[Opinion] The dying of the light

By Katherine Brown.

Eskom’s crisis is captured in the fact that it is employing more staff to sell less electricity than was the case 10 years ago.

With a workforce of 48,628 in 2017/2018, Eskom produced 232,803GWh of electricity; a decade ago it had 35,404 employees who produced 247,773GWh.

The utility’s integrated annual reports reveal several causes of the current predicament, including decreased productivity; an inflated wage bill; a bloated workforce; and rising debt (currently more than double Eskom’s revenue).

These problems have culminated in rolling blackouts and frequent load-shedding, which represent a systemic risk to the economy.

According to the World Bank, Eskom is overstaffed by 66% and requires only 14,244 employees to operate optimally. Moreover, its wage bill for 2018/2019 is estimated to be R27.14bn (R5.14bn in 1998). This follows a 7.5% wage increase in 2018, after fraught negotiations between the Eskom board — which initially opposed any increase — and the unions.

In addition to a lack of productivity, there is a widening gap between demand for electricity and electricity sales. This may be a symptom of what Eskom itself terms "the utility death spiral", where new technology makes self-generation increasingly economical for the consumer, leading to a decline in the utility’s sales. This "death spiral" compels Eskom to increase tariffs to recover its fixed operational and maintenance expenses. This in turn encourages customers to move off-grid, which further erodes the customer base.

The recently announced tariff increases are an attempt to solve Eskom’s financial shortfalls but they penalise consumers, which may push even more to go off-grid. However, the alternative to tariff increases is a bailout from the government, which already guarantees R350bn of Eskom’s now R420bn debt.
A better mix of energy sources might involve ramping up nuclear production
The projected tariff increase is 13.8% this year, 8.1% in 2020 and 5.2% in 2021. These are all below the Eskom-targeted increases of 17.1%, 15.4% and 15.5% respectively. The shortfall indicates that Eskom’s financial needs remain unmet.

However, based on international comparisons, SA’s energy prices are still relatively low.

Less certain are the implications of exploiting renewable energy sources. The full cost to Eskom for renewables is unknown: Eskom pays a base fare of 222c/kWh for renewable electricity, but its selling price to the consumer is 89c/kWh.

These prices do not include system costs (such as standby generators and variable supply). System costs are significant, but the utility’s characteristic lack of transparency makes it difficult to determine the affordability of renewables as opposed to coal.

Though SA has nuclear energy capacity in the form of Koeberg, this facility contributes only 7% of the total energy supply. Other renewable energy sources such as solar, hydro and wind power have produced a negligible amount of electricity, despite the costly introduction of the Renewable Energy Independent Power Producer Procurement Programme and extensive infrastructure to support renewable energy production.

A better mix of energy sources might involve ramping up nuclear production to provide a cheaper, more reliable source that is ultimately more environmentally friendly than its renewable alternatives.

The proposed solutions to Eskom’s problems focus on peripheral rather than core issues. This means they will be ineffective in addressing Eskom’s underlying financial and operational difficulties. For example, the move to split the vertically integrated utility into three state-owned entities ignores the bad governance, corruption and political interference that led to this crisis.

Bold policy reform is needed, such as reducing the wage bill, appointing staff on merit and giving greater autonomy to the Eskom board.

Original article on Financial Mail.