Is Eskom really too big to fail?

Is Eskom really too big to fail?

It’s an interesting question.

By definition, “too big to fail” is usually applied to banking and finance corporations. Federal Reserve Chair Ben Bernanke defines a too-big-to-fail company as “one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”

He goes on to say, “Governments provide support to too-big-to-fail firms in a crisis not out of favouritism or particular concern for the management, owners, or creditors of the firm, but because they recognise that the consequences of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way.”

No wonder then, that members of the ANC, and others, have been so quick to slap this label on Eskom.

In 2019 alone, Akinwumi Adesina, head of the African Development Bank, Paul Noumba Um, South Africa head of the World Bank, Ben Payton, head of Africa at Verisk Maplecroft, and our very own President Cyril Ramaphosa, all stated at various points that Eskom was too big to fail. More recently, Eskom board chair Mpho Makwana said the same thing amid the aftershock that followed former CEO Andre de Ruyter’s sudden exit from the utility.

I for one have a big problem with this.

When you’re cushioned by the knowledge that no matter how badly you screw up, the government is honour-bound to keep bailing you out because you’re “too big to fail,” there is simply no real incentive to clean up your act. When things go south, all you have to do is put out your corrupt and thieving hand and the government will provide.

Over and over and over again.

And you and I both know that when Eskom receives yet another bailout, the money comes from one place – the pockets of South Africa’s already beleaguered taxpayers.

Government bailout money should be a once-off kind of deal; emergency assistance aimed at helping an organisation out of a temporary hole. The idea is to get the company back up and running – with systems in place to avoid a recurrence of the problems that put them in the hole in the first place.

In the case of Eskom, however, bailouts would appear to be nothing more than a get-out-of-jai-free card – a licence to continue with the same corruption, fraud and mismanagement that characterise so much of the way the organisation is run.

Eskom’s abuse of its Open Cycle Gas Turbine (OCGT) power stations is a classic case in point. Originally intended to be used during peak periods and in emergency situations to ensure the continued supply of electricity into the national grid, Eskom is turning to its OCGT generators on an increasingly regular basis to ensure the lights stay on at least some of the time.

While I know most of us have likely reached the point that we don’t particularly care where our power comes from as long as we actually have some, the practice of using diesel as a key source of electricity generation is wholly and completely unsustainable.

Eskom spent about R22 billion on diesel fuel for its OCGTs in the Western Cape alone in 2022. Estimates for 2023 for the same area are in the region of between R30 billion and R40 billion. Although this is expected to reduce loadshedding by about two stages, it’s ultimately putting the utility deeper and deeper into crippling debt.

Why?

Because the diesel used to generate one kilowatt of electricity costs about R9. Eskom sells a kilowatt of electricity for just over R2. You don’t have to be a genius to do that math.

The glaring question here is: Who benefits from selling diesel to Eskom? Unfortunately, answering it is like playing a game of “Let’s rearrange the deck chairs on the Titanic.”

Here are the facts:

• Eskom has been forced to pay an extortionate price for diesel from PetroSA, a (you guessed it) state-owned entity which is in deep financial doo doo.
• PetroSA charges Eskom around R1 per litre more than it costs you and me to buy diesel from our local petrol station.
• Eskom has previously tried to obtain a wholesale diesel licence from the Department of Mineral Resources and Energy. This would mean it could procure and import diesel directly, saving around R4 billion a year.
• This application was denied. Popular opinion for the reason why is that if Eskom were to stop buying diesel from PetroSA, it (PetroSA) would face potential collapse.

So, the government is using one embattled state-owned utility to help shore up another embattled state-owned utility.

You just can’t make this stuff up.

There’s no doubt that over and above the alleged R1 billion a month Andre de Ruyter accused Eskom and senior government officials of stealing from the power utility, the mind-numbing cost of diesel is a massive contributor to Eskom’s reported loss of R12.3bn for 2022. A loss that’s predicted to balloon to as much as R20bn by the end of 2023.

Of course, these are just the official figures. Many experts say the true figure is around R70 billion.

In an audacious attempt to stop this haemorrhagic bleeding of funds, Eskom asked for a 32% increase in tariffs this year. The National Energy Regulator of South Africa (Nersa) authorised a little over half of this – an average increase of 18.65%, effective from the beginning of April. Eskom cited the reasons for its request as higher fuel costs, higher cost of procurement from independent power producers (IPPs) and depreciation of its power generation assets.

Not surprisingly, high-level corruption was not mentioned.

The irony, of course, is that no matter how much more we punch-drunk South Africans are forced to pay for electricity, it’s simply never going to be enough to enable Eskom to not only pay back its debts but invest in critically needed maintenance and alternative sources of energy.

Any and all cash that doesn’t find its way into greedy pockets is being spent on diesel. It’s like trying to empty the ocean with a spoon.

Almost laughably, the government’s latest attempt to address the catastrophe is to appoint a Minister of Electricity.

Over and above the estimated R3 million salary that this newly-created position adds to the cost of keeping our country’s lights on, questions are already being raised as to how much muscle Kgosientshoa “Sputla” Ramokgopa actually has to deliver on his key mandate – to end loadshedding.

On paper, he looks the part. With three degrees – including a PhD in Public Affairs – he is one of the Cabinet’s most qualified people. He has previously held office as the Mayor of Tshwane, and was, for a short time, a provincial MEC in Gauteng. He also held the position of CEO of the Johannesburg Market, a role for which he won the title of Boss of the Year.

In reality, however, none of these credentials is particularly useful when it comes to dealing with the politics attached to his role.

For a start, there seems to be friction between Ramokgopa, Public Enterprises Minister Pravin Gordhan and Energy and Minerals Minister Gwede Mantashe.

In addition, he still hasn’t really been given any official ministerial powers, making delivering on his action plan nigh on impossible.

He has outlined his three-main areas of focus as securing exemptions for pollution emissions, extending the lifespan of coal-fired power stations, and sourcing new funding to recapitalise Eskom and procure emergency power.

In the immediate term, however, he has stated a bold ambition to end loadshedding by the end of 2024.

Apparently, after touring all 14 of Eskom’s coal-fired power stations, he identified Kusile, Hendrina, and Tutuka as our best hopes for eliminating the rolling blackouts that have plagued us every day bar one since the beginning of the year. With a combined installed capacity of almost 9 000 MW, they have the potential to rid us of over eight load-shedding stages. Ramokgopa has said his aim is to have all three power stations running optimally by the end of the year.

There’s just one teeny tiny problem.

Kusile is the worst-performing power station due to “technical and structural problems,” Tutuka is the second most problematic, plagued as it is by corruption and mismanagement, and Hendrina – one of South Africa’s oldest and smallest operating power stations – is in a “very, very difficult state”, as at least four units are currently out of operation. It also has an Energy Availability Factor (EAF) of just 17.9%.

Am I the only one thinking that it might just be a tad optimistic to look at these three power stations – none of which has been operating optimally for years – as the answer to our electricity prayers?

Why did we not start building new power stations 15 years ago, when loadshedding first became a very unwelcome companion in our lives? Imagine where we’d be now if the money we’ve lost to theft, fraud, corruption, mismanagement, and blatant incompetence had been used instead to build one new power station a year.

Heck, even one new station every three, four or five years would have sufficed had they been built properly, without corrupt factions getting involved.

Even now, when the extent of the rot has been so thoroughly exposed by Andre de Ruyter, President Ramaphosa is content to simply sit on his hands, saying he’s not interested in knowing the identity of the high-ranking government officials mentioned by De Ruyter as being at the heart of Eskom’s corruption.

How does this shocking lack of interest tie in with the government’s crusade against corruption? The short answer: It doesn’t. All it does is make a mockery of anything the ruling party says when it comes to its commitment to rooting out and punishing corrupt individuals – even if they are within its own ranks.

You may recall my previous article on the newly established Integrity Commission…I rest my case.

And even if we give our new electricity minister and his plans the benefit of the doubt, it all smacks of being far too little, far too late.

Way back in 2010, the Department of Environmental Affairs gave Eskom until April 2015 to bring its power plants into compliance in terms of emissions, and until 2020 to comply with stricter environmental standards.

Eskom fell at the first hurdle, applying to the DEA in 2013 for rolling postponements to the compliance dates, saying that the benefits of compliance did not justify the R200bn cost of retrofitting its plants with the necessary filters and technologies and the need for plant downtime while they were installed.

Fast forward 10 years and precisely nothing has changed – except, of course, the cost of retrofitting, which is now estimated to be in the region of R400 billion.

This criminal waste of time and money could surely have been better spent. Better designs and technologies were available to help bring our power stations in line with environmental guidelines, but it suited the government to instead commission two new power stations which would ostensibly be compliant.

Years later, not only are they not compliant (quite the opposite, in fact) they’re not even fully operational.

So, as we suffer through another day of Stage 4, 5 or 6 loadshedding, what is the answer? What has to happen to turn Eskom around?

I wish this was as easy as listing a few practical suggestions. But it isn’t. Nothing is black and white. Nothing is as simple as saying “Stop doing that and do this instead.”

Do we simply breathe new life into our ageing power stations, ignoring climate change concerns in a desperate attempt to keep our economy going?

Do we perhaps invest more money in alternative energy sources? Ideally, yes, but we need to expand the existing capacity of our national grid first.

And is anything we do going to be any more effective than breaking wind in a thunderstorm if we don’t address the rampant corruption that, if left unchecked, will simply see us throw good, well-intentioned money and ideas after bad?

With more questions than answers right now, I’m in the dark in more ways than one.