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Eskom – a dinosaur monopoly nearing extinction

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Looking at the financials, Eskom is in serious trouble. It is in a death spiral with rising tariffs, leading to further drops in demand precipitating further tariff hikes. The end result will be the collapse of the entity with banks and financial institutions calling on the state guarantee, putting our sovereign rating in severe jeopardy. 

Eskom is our national electricity public utility, established in 1923 as the Electricity Supply Commission (Escom) by the government of the Union of South Africa in terms of the Electricity Act (1922). Eskom generates approximately 95% of the electricity used in South Africa and approximately 45% of the electricity used in Africa.

In the last decade, Eskom has faced crisis after crisis with the infamous dark ages of load shedding that rocked our economy in 2007/2008. It is calculated that load shedding cost South Africa’s economy some R50-billion in 2008. This was a result of poor planning and management with a constrained grid and lack of energy supply.

Following this, Eskom was hit with the “State Capture” that has been unravelling itself through the media over the last two years. The Guptas and their lieutenants along with strategic politicians and government officials, under the guidance of Number One, have managed to pillage and literally ransack our SoEs, specifically Eskom and Transnet. Pravin Gordhan, Minister of Treasury, estimated that State Capture has cost our economy roughly R100-billion, with immeasurable damage to Eskom’s governance and reputation.

Looking at the financials, Eskom is in serious trouble. It is in a death spiral with rising tariffs, leading to further drops in demand precipitating further tariff hikes. The end result will be the collapse of the entity with banks and financial institutions calling on the state guarantee, putting our sovereign rating in severe jeopardy.

For energy-intensive manufacturing like foundries, the dramatic increase in the cost of electricity, which rose significantly between 2007 and 2017, simply renders them uneconomic, leading to further job losses. Jobs are thus being hampered and lost due to these high tariffs.

The number of employees at Eskom rose from 32,674 in 2007 to 47,658 in 2017, a 46% increase with an average salary of R662,282 per year, excluding executives. Staff costs rose from R9.5-billion to R33.2-billion, a 249% increase. Eskom has been used as a cash-cow with a bloated middle-management that increased from 80 to over 400 people. Staff costs are only one line item among the ballooning expenses, which overall have increased while selling less electricity. The situation is untenable.

Eskom is also bloated, compared to its African counterparts. A World Bank assessment of African utilities bench-marked the number of employees at 14,200 at other utilities.

Against this backdrop, South Africans are again faced with the prospect of a cold and dark winter as Eskom announced that it will take 10 days for the national power grid to recover from the effects of the recent strike action by Eskom employees.

Last week, Eskom workers embarked on an illegal strike and requested a 15% wage increase. Eskom is cash-strapped and simply cannot afford this unrealistic wage increase given the latest inflation rate of 4.5%.

As a result, ordinary South Africans are now left to bear the brunt of this mass action. In the end, poor South Africans are the biggest losers and our entire economy is at risk.

If we cannot secure an uninterrupted power supply, not only do we run the risk of losing jobs, but we will not be able to create jobs for the 9.5-million unemployed South Africans.

The latest figures for the South African economy saw a contraction of 2.2% and the energy crisis will have a direct impact on investor confidence which we can ill-afford.

The load shedding, combined with the future electricity tariff increases, the recent VAT increase and unprecedented petrol hikes are further proof of the cost of living becoming untenable.

The reality is that most of South Africa’s SoEs are in a crisis and have been for several years now. The combined profitability of state-owned entities, measured by return on equity, fell from 0.8% in 2015/16 to 0.3% in 2016/17

Overall, loss-making public entities totalled R53.7-billion in losses for the 2016/17 year-end, that is 38% of all entities. Together, SoEs represent a major risk to the financial standing of our country through a cumulative R466-billion in government guarantees as at the 2017/18 financial year-end. Eskom accounts for the majority of these guarantees, totalling R350-billion.

We have formulated an S0E document that focuses on turning around the struggling and financially crippled SoEs in South Africa. Eskom’s long-lasting monopoly needs to be broken and the DA is working on a Private Members Bill to do just that with the ultimate goal of making the energy sector more competitive with the breakup of this archaic dinosaur.

There are also more immediate solutions to the energy crisis. In the City of Cape Town, due to past infrastructure investments, namely the Steenbras pumped storage scheme, residents of Cape Town are at times able to avoid load-shedding or remain on a lesser stage than Eskom has requested.

On Friday last week for example, due to spare generation capacity which we have made available through the Steenbras hydroelectric power station owned by the City, residents of Cape Town were spared the first two blocks of power outages.

The City has also taken the Minister of Energy and Nersa to court to fight for the right to procure clean energy directly from independent power producers (IPPs). This is primarily because we believe that cities should be at the forefront of economic growth and development. Being able to break the Eskom monopoly and allowing cities to innovate by exploring IPPs, we are able to shield residents from national government failures.

The City wants to source 20% of its energy from renewable resources by 2020, by buying directly from IPPs. This will bring more power online for the city and will further help the DA-run City of Cape Town to shield residents from load shedding which will inevitably lead to job losses.

This model of IPPs supplying electricity directly to the grid needs to be replicated across the country in order to improve the competitiveness of this sector.

In addition to the IPPs, the city and US Trade and Development Agency have signed an R12.7-million grant agreement for a gas distribution network study. This feasibility study relates to the use of natural gas in the city which will strengthen efforts to provide a greater mix of energy sources.

Cape Town is also the only city ensuring that its residents have access to reliable information and access to accurate load-shedding time schedules.

DA governments have prioritised investing in, maintaining and upgrading the electricity distribution infrastructure to provide certainty to residents and businesses.

The Western Cape Government launched its Energy Security Game Changer project this year which aims to achieve a 10% contribution to the province’s electricity needs, in order to reduce the Western Cape’s dependence on unreliable Eskom. The project includes:

  • Reducing energy consumption in public and private buildings;

  • Enhancing load management by optimally managing the electricity grid to minimise the likelihood and impact of load shedding; and

  • Rolling out of IPPs and Liquefied Natural Gas (LNG) to increase diversity of electricity supply in the Western Cape by 2020.

These contingency plans that we have in place in both the city and the province are due to years of good DA governance and effective planning.

As such, we will be engaging our government across the country on these initiatives and all our metro mayors on their plans for this turbulent period to make sure that – despite our limited mandate – we can better prepare for the collapse of Eskom when it happens.

We will continue to fight for ordinary South Africans and ensure that where we govern, residents have access to quality services. In the end, this country desperately requires an open, transparent and competitive energy sector to create the jobs we so desperately need.


 

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DailyMaverick

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