July 22, 2013 5:43 pm

Eskom battles to keep the lights on

Few South African chief executives plead with their customers to cut back on consumption or acknowledge that if the sluggish economy suddenly enjoyed a spurt of activity it would be a headache for their company.

But as head of Eskom, Brian Dames faces unique challenges as the state utility battles to keep the lights on in Africa’s largest economy. He oversees an ageing system that is operating on wafer-thin margins, while a nation nervously hopes that power cuts can be avoided.

And the past few weeks have been tough. First, Eskom admitted that the delivery of the first power into the grid from a new multibillion-dollar, coal-fired station that is critical for ramping up capacity is going to be delayed – again – by at least six months. The hold-up will increase the cost of Medupi power station by R13.6bn to R105bn and has heightened concerns about the risk of power cuts.

The 4,800MW plant, which is one of the pillars of Eskom’s programme to increase its installed capacity beyond the current 42,000MW, was supposed to add 800MW into the grid by the end of this year. But Eskom now says a “more realistic target is the second half of 2014,” adding that there could be a potential gap in supply next year, “with the most likely scenario being a gap of in the region of 700MW”.

That news was followed by results that showed a fall in Eskom’s post-tax profits in the year to March 31 dropped to R5.2bn from R13.2bn the previous year. Mr Dames also revealed an expected revenue gap of R225bn ($22bn) over the next five years – a result of regulators ruling that Eskom’s request for 16 per cent annual tariff increases over that period should be reduced to 8 per cent.

Still, Mr Dames is bullish about Eskom’s ability to avoid the hugely damaging rolling blackouts of 2008 that cost the country billions of dollars.

He insists that while Medupi is important, the delay is manageable. What he will not do is guarantee no “load-shedding” – scheduled power outages – as peak demand can spike by 3,000MW during winter evenings.

“We have always said as Eskom alone we can’t keep the lights on, without the customers,” he told the Financial Times.

The dilemma for Eskom, which has run campaigns to ask consumers to reduce their electricity use, is that after years of under-investment in the system it can no longer delay maintenance projects it has been deferring.

Last month, Eskom briefly cut supply to one of BHP Billiton’s aluminium smelters after demand outstripped supply.

Supply constraints – as well as significant tariff hikes with electricity prices rising more than 100 per cent over the past five years – are factors impacting on South Africa’s competitiveness and its ability to attract investment, analysts say.

“It [Medupi] is a big issue . . . this ‘not another six months, who cares?’ – it’s massive how it impacts into boardroom decision-making,” says Kevin Lings, chief economist at Stanlib, an asset manager. “You can’t go to a board and ask it to commit billions of rand to a project when you don’t even know if you have consistent electricity supply.”

But Mr Dames said Eskom has “not said no to any customer that wanted to invest and have an electricity connection.”

“In many cases customers themselves have decided not to proceed with the investment,” he says.

The irony is that the sluggish pace of the economy, coupled with problems in the energy-intensive mining sector, has benefited Eskom. The International Monetary Fund has revised downwards its forecast for South Africa’s growth this year from the 2.8 per cent it projected in April to 2 per cent.

If the economy did pick up, “it would be a big problem to deal with,” Mr Dames says. “We would have to find other . . . options and I think there are options.”

He is already predicting that next year will be harder, with forecasts that electricity sales will rise, while in the past financial year they declined.

Construction began on Medupi – Eskom’s first new coal plant in more than two decades – in 2007 and it is one of three new plants Eskom is building to add 11,000MW to the system by 2019.

But the projects have been hampered by technical problems and workers’ strikes and, with elections next year, opposition parties have jumped on Medupi’s delay.

Agang, a new party led by Mamphela Ramphele, a veteran activist, also raised concerns about the involvement of the ruling African National Congress’s investment company, Chancellor House, in the Medupi project.

Chancellor House owns 25 per cent of Hitachi Power Africa (Pty) Ltd, a subsidiary of the German-based Hitachi Power Europe, which is involved in building steam generators for Medupi.

“The Eskom Medupi fiasco comes at a time when electricity prices are already rocketing: ordinary citizens cannot afford to pay more only to see more blackouts,” Agang said in a statement.

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