VIEWS, COMMENT AND OPINION

The inflection point of South Africas electricity supply industry

by Oom Kaspaas When Benjamin Franklin was expressing his sentiments on the value of institutions (Gross, 2002) he stated: "Trust not a single person with the government of your state". Three and a half centuries later, plus a number of forced load shedding events, South Africa has learned not to trust a single supplier for its electricity needs.

The countys current fleet of power stations comes from the time when Eskom was overestimating the economic growth that had stemmed from macro-economic policies of the past. Now, when the country is reaching the point where this historical excess capacity has been taken up, the decision making processes of yesteryear are by no means applicable today. The electricity supply industry (ESI) has most likely reached an inflection point in the way it will be conducting its affairs henceforth. Scanning the SA electricity landscape In his time, it was possible for Van der Bijl as an individual to make a momentous contribution

to industry because it was of a very low base. But people are nowadays more empowered with knowledge, and market resources are on a larger scale. The validation of these aspects is quite evident in the response to Eskoms invitation for co-generation, following the realisation that new capacity is needed. On the other hand, from an engineering viewpoint, these are some of the most exciting times the electrical profession has seen. There is not too much convincing of management necessary as to what needs to be done, because the plant and networks are now doing the talking by themselves. The critical question, however, is whether management is starting to listen.

The route the SA electricity industry has journeyed By means of observation and interpretation, it can be stated that the considerable success of Eskom as a supplier of last resort has been achieved by being a financier of electrical networks. The other end of this claim is that its assets, in effect, then belong to the power consumers, an aspect that should be more prominent in the way the organisation is guided. Having a history of close to a century, Eskom has seen many business cycles, the most recent one starting with John Marees era to commercialise an engineering fraternity. His mission, strategy and philosophy roadshows ended up in the workshops with the slogan: "meetings, seminars and parties". In succession to this, Ian McRae put an ambitious electrification programme to the organisation, whilst Allen Morgan set about transforming the racial composition of the workforce (Fig. 1). But in all of this, none of the corporate champions gave notable cognisance to the critical role of goodwill in the workforce, especially the artisans, in making a vision become reality. To appreciate this, it has to be accepted that all acts are judged with reference to the standing motive of moral obligation. This means doing a job not because the process states it, or because there is a bonus on the line, but purely because it is necessary. This is generally referred to as work beyond the call of duty. Now, for the past decade, everything has been changing except the link stick of the people doing the work in the field. But worse, merit and recognition have gone astray in the promotion of employees, and despite numerous words of caution to business leaders, and even though the wagon is stopping intermittently, no questions are asked as to whether or not the people doing the work are getting tired of pushing as hard as they can, whilst their managers are awash in superfluous bonuses. Taking the contemporary state of the ESI into account, plus the damage inflicted by load shedding on the economy, a call for an independent review of the industry does not come as a surprise. For the sake of

Fig. 1: Good Will.

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VIEWS, COMMENT AND OPINION

Power station Strategic stock March '07 [days] 10,5 10,5 15,0 10,3 5,8 25,4 5,9 20,5 15,9 15,2 15,0 10,9 Strategic Stock March '07 [ton] 197 809 375 838 484 431 376 995 104 063 844 912 217 854 662 056 427 914 218 173 161 477 4 071 522 Strategic stock weight @ 30 days [ton] 565 169 1 073 822 968 862 1 098 043 538 257 997 928 1 107 732 968 862 807 385 430 605 322 954 8 879 619 Movement in strategic stock [ton] 367 360 697 984 484 431 721 049 434 194 153 016 889 878 303 806 379 471 212 43 161 477 4 808 097

Arnot Matimba Duvha Majuba Hendrina Lethabo Kendal Matla Kriel Camden Grootvlei Total/Average

R105/ ton. The additional expenditure for this stock procurement will be about R525million, hardly an amount worth mentioning compared to the monetary turn-over of the organization. However, with all the talk going about, even NERSA is under the impression that coal procurement is to be a significant factor in adjudicating an unplanned tariff increase. What is more important to note in the matter is how the risky coal procurement practices that Eskom has employed of late could have augmented prices. The question that has to be asked is why is more coal not purchased on long term contracts? This confusion regarding coal stockpiles and purchases is nonetheless to the detriment of power supply continuity and transparency. Available generation capacity Working on an understanding of openness, even more acute is the call for the correct interpretation of the reserve capacity. If this does not receive the same focus as the inherent problems of coal procurement, the opportunity to address the root causes of the industrys misfortunes will be lost. At the start of this years load shedding, according to the update on the state of power security in South Africa (Maroga, 2008), the reserve margin was given to be 8 to 10 % as opposed to the aspired 15%, which was then claimed as one of the leading causes for these events (Fig. 2). The intention and origin of the required reserve margin is the time needed to take every generator off the grid each year for general maintenance. For each generator, it takes about six weeks per year for its annual general overhaul, and the result is that for

Table 1: Strategic coal stocks.

contributing to the debate, it is important to map the functioning of the ESI in terms of some key elements. Evaluation of some performance fundamentals of the industry The present state of the electricity supply industry can be quite well surveyed against a background of the three visions Eskom has dispensed to South African power consumers, which are: To transform the racial composition of its workforce To embark on an ambitious electrification programme of under-developed areas To significantly reduce the real cost of electricity

Coal procurement and stock levels The extent to which low coal stockpiles have been portrayed as the root cause of the national power outages at the beginning of 2008 (Eskom, 2008) is a typical example of how explanations can be viewed as obscuring the failure in corporate control. This sentiment is evident in public opinion when, using some simple calculations, Eskoms need for extra coal is exposed as a fairy tale. To illustrate the point, the total movement required to restore strategic stockpiles (Table 1) is calculated from the base that Eskom declared in March this year (Maroga, 2008). The deduction is that the maximum quantity of coal that will be required to replenish the preceding year's burning down will be 5-million tons at an average cost of

When these objectives are considered together, the forces released by each could just as well be of an opposing nature, and it therefore does pose the question as to how Eskom was to ensure the sustainability of the industry. Whilst it is difficult to second guess what their respective strategies were, the information in the public domain does render it possible for industry observers to comment on how successful Eskom has been in its endeavours. Evaluating a set of parameters, namely: Coal procurement and stock levels, Available generation capacity, Electrification losses and cost of operation, Refurbishment of electrical network and generation base, and Realistic equity targets,

will give a passable impression on the strategies of Eskom's leadership, as well as the challenges ahead in the way the industry is managing its affairs.

Fig. 2: Generation margins.

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capacity margin is still close to 15%. Working from an average of 400 MVA per unit for the sizeable number of generators connected to the grid, there is still at least six weeks available per generator for maintenance. Thus there is still enough time for the proper upkeep of generation plant. Therefore, statements by Eskom (Security, 2008) that half of the 18 generators that were down on 18 March 2008 were due to unplanned maintenance, reinforces the opinion that preservation of plant is simply not up to scratch. Electrification losses and cost of operation Since the start of South Africas electrification programme, there has been only one broad evaluation in 2001 by DME on its success and merits. A considerable time has since elapsed, and the industry appears to be oblivious to some of the critical questions that were raised during that exercise, namely:
Fig. 3: Reserve margins.

Pre-paid metering has not solved the problems of non-payment The programme does not seem to be viable or sustainable in the long run, especially if viewed against the extent of non-technical losses Basic information on the level and scope of operations and maintenance is lacking

Fig. 4: MVA hour availability.

a period of 12% of the year, that unit will not be available for generating power. To calculate the reserve margin available within a power grid, the point of definition is amplified in Fig. 3. Three different load profiles, one with a low load factor (green line), the other with an average load factor (red line), and one with a high load factor (purple line), are depicted. The MVA hours available for maintenance is the difference between the systems total generating capacity and the demand, over the period of one year. The importance of this interpretation becomes clear if it is appreciated that all three of the load profiles in Fig. 3 do record the same peak, but the one with the lowest load factor does have far more MVA hours available to perform maintenance during the year. If peak demand is used to state the reserve margin of each of the hypothetical systems, the

reserve margin value would be the same for all three of them. This, however, does not give a true reflection of the impediments the respective systems have to operate against. It would therefore be far more appropriate to use the average demand of the applicable load profile to calculate the reserve capacity contained in that particular mode of operation. Using this method, it is evident from Fig. 4 that for a typical load profile in the South African environment, more maintenance is to be done during the summer months to accommodate the winter peak. To appreciate the implication of such an interpretation, assume a growth of 3,5% on an average demand of 32 GW for 2006. This means there would be an average national demand of 34,3 GW expected for 2007. Comparing this to the installed generation base of about 40 GW, the actual reserve energize - July 2008 - Page 23

Concerning non-technical losses, a peculiar statement made by Eskom is that the organizations performance is in line with international standards. Judging from the formal statistics, this appears to be fallacious when comparing the stated losses of 5,1 TWh (which can be justly assumed to stem from the residential sector) against the sector sales of 9,7 TWh (Eskom, 2007). This equates to an overall loss of more than 34%. Surely, viewed from this perspective, this level of non-technical losses cannot be classed as acceptable by any standard. Nonetheless, adding insult to injury is the fact that the money lost due to energy theft is at least R2-billion per year, which is far more than the annuity of a new power station. And the Eskom annual financial report is patently silent on this subject. Refurbishment of the electrical network and generation base Another topic on which the governance structures of Eskom has to account is how refurbishment has been left drifting. A rule-ofthumb for systems operated into perpetuity is to make a 2% annual re-investment of capital value, which should account for the normal deterioration of plant. For the Eskom asset base, this could be a value in the order of R12-billion and R6-billion per year for power stations and electrical networks respectively. As in the case of non-technical losses, this is an aspect that also receives meagre attention and money from Eskom leadership, if judged by what is reported in the formal annual

Conclusion Adding together the mishaps in managing coal stockpiles, the mal-performance of generators, the extent of energy losses, the state of maintenance, and the loss of skills due to social re-engineering, puts a sincere question mark as to how it came about that Eskom has failed the country, resulting in the spate of load shedding events and the surprising need for exorbitant tariff increases. These glaring contradictions are the fuel for condemnations that could disrupt the working of the industry, or worse, could prevent decision makers from making bold changes for the better.
Fig. 5: USA women engineers.

financial reports. If these costs were to be factored into the tariff in the present climate, it would create even more emotions among electricity consumers. For the time being, it might be difficult to incorporate these costs into the normal operations, but one day or the other this will have to be done! Realistic equity targets Even with all the sensitivities surrounding the needs and expectations of affirmative action, the future will be asking ever more questions about the dogmatic manner in which Eskom has gone about implementing the transformation of its workforce. The tangle that Eskom's management is getting the organisation into is quite evident from the

inflexible target setting for gender equity. Whilst the USA, as the beacon of equal opportunities, barely breaks the 10% ceiling (Fig. 5), Eskom deems it possible to achieve a 30% ratio virtually overnight. In the end, the success of transformation can only be claimed if the ball is not dropped somewhere along the way, something that the spate of load shedding events makes it difficult to believe. Pinpointing the linkage between a drop in business performance and loss of skills will incriminate the intentions and effort of the present incumbents. The overarching question is, however, what effective engagement was there from management to ensure a successful transition plus instruction of new appointees?

Whichever way the present state of the national power sector is viewed, the harm that was piled onto the electricity consumers of SA the past year is a living testimony of strategic failures within the ESI. But looking at Eskom in particular, and based on the above listed measurements, it would be difficult not to question the effectiveness of its board of directors. They have to direct, assess and influence the functioning of Eskom, of management who will, like all other peers, skillfully apply the asymmetric availability of information and intelligence to pursue a preferred agenda. Based on this, the core question remains: did the strategies (which are the forte and responsibility of top executives) prevent the generators from tripping? Opportunities on the way forward A decade has now elapsed since the DME understood the economic sense of breaking up the vertically integrated electricity monopoly. It is now time to get this imperative into motion by unbundling Eskom as per guidelines of the 1998 White Paper on Energy. Without upsetting anybody other than the vested interests residing in that organisation, it is a financial exercise to unbundle the different divisions into independent, ring fenced institutions. What needs to be done is to hive the Eskom name off to Generation, and create an energy trader with Transmissions asset base. Getting away from the impasse on Regional Electricity Distributors, all HV networks can be demarcated into Metro/Provincial structures (to create economies of scale for specialisation), and allow MV and LV networks to reside with the Municipalities (for perceivable local input). This will put cost recovery entities into politically administered units. Then, where needed, NERSA can allow cross-subsidisation to take place. Save for these changes, one of the most progressive steps could then be to transform Eskoms treasury department into an electricity focused development bank that can give mortgages and guarantees to the whole of the South African ESI. This will give reality and means to Eskoms argument that it has to protect the industrys credit rating.

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