Eskom hit by ballooning costs

DELAYS in road infrastructure spending and poor coal volume and quality at some mines, resulting in the purchase of more expensive coal, are the main challenges influencing primary energy costs at Eskom.

This is worsened by the ballooning wage bill at the parastatal which has seen employee salary increases higher than inflation and large executive performance bonuses.

The utility’s delay in implementing its Independent Power Producer (IPP) programme is also proving very costly.

The IPPs may be more expensive than the current coal fleet and imported electricity, but are cheaper than the Medupi and Kusile coal-fired power stations and the gas and liquid turbines that Eskom normally uses to meet demand.

Eskom is battling with an ageing asset base and low reserve margins. In 2010 Eskom had R10.5-billion to spend on repairs, maintenance and transport, but only managed to spend just over R8-billion.

Last year the utility only spent about R9-billion of its maintenance budget of R12-billion.

Eskom’s financial statements also reveal that its healthy financial results were mainly driven by domestic tariff charges.

Economists forecast economic growth of about 2.9% for the year, but the forecasts assume there will be no power outages or any other challenges in electricity infrastructure.

Shamal Sivasanker, power industry leader at Deloitte, said that in 2008, when the power crunch started, the country did not have alternatives, whereas today there are alternatives.

“We have an opportunity to reduce consumption. There is an awareness that we need to switch off non-essential things like lights and air conditioners in the workplace to save power, and we have an important opportunity for renewable energy to come on stream,” Sivasanker said.

He said the current electricity status is something that the country has been forewarned about.

Eskom spokeswoman Hilary Joffe said the utility has signed up more than 1000 MW of power from IPPs and municipal generators (such as the Kelvin power station).

“These are short- to medium-term contracts. (Plans) beyond that would fall under the Department of Energy and would have to be within the framework of its Integrated Resource Plan. The department has been procuring renewable energy IPPs. Eskom will be the buyer of that power and will connect those producers to the grid,” she said.

Joffe said Eskom buys a small proportion of its coal on short-term contracts. Since 2008 Eskom has significantly increased coal stockpiles from 12 days in early 2008 to about 40 days this year.

“Quality issues have been addressed. There are still coal issues at a small number of power stations which are being addressed,” she said.

An independent consultant who did want to be named said the fact that Eskom has relatively reduced its maintenance programme is a danger.

“With such an ageing asset base, coupled with low margins, there will be no chance of taking assets off-line to do the necessary maintenance. The maintenance gap is getting bigger day by day,” the consultant said.

The consultant said there are no incentives for Eskom to reduce its costs because the parastatal is assured that revenue is equal to costs incurred, whether efficiently or inefficiently, including a fair return on investment.

“Eskom’s cost model is to simply look at the asset base, operating costs and returns on the asset base. This will inform Eskom what it needs to keep going. Based on this, Eskom will ask for a particular tariff.

‘‘Because of this assurance, there are no signals to management to efficiently manage costs and investments.”

The consultant said there is always an incentive for Eskom to overstate costs to reflect on the tariff.

“Particularly obvious is a tendency by Eskom to capitalise everything it can, like reporting expenses like salaries as assets,” he said.

The consultant said Eskom is also in the business of overstating its weighted average cost of capital so as to be in the good books of the rating agencies.