Eskom is in a ‘utility death spiral’

Open-Ed

In the first months of 2023, the intensity of loadshedding increased from an already significant number of days in the year to occurring almost every day. The absence of a reliable electricity supply has an ongoing devastating impact on South African society and the economy with hundreds of thousands of jobs been lost, whilst many more have been compromised. The full impact on economic output has not been quantified but is undoubtedly very high. The academic community has published widely on the causes, inter-dependencies, and implications of load-shedding.

In 2023, the President declared that the energy crisis being experienced in the country constituted a national state of disaster. The new Minister of Electricity, appointed in March 2023, was tasked with implementing the National Energy Action Plan to end loadshedding and to focus on Eskom. Eskom’s operational activities are now administered by three Ministries – Mineral Resources and Energy, Public Enterprises, and the Presidency (Electricity). However, the unclear division of responsibilities and coordination of mandates among these three Ministries creates additional confusion that undermines accountability and performance improvement. Consequently, little progress has been made in politically resolving the electricity crisis.

ASSAf believes that sound, evidence-based policymaking should start with understanding the deep roots of the electricity crisis, in the context of multiple other crises (polycrises) that confront the country. This Statement aims to contribute to the public discourse on the current electricity crisis from a ‘just transition’ perspective.

South Africa is facing a serious risk that inequality will be further entrenched because of Eskom’s death spiral. With daily loadshedding, more and more businesses and richer households are defecting from the grid. Those who can afford alternative power, either buy diesel generators or install solar home systems. This leaves the remainder of Eskom as a national utility to provide energy for poor households. The silver linings are that the national utility must supply to a reduced demand. Seemingly, South Africa is heading for a dual energy economy – those who can buy their own services, and those who cannot pay who get poor public services.

The complexities within Eskom and the energy crisis

The root of the electricity crisis in South Africa lie in the complex issues around Eskom’s operational, structural, and financial challenges. These major internal challenges are compounded by failures in governance, and a complex and contested relationship with government. Additionally, these operational, structural, and financial problems have been further exacerbated by mismanagement within Eskom. Moreover, the technical structural problems have been compounded by corruption during the era of state capture.

Related news: Eskom reports poor performance across the board and record loss of R23.9 billion

Operational challenges include a fleet of ageing coal plants, with other units out of operation (even the newly built Medupi and Kusile plants), leading to a rapid decline in the Electricity Availability Factor (EAF). The EAF is the share of time that a power plant produces electricity over a certain period. A good EAF would be around 80%, considering that plants require planned maintenance, and often unplanned shutdowns may occur. However, Eskom’s EAF is now below 53%, meaning that the fleet is operating just over half the time.

Additionally, the building of two large new coal-fired power stations, Medupi and Kusile, experienced long delays and over-spending which are typical of mega-projects everywhere. In South Africa, however, these problems were compounded by corruption and mismanagement. Consequently, these new power stations were not constructed properly. This resulted in design defects and damaged units, and subsequently in power stations that have never operated at full capacity.

There are structural challenges related to Eskom’s history as a national utility. South Africa’s existing grid has been highly centralised, which is supplied by 15 coal-fired power plants, one nuclear plant, a smaller capacity of open-cycle gas, renewable energy, and other sources. However, with the implantation of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), Eskom lost its status as a ‘natural monopoly’ and now faces competition in generation.

The REIPPPP has brought in private investment, but regulatory constraints were placed on Renewable Energy (RE) development. During the several years that the Integrated Resource Plan (IRP2019) was debated, limits were placed on how much wind and solar photovoltaics (PV) could be added – despite these technologies rapidly having become lower in cost, in South Africa and globally. There is strong resistance from some actors in the fossil fuel industry to large-scale deployment of renewable energy, or what some studies call ‘regime resistance’.

The financial challenges of Eskom are multiple, very large, and have been at least two decades in the making. Electricity tariffs are not cost-reflective, yet they are unaffordable for poor households. Increases in tariffs that would make them cost-reflective are not politically palatable, as consumers already pay high tariffs for electricity that is available intermittently, at best. The CSIR found that loadshedding occurred for 3 773 hours in 2022 with an upper limit of 11 529 GWh relative to actual energy shed of 8 301 GWh. Furthermore, part of South Africa’s history was to over-build electricity generation, in response to sanctions that could have put energy imports at risk. Yet this did not provide affordable access to energy for most of its citizens.

This results in what is known as a ‘utility death spiral’. This term in the literature refers to situations of increases in demand-side energy efficiency or distributed generation leading to declining demand, increased tariffs, and more pressure on customers to reduce demand. Customers ‘defect’ from the grid, leading to losses of revenue and contributing to a further downward spiral.

A widely misunderstood issue around tariffs is the view that cross-subsidies flow from industrial to residential users. On the other hand, many think that households subsidise industry, since energy-intensive users pay a lower amount per kWh but use by far the larger amount of electricity. However, higher residential tariffs are applied to a smaller share of total electricity, and thus contribute less to total revenue.

In the absence of revenues covering costs, Eskom has repeatedly asked for, and received, bailouts from National Treasury. Effectively this means that, instead of customers paying, taxpayers do. Government provided Eskom with R350 billion of debt guarantee and committed R128 billion in bailout fund for 2019-2021. Debt has built up rapidly since 2018 and stood at R423 billion at the beginning of 2023. Interest payments on Eskom debt now exceed R20 billion per year and total debt service costs are over R60 billion.

Different Finance Ministers have repeatedly sought to bring the debt by state-owned enterprises (of which Eskom’s is the largest share of debt) under control. In January 2023, Minister Enoch Gondongwana effectively said that Treasury will consider taking on all of Eskom’s debt under certain conditions. Another R254 billion was allocated – to be spent only on debt, not on any new generation capacity by Eskom.

Eskom’s credit rating has fallen to a speculative level (junk-rated) and matches that of the sovereign debt of the country by most of the international agencies. As at the end of 2023, South Africa is facing increased indebtedness as a percentage of gross domestic product whilst also having to budget for increased debt servicing costs.

This is an excerpt from the Academy of Science of South Africa (ASSAf) Statement on the Electricity Crisis and the Just Transition Issued at 10:00 on 14 December 2023. 

For more on ASSAF’s recommendations and what needs to be done to turn things around, link to the full statement here: ASSAf-Statement-on-Electricity-Crisis-and-Just-Transition_Final_14Dec2023a

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