Eskom chief expects first signs of turnaround in 18 to 24 months

Eskom CEO Tshediso Matona believes positive results from the current turnaround plan at the embattled utility will begin showing through in the next 18 to 24 months and has committed to continue “telling it as it is and telling it like it has never been told” so that the issues facing the electricity system and the company can be properly addressed.

 Besides the decision to hold firm to a codified maintenance regime, which will increase the risk of load shedding until the coal fleet is restored to health and new capacity is introduced from the Medupi, Kusile and Ingula projects, Matona’s other immediate focus relates to the financial stabilisation of the group.

Matona indicated that besides the R20-billion injection that was announced by the Finance Minister Nhlanhla Nene in October, urgent talks are under way regarding a R3-billion “bridging finance” arrangement.

Diesel Injection

The injection will allow Eskom to continue to buy the diesel it will require in February and March to operate the expensive open-cycle gas turbines. While controversial, the utility is arguing that the cost of burning diesel to create space for its summer maintenance programme, is materially lower than the cost of unserved energy and, thus, prudent.

Burning diesel in the Western Cape plants is unlikely to be sufficient to fully mitigate the load-shedding risk in the months ahead, owing to a dramatic rise in unplanned plant breakdowns since 2009. These outages have already resulted in Eskom running the diesel plants for up to 12 hours a day, increasing its diesel budget from a couple of million rand a few years ago to R10.5-billion in 2013/14 – the utility expects to have a similar diesel bill in its current financial year.

Matona does not anticipate Eskom assets being sold in order to raise funds for the two support packages, emphasising that any far-reaching restructuring of Eskom would be counter-productive at a time when the “platform is burning”. Instead, attention should be given, he avers, to stabilising the organisation, rebuilding employee morale and creating the space for plant maintenance.

For this reason the voluntary severance package, which raised eyebrows at the tail-end of 2014, has been revised in order to “ring-fence” critical skills from the scheme, including most of the organisation’s 3 000 engineers.

Matona laments the departure of a number of senior executives and managers in recent months, but says he is comforted by the depth of talent within Eskom. Nevertheless, stabilisation of the organisation, including of the executive and management teams, remains a key concern and focus for the CEO.

Stakeholder Communication

Stakeholder communication, which is increasingly being pursued under the aegis of the Eskom ‘war room’, is another priority, particularly in light of the rising risk of rotational power cuts.

“Part of telling it as it is and telling it like it has never been told, is to improve South Africa’s understanding of the problem. I can’t see that I can come to Eskom and perpetuate the tendency of being less than forthcoming and too afraid to tell the bad news.”

But besides sharing the “full ugliness” of the prognosis, there is also a desire to use the engagements to galvanise new thinking, investment and support for demand- and supply-side remedies that can relieve the system of some of its current pressures.

However, there is likely to be some robust debate about whether the private sector will feel truly confident to invest in the electricity supply industry in its current form, as there are concerns that a vertically integrated utility is both player and referee. For this reason, the private sector is keen to see progress on the Independent System and Market Operator Bill, a piece of legislation that Eskom believes could have serious unintended consequences for its financial stability.

Tariff Warning

In consultations with government and business, Matona also plans to amplify Eskom’s call for a more accelerated, yet smoothed, transition to so-called cost-reflective electricity tariffs.

Matona said that, while there is agreement on the need for cost-reflectivity, actions are required to ensure greater “convergence” on the matter. Improved visibility is needed on how that transition will take place and over what period.

“Further work is needed on scenarios that would not further harm the economy or constrain growth, but at the same time respond to the financial shortcomings and challenges of Eskom.”

Matona agrees that this could imply an approach that is broader than using the National Energy Regulator of South Africa’s Regulatory Clearing Account, through which Eskom has already clawed back R7.8-billion for the second multiyear price determination period (MYPD2), which means that the tariff will rise by 12.7% from April 1, 2015, instead of the 8% originally sanctioned.

However, a reopening of the MYPD3 determination is but one mechanism being assessed, with Matona saying only that “a more thoroughgoing review of the regulatory framework” is probably needed, with the “intention of recalibrating” towards cost-reflectivity.  In parallel, Eskom will be assessing the opportunities to secure more non-regulated revenues, as well as the re-engineering of its financial model. However, Matona offered no specifics in this regard.

Municipal Debt

Another burning priority relates to the issue of Eskom’s burgeoning municipal debt, which has increased materially, with about R15-billion overdue and with Soweto comprising about R8-billion of that. Having grown up in Soweto, Matona is acutely aware of the non-payment culture, which was born out of a desire to dismantle the apartheid regime.

However, he warns that a problem is being created that could truly come back and haunt all citizens, adding that the non-payment issue is bigger than just Eskom and its debt. “It has far wider implications,” he cautions, adding that Eskom is in active discussion with government at all levels on finding ways to resolve the problem.

Besides Soweto, where finance is being sought to continue with the roll-out of split prepayment metres to mitigate the risk, billions is also outstanding from municipalities in the Free State, Limpopo and Mpumalanga. Eskom initiated a process of disconnection in 2013, but following an intervention from government has held back on implementation in order to create space for an alternative remedy.

Source: Engineering News

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