan facility comes at a time Eskom is struggling to keep the lights on. President Cyril Ramaphosa recently said the severe financial and operational challenges being experienced by Eskom are as a result of a number of factors, from state capture to poor maintenance of its power plants.

The loan agreement was signed by Xian Zhu, NDB vice-president and chief operations officer, and Calib Cassim, chief financial officer of Eskom.

The NDP's Project Finance Facility (PFF) will be used to support the development of grid connection infrastructure, which is vital for the development of renewable energy projects, says Eskom.

It adds the PFF will support renewable energy development and reduce the country's reliance on fossil fuels.

​The project will integrate a total of 670MW of renewable energy into Eskom's grid. Modern grid connection infrastructure will be used for renewable energy projects and augmentation of the Eskom transmission network to the identified areas.

The project will also help increase electricity supply to the targeted areas for sustainable development.

According to the power utility, the project will enhance the country's capacity for renewable energy while achieving sustainable growth. It also aligns with the bank's focus to support projects that aim at developing renewable energy sources.

"We are happy to support this important project that will contribute to the development of grid connection infrastructure in South Africa and support the shift to a more sustainable energy path in the country," says Zhu.

"The project is coherent with the bank's focus on projects that incorporate sustainability from their inception. Moreover, we believe that supporting South Africa's energy sector is fully in line with the bank's mandate and our role as a reliable development partner."

Eskom's Cassim says: "The successful conclusion of this inaugural transaction with NDB will significantly contribute towards driving Eskom's goals to reduce South Africa's CO2 emissions.

"Eskom welcomes the support from NDB and we look forward to fostering a valuable partnership with this organisation whose mission is to enhance infrastructure for sustainable development in its member countries."

Commenting on the deal, Brenda Martin, chairperson of renewable energy industry body, the South African Wind Energy Association, says Eskom's role and duties as sole purchaser of power has been reinforced by government and the courts since early 2018.

This after the power utility had for some time been blamed for delaying the signing of renewable energy projects. The 27 outstanding power purchase agreements were eventually signed last year.

"With construction for Round 4 projects now under way and with the urgent need for new additions of power, the industry anticipates Eskom will recognise the need to fulfil its mandate to government and South Africa and not inhibit further investment in renewable energy," says Martin.

She adds that while the private sector covers significant costs of connecting to the grid up to the point of connection, Eskom as owner of the grid has to cover its own costs routinely associated with additions of new power such as deep connection costs.

"These routine operating costs for the grid owner are recoverable in the tariff. In a power system where the utility is a vertically integrated monopoly, this is quite routine. This is another reason why restructure of the SA power system is advisable."

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Two energy experts have slated Eskom’s leadership, arguing that the Eskom board should be sacked and a new CEO with an engineering background and energy experience should be appointed.

Speaking to SABC News, energy expert Ted Blom said he has never seen a “bunch of amateurs” running a company as is the case with Eskom.

Blom said the current Eskom board has been in place for over a year, but the situation at the power utility is now worse than under the previous corrupt board.

“This board is ineffective, they do not have the necessary experience and the chairman is conflicted,” said Blom.

Blom said the ANC government employed people who do not know what is going on because it refuses to look outside of the party for people with the required skills to run Eskom.

He said the solution is to appoint an interim board consisting of people who used to run Eskom effectively until the problems are resolved.

Get a new CEO
Transform RSA President Adil Nchabeleng concurred with Blom, saying Eskom’s leadership had ample warning and time to resolve the problems at the power utility.

“Management is refusing to raise its head. The board has not spoken. The minister is nowhere to be found. No one knows what is going on,” said Nchabeleng.

He added that Eskom’s board is “chaired by a person who knows nothing about energy, who has admitted that he is not an energy expert”.

“The board should have by now been recused and a new board should have been appointed,” said Nchabeleng.

He said that an experienced CEO with a strong engineering background and understanding of the energy sector should have been appointed.

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The electricity crises in South Africa is real, watch the video....

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Former Eskom chief executive Brian Molefe says he is in the dark about current problems faced by the power utility, which have seen the return of crippling power cuts as the company battles operational challenges.

Speaking to eNCA on Sunday morning, Molefe said he did not want to apportion blame about what could have occurred at the firm he led between April 2015 and November 2016.

In 2016, former president Jacob Zuma declared that there would be no more power cuts, following a visit to Eskom's headquarters.

'Then the lights went off'

During the interview, Molefe was asked what had gone wrong between that period and now, and he responded: "I don't know, because since we have said that three years have passed, and the lights didn't go off and then they went off."

"I don't know what is happening at Eskom because I am not at Eskom.... I am in the dark," he said.

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"I cannot say I appreciate what the problems are, but it means something must have gone wrong," he added.

Last week, Eskom announced that it would institute load shedding for the first time since December, blaming the problem on the failure of a number of generating units.

In December, Eskom blamed supply challenges on low coal stockpiles.

Related to the coal supply challenge was the controversial 2016 contract with formerly Gupta-owned Tegeta Exploration and Resources, which ran into operational challenges.

Supply constraints experienced by Tegeta were, back then, partly blamed for the current low coal stock piles at Eskom power stations, contributing, in turn, to load shedding.

Molefe, who resigned from Eskom after being named in the State of Capture report by former public protector Thuli Madonsela, stated that the contract was above board. 

He added that he had not been asked to appear before the commission of inquiry into state capture headed by Justice Raymond Zondo.

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Corruption and State capture are major reasons why coal plants Medupi and Kusile are not delivering electricity as planned and why South Africa is facing crippling blackouts, say energy experts.

Kusile and Medupi, the third and fourth largest coal power plants in the world, were originally due to come online in 2014 and 2012 respectively, which would have given the country an extra 9 600MW of power, enough to avoid blackouts.

In 2019 both are still under construction.

When Eskom announced in 2007 that it was to build the two new mega coal power plants, the cost of Medupi was just under R70-billion and Kusile R80-billion.

The latest costs are now R208-billion for Medupi and R239-billion for Kusile.

While some of the units have come online and are generating electricity, they have been plagued by problems. Eskom calls these "design faults" and says it will cost R8-billion to rectify.

Some experts say that is par for the course with mega projects worldwide, now regarded as outdated because of the almost inevitable time delays and cost overruns that go with massive projects.

Others, while acknowledging this, say there was a lack of oversight and control over the projects from an early stage, which paved the way for corruption.

Energy expert Hilton Trollip of the University of Cape Town's (UCT's) Energy Research Centre, said there were serious problems with Medupi almost from the start, but they were not investigated.

​"Unless we are so punch-drunk that we don’t think the ANC’s [African National Congress'] role and benefits in Hitachi Africa, Chancellor House and Medupi contracts were not a clear signal, already reported in 2007, that prosecuting authorities would turn a blind eye to blatant corruption – and what the results of that would be," Trollip said.

When the problems around lack of transparency became systemic, National Planning Commissioner Anton Eberhard had recommended a probe, but nothing had been done.

"Once the conditions for both corruption and impunity had been established at the levels they were in Eskom, and as it become clearer that this impunity persisted, it became increasingly likely that things would develop along the path they have. By now there are so many beneficiaries, large and small, throughout the Eskom ecology, and the culture is so entrenched, that rooting them out within the existing institutional structure is not credible," Trollip said.

Jesse Burton from UCT’s Energy Research Centre agreed that corruption and State capture had been serious underlying factors in the delay and cost overruns of Medupi and Kusile.

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South Africa's Eskom could be split into three separate firms under proposals from experts President Cyril Ramaphosa has hired to help revive the ailing state power company, two sources familiar with the matter told Reuters.

Reforming Eskom is vital to get Africa's most industrialised economy firing on all cylinders. It supplies more than 90 percent of the nation's power but is drowning in debt.

A Sustainability Task Team, picked by Ramaphosa, is due to report to the president next week, but shared its preliminary thoughts about Eskom with senior members of the ruling African National Congress (ANC) at a two-day meeting that ended on Monday.

One senior ANC source briefed by the task team said it proposed a "functional unbundling of Eskom," which would involve separating it into three state-owned entities responsible for power generation, distribution and transmission.

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by Dr. Tobias Bischof-Niemz and Johan van den Berg

Eskom’s current debt is R350-billion, and it needs to raise a further R150-billion over the next three to four years. This is almost certainly impossible, even with a government guarantee. It would appear that Eskom cannot stay afloat without a gargantuan bailout by the South African government.

NERSA’s low electricity price increase announced in December 2017 has passed most of the responsibility for funding Eskom from the electricity customer to the taxpayer and the fiscus. It’s been widely reported that Eskom would have already run out of cash without an emergency bridging loan by the PIC of R5-billion in early February 2018 and a further R15-billion by the end of the month.

But there is a simple way to stabilise electricity prices, cast off Eskom’s crippling debt and boost South Africa’s credit rating, while maintaining public sector control of critical assets in the electricity sector.

The Eskom generation fleet consists of 15 coal-fired power stations. They all have a limited lifetime, and were built to serve the country and economy before being retired and replaced. Scheduled decommissioning dates start soon, and end in 2050 or later. Given that these assets were meant to be extinguished over time for the common good, we can choose to do so in the most beneficial manner. The value of the power stations does not stem from their steel and metal, but from the fact that they are able to produce electricity over the residual lifetime of the plant. If we can manage to sell the Eskom coal fleet at the “net present value” of this residual lifetime value, we will be able to raise enough money to pay back the Eskom debt. This can be done as described below.

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The nascent private power industry and its substantial financial backers are reeling from Energy Minister Mmamoloko Kubayi’s recent apparent hit-and-run attack on them.

Last week, the industry was shocked to hear Kubayi announce they must all renegotiate their previously-agreed tariffs down to 77c/kilowatt-hour.

This would get them their long-delayed power purchase agreements with Eskom by November.

Looking for clarity, they learnt that Kubayi had left for the Brics summit in China and would take leave afterwards, said Mark Pickering, managing director of solar industry lobby group Sapvia.

“The minister drops this massive bombshell, then promptly leaves for China. After that, we are told, she is on leave for two weeks,” he told City Press.

The department and the minister’s spokespeople said they could not confirm the minister’s itinerary.

“The lawyers are really clear – there is no legal basis for this,” Pickering told City Press.

The department of energy simply endorsed Eskom’s attempt to “squash” South Africa’s flagship public-private partnership initiative – the renewable energy independent power producer (IPP) purchase programme – he said.

Kubayi’s announcement affects 27 projects representing at least R60 billion in capital expenditure.

“By setting a date and a price, you contradict the idea of a negotiation,” said Pickering.

“What is left to negotiate? It is absolutely clear that it is Eskom trying to squash the IPP office. To our astonishment, the minister has bought Eskom’s line hook, line and sinker,” he told City Press.

Eskom seems to be winning the battle on other fronts as well.

Coincidentally, the National Energy Regulator of SA (Nersa) is this week holding a hearing on complaints that the renewables sector lodged against Eskom months ago.

Despite the industry’s objections, it would be a closed hearing, said Pickering.