Eskom turnaround strategy and infrastructure build programme: progress report

Meeting report

The Chairperson stated that the presentation is timely and important at this time when there is economic crisis everywhere.

Mr N Singh (IFP) remarked it would be injustice to hear only from Eskom since Eskom is tied to many other state entities such as National Treasury and the South African National Energy Regulator (NERSA). He wanted a meeting where all the entities responsible for energy generation, would make presentations so the Committee can have a bigger picture of the problems in energy generation in South Africa.

Eskom briefing on its turnaround progress
The CEO of Eskom, Mr Brian Molefe, began the presentation by talking about the academic qualifications of members of his delegation to dispel the rumours in some quarters about the qualifications of those leading Eskom. He gave an overview of the executive summary. Appointments have been made to fill the vacant positions of the Chairman, Group Chief Executive, Chief Financial Officer and other EXCO appointments. There is currently only one top management vacancy, which is that of Group HR, and this will be filled soon. A new model known as the Tetris maintenance planning tool has been developed to support the execution of more planned maintenance without load shedding. There have been 217 days without load shedding to date. 794 MW has been added to the Medupi Unit 6 capacity. There was a delivery of R26.5 billion EBITDA (Earnings before Interest, tax, depreciation and amortization) that is an increase of R600 million compared to FY2014/15. R11 billion of the RCA (Regulatory Clearing Account) application was also approved.

The generation turnaround was discussed by Eskom Group Executive for Generation, Mr Matshela Koko. He said Eskom has made significant performance strides in generation. Planned maintenance improved from 9.3 % in December 2014 to 13.5% at December 2015 which was an improvement of 4.2%. Unplanned breakdowns improved from 17.7% in the third quarter of last year to 15.6% in the third quarter of this year showing an improvement of 2.1%. The Open Cycle Gas usage (OCG) declined from October to December 2015 indicating a 53% performance improvement. The reliance on diesel has been greatly reduced in the power generation process. In comparison to the last 3 months, there has been an improvement in partial load loss savings; 1.65GW was saved. In 2015, major and significant incidents dropped considerably. There were only 26 incidents compared to 36 reported in 2013. Between October 2015 and January 2016, there was an increase of 7% in plant availability, which was an impressive improvement from the 5% decrease in the same period the previous year, and this is the highest plant availability since April 2015, a result of more effective maintenance. Between October 2015 and February 2016, unplanned breakdowns decreased by 10% on average compared to the previous year. The reduction in unplanned breakdowns contributed to improvements of availability whilst reducing open cycle gas usage. The decrease in unplanned breakdowns resulted in an 80% decrease in Open Cycle Gas usage and a decrease in diesel costs between October 2015 and January 2016. Generation will strive to limit Open Cycle Gas Turbine (OCGT) usage to a maximum load factor of 6% while planned maintenance has increased by 23% compared to the same period in the previous year, resulting in no load shedding over a period of over 217 days. In December 2015, planned maintenance reached a high of 15.59%, which is 9000MW of planned maintenance.

Speaking further, Mr Molefe discussed the autumn and winter outlook. He stated that the expectation is that there will be no load shedding for the rest of the summer and going into the winter. The rigorous programme of planned maintenance without implementing load shedding will be continued while a minimal usage of OCGTs will be adopted. Eskom is targeting to have no more than 11.5 GW in summer and 8.5 GW in winter out due to planned maintenance and unplanned breakdowns. Renewable energy will continue to contribute up to 1 600MW (at peak) of electricity generated during the day from solar and wind including Eskom’s Sere wind farm. He assured the Committee that all available levers will be used to avoid load shedding including electricity generated by Independent Power Producers, OCGTs and demand response.

Updates on the New Build programme showed that 794 MW of electricity has been added to the grid while 232km transmission lines have also been delivered and 1 935 MVA substations built. To date, the construction work that has been completed has added a total of 7 031MW of capacity, 6 048 km of transmission network and 31 590 of MVAs. For the financial years 2016 – 2023, there is a target of commissioning 17 234MWs, 7 032 has been achieved. There is a target to build 7 428 transmission lines between the 2017 and the 2018 financial years. 6 048 have so far been built. There is also a target of 36 400MVAs to be commissioned between the 2017 and 2018 financial years, so far a total of 31 590 have been completed. The New Build programme will contribute 5 620 MW to the network.

Eskom CFO, Mr Anoj Singh, presented the financial update. The financial performance report showed that net profit moved up by 22% to R11.3 billion, EBITDA increased by 9% to R24.9billion, the EBITDA margin was sustained at 28%, revenue increased by 8%, primary energy cost went up 7.7%, cash flow from operations also increased by 13% to R23 billion, debt/equity improved to 1.50 from 1.90, cash from operations grew by 13% to R23 billion, gearing improved to 60% from 66% while interest cover declined to 1.31 from 1.40. For the 2016 and 2017 financial years, R84.8 billion of the funding is already 95 -100% signed. In an attempt to reduce municipal debt, Eskom is in the process of engaging various municipalities. Out of 281 municipalities, 100 municipalities owe Eskom in excess of R500 000. The total municipal overdue debt at the end of January 2016 was R6 billion. There are 56 payment arrangements in place with 11 municipalities fully honouring their payment arrangements, while 45 municipalities are defaulting in honouring their arrangements. The Promotion of Administrative Justice Act process has been officially initiated for 45 municipalities with publications in the media. Partial disconnections were carried out in four municipalities in the Eastern Cape and five in the Northern Cape.

On the way forward, Eskom will deliver on its turnaround plan, targeting cost efficiency especially through lower coal cost escalation. Eskom remains focused on delivering on its capital expansion programme while it continues to supply the country’s electricity and maintain its plants with no anticipation of load shedding. The company had also managed to save R9 billion and increased net profit 22% to R11.3 billion at the end of September and was not in danger financially. The liquidity position of the company has improved and it is nowhere near bankruptcy as was said a few years ago.

Discussion
Ms N Mazzone (DA) asked for clarity on the money approved by NERSA to Eskom as reported in the media. She wanted a commitment from Eskom there would be no load shedding or increase in electricity tariffs irrespective of the amount granted by NERSA. She was happy about the improvement in the maintenance culture at Eskom. On the Tetris model being used by Eskom, she asked if the model considered using the lowest cost possible for electricity generation. Talking about the lower demand in electricity, she wanted an explanation on that because it is only logical that since the population is increasing and more people added to the grid, there should be an increase in electricity demand and not vice versa. On the municipalities which are in debt to Eskom, Ms Mazzone stated that the DA had laid criminal charges against the defaulting municipalities as it was criminal for such municipalities to get money for electricity from the people and divert such monies to other projects. She asked if Eskom was also pressing charges against such municipalities and asked what was being done to recover such monies

Dr Z Luyenge (ANC) appreciated the reports on the consistent progress being made by Eskom. He said the people in the rural areas were pleased with the progress made by Eskom especially because they have not experienced load shedding so far. Talking about the municipalities, Dr Luyenge stated that some municipalities had challenges with capacity as regards getting services from Eskom on behalf of the communities. He asked if there was any structure in place to help such municipalities or what suggestions Eskom could offer to these municipalities. With regards to the NERSA approach to Eskom, he asked if the rejection by NERSA was a result of certain conditions which were not met by Eskom and if there was a timeline for meeting such conditions in order for them to reconsider their stance.

Ms D Rantho (ANC) congratulated Eskom for the 217 days without load shedding because some people got used to the load shedding and never thought it would be possible to have a no load shedding situation. She stated this improvement was a result of the commitment shown by the new management of Eskom. Speaking about load shedding, she wanted a commitment from Eskom that the changes in weather conditions and climate will not affect the grid during the winter when there will be a higher demand for energy which might cause the grid to be over loaded. She said slide 5 of the presentation was not clear to a layman because it was full of technical terms. She asked for clear and simple terms that could be understood.
She asked what was responsible for the delay in signing the agreements between the defaulting municipalities and Eskom and why they had not been in compliance. Lastly, she referred to the letter which was submitted in respect to the unrest in Soweto. This was as a result of no electricity in the area with Eskom saying there was a cut off in electricity due to the debt owed by the people. She wanted an update on what had been done there.

Mr M Tseli (ANC) referred to the planned increase in electricity tariffs which was rejected by NERSA and asked what impact this could have on electricity generation.

The Chairperson asked about the status of the war room. She mentioned the remark by the Minister of Energy about the credibility of information from Eskom which led to the suspension of some senior executives and the formation of an investigative panel. She asked if there had been any findings from that investigation.

Mr Brian Molefe replied about the decision by NERSA, stating that the sum of R22 billion was requested but only R11 billion was approved and this put a hole in the balance sheet of Eskom, prompting the company to give a warning that there might be series of load shedding. However, management decided to have a retreat where an analysis of the situation was done and measures were put in place to ensure that there would be no load shedding. NERSA has stated that the use of diesel is not permitted but Eskom still relies on this where load shedding occurs, though usage is reduced to the barest minimum possible.

On using the lowest possible cost in electricity generation, Mr Molefe replied that the cheapest source of electricity generation presently was nuclear energy followed by coal. The next is gas though this is not readily available in South Africa therefore the need to use diesel as an alternative, but it is expensive. The most expensive is the IPPs.

On the energy availability factor, the average energy available at stored capacity is about 74%. Talking about the lower demand in energy, Mr Molefe was of the view that this is as a result of people becoming more conscious of the need to use energy more efficiently and responsibly. On the defaulting municipalities, he stated that Eskom was not pressing criminal charges but rather a more strategic approach was being considered. One of the options is for Eskom to introduce prepaid meters into these communities and collect the money on behalf of the municipalities. This approach would also take care of the issue of capacity which some of the municipalities complain about.

Speaking on the electricity supply during adverse weather conditions, especially in winter, Mr Molefe assured the Committee that there will be no load shedding and he was quite confident about that. Explaining slide 5, planned maintenance is a situation where the machines are switched off for scheduled maintenance. Unplanned breakdown refers to a case where the machines switch off themselves due to a fault situation and this has reduced significantly. The use of diesel has also reduced significantly from about R800 million in October 2015 to about R40 million in Feb. In the maintenance plan for winter, there is no provision for the use of diesel and the company is very confident that South Africa will go through winter without load shedding. Major and significant incidents are incidents such as explosions and these have reduced greatly. On the status of the war room, it has not been active. Cabinet made a decision not to continue with that. On information given by Eskom, Mr Molefe stated that this information has always been credible.

Ms Makgola Makololo the Acting Deputy Director General: Energy at the Department of Energy gave a quick overview of the presentation and pointed emphatically at the improvement in the leadership of Eskom. She also pointed to the improved maintenance culture in Eskom which has ensured that there has been no load shedding in the last 217 days. She also talked about the improvement in the build programme and on the war room she agreed with the position of Mr Molefe. On the credibility of information coming from Eskom, she stated that the Department and Eskom have worked on the gaps and are now on the same page.

Ms T Stander accused Eskom of breaching the constitution of South Africa with regards to environmental issues in the course of electricity generation. She also accused Eskom of choosing money over the health of the people and asked if Eskom would stick to its emission reduction plan considering its present financial state. Talking about renewable energy, she was of the opinion that Eskom could reduce its usage of coal and spend more on renewable energy especially solar energy.

In his response to Ms Stander, Mr Molefe told her Eskom could shut down the coal stations and there would be no electricity since 85% of energy generation for electricity comes from coal. He further stated that if she was objective, then she would know that the most efficient source of energy with no emissions to the environment was nuclear. Wind, solar and the IPPs alone cannot guarantee sustainable electricity supply.

Ms Stander further disagreed and pointed out that hydro and solar energies have no emission and there was always a supply of wind and sunlight somewhere at every given point. She pointed out that Eskom must have a decommissioning date for its coal plants and stick to it.

Mr Molefe reminded her some of the issues being raised were policy issues.

The DG Department of Energy, Mr Thabane Zulu collaborated the position of Mr Molefe as regards the energy mix programme which makes nuclear energy the cheapest and cleanest energy source for South Africa presently though the Department of Energy is also looking at ways to improve on other alternative energy sources. He stated that he was happy that Eskom had taken the NERSA approval in good faith and has made commitment to the continuous provision of electricity to the people of South Africa.

The Chairperson asked the members of the Committee to avoid a dialogue on the presentation and instead proposed that issues relating to the environmental aspect of Eskom’s work be discussed at a later date.

Ms Rantho asked Eskom tell the people of South Africa what impact the NERSA issue would have on them, will there be an increase in tariff and what will the percentage increase be.

Ms Stander again talked about the ambient policy and re-emphasized that Eskom was in contravention of the law.

Mr Molefe responding to Ms Rantho stated that on average the tariff increase will be about 9.4% and responding to Ms Stander, he again disagreed with her on contravention of the law by Eskom.

The Chairperson thanked the Eskom delegation.

The Committee adopted its minutes of 2 March 2016.

The Chairperson adjourned the meeting.