Power issue becoming bigger

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-
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
"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.

Source: businesslive.co.za/southafrica/sa_markets/2012/06/02/eskom-hit-by-ballooning-costs
Date: 2012-06-03

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