The Committee received Eskom’s presentation on its recovery and unbundling plans from the entity’s Board and the Minister of Public Enterprises, Mr Pravin Gordhan.
The Eskom’s maintenance and recovery plans were fleshed out thoroughly in a 33-page report provided to the Committee. However, the two presentations spoke to the utilisation of the two months during COVID-19 lockdown to address partial load losses in terms of its nine-point plan. Eskom spoke to successes at the Medupi plant and ongoing work that still needed to be done at all plants. It distinguished the quick wins and increased capacity of electricity gained during the lockdown from the long-term major maintenance which still needed to take place over the next 18 months.
Eskom provided its winter outlook pertaining to load shedding and emphasised the reliability of its emphasis that with 80% certainty no more than three days of stage one load shedding would be needed throughout the winter period. The entity spoke to the ongoing negotiations around coal contracts, the desire to use less diesel and its plans to include clean coal technologies into its refurbishments. Eskom then proceeded to present on the divisionalisation roadmap and explained the initial stage as being the creation of three separate divisions with their own board members who would function as managing directors of the generation, transmission and distribution divisions before any legal separation may be considered.
Members asked questions around a timeline for the unbundling of Eskom and were divided on whether the progress made during the lockdown period was to be applauded. Concerns were raised about the new plants and when they would be completed; also about whether unit trips had been addressed, and about Eskom’s plans for dealing with its R450 billion debt and the debt owed to it by municipalities – considering the existing court orders prohibiting the cutting off of supply. Members also asked for why the outages occurred in some municipalities, and whether this was due to throttling of supply.
Concerns about the target of 74% Electricity Availability Factor (EAF) target being too low were raised, considering that the optimal target was 80%. This was noted by the Minister, who said that he would encourage Eskom to achieve the higher target and see if it could achieve greater than 74%.
Members asked the entity to report on the questions that were raised by the Minister in 2018 about sabotage claims around the existence of load shedding. Several Members enquired about the retirees who had offered their services to Eskom and asked whether they were being paid. Related to this, Members asked why Eskom seemingly always had a critical skills shortage when it continued to allocate bursaries and train young operational engineers.
Questions were also fielded by Eskom on the cost of the unbundling and how this related to the retrenchment of staff due to its high payroll costs. Members raised concerns that creating the three different companies would oppose the effort of streamlining personnel. Members also pointed out the business concerns such as the status of private debt, the inclusion of private provision of electricity, the high tariffs paid to Eskom by South Africans in comparison to those paid by organisations such as by the Mozal smelter.
The Committee also requested the report relating to the investigation of the Chief Operating Officer (COO) and also asked what effect the loss of revenue during the lockdown would have on Eskom and what its plan was to deal with it.
Co-Chairperson Magaxa welcomed the Joint Committee and announced that this meeting served as an information-gathering meeting as the Members needed to exercise their oversight role with sufficient information. He indicated that the Chairperson of the Select Committee on Public Enterprises and Communication, Mr T Matibe (ANC, Limpopo), would be co-chairing the discussion section of the meeting. Chairperson Magaxa said that he would hand the meeting over to Eskom to present its progress with its recovery plan as well as a report on the unbundling of the entity. He welcomed guests and the Members of the Select Committee.
Group CEO of Eskom, Mr André de Ruyter, asked for the ProfMalegapuru Makgoba, Interim Chairperson of Eskom, to begin with the presentation, as there were technological issues.
The Committee Chairperson asked if the Minister would like to add anything before the presentation.
Minister of Public Enterprises, Mr Pravin Gordhan, said that he was just a visiting professor for today. He noted the request for an update on the recovering plan and the restructuring process, and he said that he did not want to take up too much of the Committee’s time. He thought that Eskom had made good progress in relation to the recovery plan and that it had used the time during the COVID-19 period well. If the national borders had not been shut, the entity might have been able to do better as supplies and persons would then move freely. As far as the re-structuring Eskom was concerned, as per its roadmap, this was a very complex process. However, progress was made in the creation of divisions and boards. He said that he would be in contact with Eskom again in the near future to see how things could be sped up, but the complexity required that the entity should proceed with caution in the current environment.
He suggested that the CEO give the presentation and said he would be available for questions at the end if there was a need, until the Chairperson’s technological issues were resolved.
Briefing by Eskom on the recovery plan and progress in the unbundling of Eskom into three independent entities
The CEO indicated that a 33-page document had already been sent to the Committee; he would quickly go through it.
The COVID-19 lockdown reduced demand for electricity, particularly during the first few weeks of the lockdown. Eskom was slowly seeing a return to normality in terms of off-take. The entity made use of the unfortunate opportunity created by the global pandemic to do additional short-term maintenance, particularly known issues which addressed partial load losses. It had been able to increase and almost double its planned maintenance to reach more than 9000 megawatts (MW) of capacity. This reduced Eskom’s diesel consumption and consequently saved a considerable amount of money; in financial year 2020/21, it saved some R2.7 billion.
As the Minister indicated, Eskom had to delay some of the reliability outages which it had planned because of the medical inadvisability of congregating numbers of Eskom employees and contractors on site. In particular, he informed the Committee that Koeberg unit two was placed in cold reserve in April. This was intended to keep the unit available for when it was needed most in order to improve the certainty that required international resources – in particular, nuclear experts who would need to be available and able to travel freely. There were plans in place and the entity was communicating closely with its key industrial partners to ensure that it has enough capacity available in line with the government’s gradual relaxation of lockdown requirements.
Eskom managed to increase maintenance from 3600MW prior lockdown, to 9800 MW. Capacity was currently being maintained at about 6700 MW against the pre-lockdown plan of about 4200MW.
The available capacity increased by about 2000MW due to of taking advantage of this opportunity; the entity was pleased to be able to reduce the risk of load shedding from an envisaged 33 days of stage one lockdown, to an 80% estimate of three days of stage one load shedding during the winter period. The CEO did, however, emphasise that the system remained unreliable and unpredictable. Therefore, there was an inherent risk of load shedding which would be the reality until the completion of the 18 months of reliability maintenance, which the utility anticipated completing by August 2021.
Partial load losses
The unplanned capacity load factor was addressed through the opportunistic maintenance which added 2000 MW of capacity to the system. This amounted to roughly two thirds of an average power station’s capacity.
Camden Ash Dam Risk
The CEO said that Eskom took the decision to shut down this power station as there was the risk of a possible collapse of the dam wall. The utility was currently in the middle of mitigating the risks and was not expected to be operational until after the end of winter. It was taking advantage of shutting the dam down in order to attend to critical maintenance so that it may continue as a reasonable and prudent operator of the power station. He assured the Committee that Eskom was reviewing all of its other ash dams in order to ensure environmental compliance so as not to breach its legal obligations.
Emissions poor performance due to Kendal
Unit one was disconnected for repair and both units one and two were now compliant. The utility made good progress in this respect. Unit five was taken out for repairs and unit six was on a 22-day outage. Once these were repaired, the plant would be compliant and would return much needed capacity to the generational system.
Nine-point recovery plan
The CEO said that the Committee would be familiar with the nine-point plan to restore operational stability in particular to a generational system; he did not think it was necessary to go through each of the points.
He noted that good progress had been made at some of the new plants, particularly Kusile and Medupi. There were technical solutions to the known design defects at Medupi unit three and for the first time, the plant was able to be run at full capacity. Eskom had augmented technical solutions with further modifications to the milling plant and was satisfied that the plant was now performing according to specifications.
Medupi unit six was currently shut down and units two, four, five and Kusile unit three would implement similar solutions. Eskom had a high degree of confidence that it would be able to deliver the design output following the modifications to the plant.
They remained a challenge. Eskom had not done very well in resolving these, particularly at its Tutuka plant. Management was following this metric closely and endeavouring to bring down the number of trips.
There was a significantly improved performance in generation. Outage durations and slips were currently the key focus of Eskom. The utility intended on continuing to build more reliable capacity.
Critical vacancies were filled. There were no longer any power station General Manager vacancies. The utility filled the pipeline of its learner plant operators, with 1 384 positions being filled as of April 2020.
Diesel consumption had been a major cost factor and the entity was keeping a close eye on this expenditure. The entity had underspent in spending R 4.3 billion, which although it considers to still be too much, it was pleased about this against the provision of close to R7 billion. It was keeping back-up plants with a high level of feed-stock available. Average tank levels were full and could be used as and when required.
On Eskom’s efforts at reduction emissions, the CEO said that the utility continued to pay attention to different technology options in order to ensure that the Department of Environment, Forestry and Fisheries was adequately informed in ensuring Eskom’s compliance. He maintained that Eskom had a good working relationship with the Department.
Fixed coal stockpiles
In November 2018, Eskom had very low stock and consequently had to acquire short-term stock at a high cost. At this point in time, average stock days exceeded 55 days and this comfortably met the requirements of the grid code
These aimed at improving energy availability factors. Once these targets have been reached, Eskom would be more able to reduce the risk of load shedding. The utility also aimed at driving savings, ensuring refurbishments and ensuring a sustainable recovery.
Activities for April and May 2020
Power station visits continued during the lockdown. The reliability maintenance scope had been firmed up and Eskom was ready to go with having contractors on site to begin reliability maintenance from 01 July 2020. Additional resources were appointed from internal staff and, in some cases, from fixed-term contractors on a short-term basis to ensure it could augment existing resources as it carried out the expected and required maintenance. The utility was also working very hard to keep all of the stakeholders informed, so that increased the chances of successful maintenance.
Winter 2020 System Status Outlook
Eskom’s CEO said that the utility anticipated that if load shedding was required, it would only occur during the evening peak from 17:00 to 20:00. It was working closely with its industrial partners to ensure that this did not unnecessarily impact them. He added that Eskom anticipated with an 80% degree of confidence that there would only be three days of load shedding at stage one, none at stage two and none at stage three, with a relatively modest diesel consumption.
Co-Chairperson Magaxa asked if there was anything the Professor would like to say before he hands over to Chairperson Matibe to manage the discussion.
Prof Makgoba, Chairperson of Eskom, commented that a lot of work had been done in relation to the recovery plan and the unbundling of Eskom, and the entity should take pride in this. He indicated that it had been about 78 days free of load shedding and whether this was ascribed to the low load demand during the pandemic, it was nevertheless a situation that had the well-being of the nation at heart. He added that in his view, the staff at Eskom needed to be congratulated for the hard work they had done. The staff at Eskom had a very reliable model that was being used in other sectors in South Africa to deal with the challenge of the pandemic as it evolved in the country. He thanked the Committee for always asking Eskom the most difficult questions so that the entity could account for what was provided to it and for what it did for the country.
Co-Chairperson Matibe greeted the Minister, Chairperson of Eskom and the Committee and then began to call on Members to make inputs.
Ms J Tshabalala (ANC) commented that Eskom had benefited from fiscal support for over ten years. She continued to add that Eskom would be allocated R230 billion over the next few years and asked how the entity’s business model and new management had changed to become more profitable so that it no longer needed to depend on injections from scarce government resources in the future. What alternative measures are available for Eskom to raise its revenues and contain costs apart from tariffs and government bail-outs? She asked why electricity tariffs imposed on consumers were at more than four times the inflation rate, while government was injecting R23 billion per annum and South African taxpayers were funding Eskom and taking away from other development objectives. She knew the Minister would tell her that that was a thing of the past. Proposals to reorganise the R454 billion owed by Eskom were reportedly completed in February 2020 by Mr Freeman Nomvalo, who was subsequently appointed as the Chief Restructuring Officer (CRO). She asked if the report on the CRO was available and whether this could be made available for the Committee to exercise oversight over it. She then asked what the options were for restructuring Eskom’s debt and how the proposal put forward by COSATU for government to a special purpose finance vehicle to a more manageable R200 billion was considered.
Mr G Cachalia (DA) indicated that he had technical glitches which prohibited him from joining until the end of the presentation. He said that this was unacceptable. He asked for forgiveness for being blunt, since his questions would come from his reading the report, which he considered to be lengthy and full of jargon, including 20 or more acronyms.
He said that it seemed as though the country could afford electricity but may not be able to afford Eskom. He noted that COVID-19 had been kind to Eskom on one level as maintenance had increased from 3600MW prior to lockdown to 9800 MW in the second week of April. He asked how this number increased so drastically in two months.
He noted Eskom’s intention to take the Energy Availability Factor (EAF) from 70% in 2021 to 74% in 2023. This seemed unachievable considering the current and previous track record. He said that Eskom used to be at 80% some fifteen years ago. Instead of highlighting its progress, he asked how the utility intended to achieve its goal of becoming a self-reliant business entity and asked that it explained this without using jargon such as ‘reliability maintenance,’ ‘philosophy maintenance’ and ‘progress logged on plans thus far’.
He recounted that four years prior to the meeting a boiler blew up at the Duvha plant. He asked whether there was a new build at the Duvha or if there was still just a hole in the ground.
He asked how much SA paid to Electric Power Research Institute (EPRI) in Palo Alto for membership fees; the return on investment and what had happened to the country’s own membership division. He commented that surely a home-grown research department was placed to effect recovery plans than integration of EPRI designs.
In terms of human capital, he asked what happened to the many scores of millions spent on bursary allocations. As these people were educated and trained at Eskom, he asked where they were and why there was a constant need for critical skills in Eskom.
In all recovery statements, Eskom caveated that the threat of load shedding continued to exist due to years of neglect. He said that surely at some point, accountability must be taken to implement its plans to obviate the scourge. He asked at which point Eskom would be accountable for its actions and projections.
How will Eskom be divided, since the utility had about R450 billion in debt and the National Energy Regulator of South Africa (NERSA) requires the separation of accounts into generation, transmission and distribution? Eskom always had business executives to attend to this but now that it had new management; he asked how the loans would be covered in the division.
Finally, he stated that the legal separation of Eskom would require armies of accountants, lawyers and other professionals and consultants as well. He asked where the money for this would come from and recalled that the business rescue exercise of South African Airways (SAA) came to a cost of R30 million and by comparison, Eskom was a hugely complex business. He asked why divisionalise before it fixed itself as 85 to 90% of Eskom’s business was in generation and that was where the major debt sat.
Ms O Maotwe (EFF) recounted that on the 15 April 2020, Eskom released a statement clearing the COO, Mr Jan Oberholzer, of corruption. On April 16, the EFF wrote a letter to the Chairperson of this Committee asking for the Minister to furnish it with the report on the clearing of the COO, as he was never suspended and continued work whilst being investigated. She requested, very formally, for the report of the investigation. It was important for the Committee to receive the report as the COO would be playing the very important role of overseeing the unbundling of Eskom.
She asked when the estimated completion dates for the Kusile and Medupi power stations as there was no estimated completion date in the report. She said that the fact that there was a lockdown could not be celebrated as Eskom doing well regarding load shedding when the reality was that the utility did not have capacity.
She asked for a racial profile of the appointed roles. She also asked who the handpicked engineers were and what the process of selection was.
Regarding the unbundling, which she noted had not been presented on, she asked how many people would lose their jobs as a result. She said that the report indicated that the new model would entail having managing directors for each division. At the present moment, the Committee was told that Eskom was highly staffed and that it needed to lay off some employees. Once it unbundled, it was bound to have structures for each division, which would mean that more people would need to be brought on board. She noted that the report said that a board for each entity would need to be appointed. This would mean having three entities with full structures as opposed to the model of Transnet, which has one Transnet Group with operating divisions that had leadership teams. She asked when the presentation of the unbundling would be given.
Ms J Mkhwanazi (ANC) appreciated the explanation of the unbundling in the report. She first asked the Minister to outline the roadmap and specifically the cost-savings benefits thus far and the effectiveness of the utility to deliver services.
Secondly, she asked for Eskom to speak to how it would address the loss of revenue during the lockdown and on how this loss would impact on its financial statement. She also asked for it to elaborate more on its winter plan. How does Eskom plan to dealing with its R450 billion debt?
She asked for clarity on how far the re-negotiations of the coal contracts were. She enquired as to the benefit of unbundling and restructuring Eskom would be to the state. She also asked the Minister what progress had been made on the appointment of the boards. Finally, she asked for Eskom to talk to legal agreements which it was bound to relating to bonds and loans vis-à-vis the issue of restructuring.
Ms L Bebee (ANC, KwaZulu-Natal) asked for an update on the utilities borrowing programme for the coming year and how this would impact on its operations and whether the entity would be relying on its own funds for the coming financial year. She continued to ask when the financial statements for each division would be finalised.
She asked the Minister to explain the role of the Chief Restructuring Officer (CRO) with respect to Eskom. She asked what his term of office was and why his report was not submitted to the government.
She asked how a lower demand post-COVID-19 would impact Eskom’s financial stability. How will the unbundling of Eskom into three entities help the entity reduce its debts? Will Eskom welcome private sector equity?
Lastly, she asked whether Eskom had managed to recover any money owed to it by various municipalities, during the lockdown. She thanked Eskom for giving the presentation in advance so that the Committee could look at it.
Mr M Nhanha (DA, Eastern Cape) pointed out that the group CEO of Eskom had assumed a very difficult job. Despite all the criticism and difficulties, whether warranted or unwarranted, Eskom seemed to be coming back to its former glory. He said that this went to show that at some point in the lives of South Africans, the issue of race should not be a predetermining factor of whether a person gets a job or not. If you are a South African, that would be good enough for him. He gave the example of this group CEO, who was trying to do as much as he could under very difficult circumstances. One could not doubt that this CEO was a committed patriot of SA and that he was a citizen. He said this as a precursor to his comments. Last he checked, Eskom was selling electricity to smelters in foreign lands, such as in Mozambique, at a far reduced rate, whilst domestic consumers were charged a significant amount of money. He asked the CEO whether this was still the case and if so, what the rate was compared to the amount it was sold to South Africans for.
Regarding the statement of having to buy coal at a high cost and the need to use diesel, he would like to focus on the use of coal. He said that some time in 2019, Minister Mantashe had said that Eskom was looking into clean coal technology. He asked at what point Eskom would consider using clean coal technology rather than using diesel as the country had an abundance of coal resources, rather than relying on expensive diesel. He asked what Eskom’s plan for using clean coal was. He said that the Minister mentioned on numerous occasions in 2018 that he suspected load shedding was an act of sabotage and/or coal price manipulation. He asked the Minister to brief the Committee as to whether there were any investigations done about this and if so, what the findings were.
Mr A Arnolds (EFF, Western Cape) he said that mentioning that there had been many days without load shedding was a slap in the face of South Africans. He said that South African citizens could not pay for corruption. As citizens wanted no load shedding, the Committee could not sing praises to Eskom for this. Regarding the three days of load shedding during winter, of which there was no guarantee, he enquired whether there was a possibility that load shedding would last either for more than three days, or that it would go up to stage two. He noted the CEOs confidence in saying that load shedding at stages two and three would not be needed. He also asked for an update on the progress of acquiring the R28 billion owed by municipalities, considering the court order which interdicted Eskom from cutting off supply to them. What is the decisive plan for managing the unit trips as a clearer programme of action is needed?
Mr A Cloete (FF+, Free State) asked about the 60 retired engineers who volunteered to assist Eskom. When will they start and who are they? He asked if there had been any retrenchments as part of the recovery map.
He noted that the debt owed by municipalities was R28 billion and asked what the situation was, around this as well as the disputes around it which could prolong the settling of debt. He said that it had come to his attention that there were some municipalities, including the one under Governor Mbeki in Mpumalanga, which were being throttled. Apparently, Eskom was putting a limit on the electricity available to these municipalities, and then the municipalities imposed their own load shedding. H asked if this was true and if so, whether Eskom could provide information about the throttling.
Mr S Gumede (ANC) greeted the Minister, the Committee and the representatives of Eskom. He said credit must be given where it is due. The presentation gave hope to the people of South Africa. He said that the test of the pudding was in the eating and it left a lot of oversight work for the Committee to do.
He said that the unbundling process was not presented. However, it was covered in the report, therefore the Members benefit from asking questions based on the report. He asked what the related costs of the unbundling processes. The issue of staffing was critical to him. He asked when the process of unbundling was complete and how many people would remain at Eskom.
In terms of skills and capabilities, he expected that many of these skills would be sourced internally. He said that severance packages had been offered to people and that he was unsure how many people would be exiting.
He asked if there would be load shedding during the winter and asked for a winter programme. He explained that he understood that it would take 18 months to complete the maintenance programme. After the 18 months, will the country be bidding goodbye to load shedding?
The Chairperson asked if Mr C Smit (DA, Limpopo) was still in the meeting as he had said he would need to leave the meeting early but had not left.
Ms T Modise (ANC, North West) asked whether Eskom had a plan to capacitate its internal staff, particularly young people and women to avoid outsourcing skills to the retired staff.
Ms C Phiri (ANC) greeted the Committee and Eskom. She said that the report gave her a lot of hope. On municipality debt, she asked for re-assurance that Eskom would not cut off municipalities and asked what Eskom’s plan was, regarding this. She said that the winter plan was articulated but asked what the plan was for summer and onwards into the next financial year.
Co-Chairperson Matibe asked the CEO and the Minister to respond.
The Minister said that the CEO had a separate presentation on unbundling and asked if an opportunity could be given for him to make that presentation as it may answer some questions.
Eskom presentation on unbundling
Eskom achieved most of its 2019/20 targets set out in the Department of Public Enterprises Roadmap for Eskom and a Reformed Electricity Supply Industry.
It re-allocated 8 890 employees to the divisions, of which 6 500 from head office functions moved to the operating divisions. The utility appointed Divisional Managing Directors at no additional cost, from existing employees who had simply taken on more responsibilities.
The entity established a market operator and a central purchasing agency to allow the transmission business to act as the buying agent for electricity. The CEO hoped that in the future it would see more private sector investment in generation.
The envisioned end state was three businesses operating as subsidiaries under Eskom Holdings.
Roadmap on Deliverables
By in large, the CEO said he thought Eskom had met the timelines. Some of the timelines issued by the Minister were quite aggressive. The utility targeted some slightly relaxed timelines but was monitoring them closely so that the timelines set out would be met.
Deliverables by 31 March 2020 (End of Eskom’s financial year)
The CEO said that Eskom’s intention was to divisionalise production into Transmission, Generation and Distribution divisions. The utility set up divisional financial reporting, completed its organisational design, put in place power purchasing and electricity supply agreements, and it was internally trading energy within Eskom. It also set up power purchasing and energy supply agreements between Transmission, the 27 different power stations and Southern African Energy.
The utility was running an electricity market internally in order to simulate what would be required once the full divisionalisation and re-structuring took place. He added that Divisional Boards were set up, each of the three boards having two meetings to date and were in the process of finalising the delegations of authority for each of the Boards. The CEO said he was personally very satisfied with the nature of the conversations taking place. He said that the heads of the divisions are not being called CEOs, but rather managing directors as this was a closer approximation of the work they did. However, they were Eskom executive committee members. The entity was retaining certain shared services in order to maximise cost saving opportunities by leveraging economies of skill and scale. He gave the example that Eskom would still only have one IT system and department with appropriate segregation of equipment to ensure that it could give adequate comfort to investors that their commercial information would be adequately protected. He said introducing a new IT system for each of the divisions would introduce unnecessary cost. Similarly, the Eskom would only have one payroll and would try and maximise certain scarce resources, such as tax and some financial resources. The divisionalisation process was aimed at streamlining and driving down accountability to the right level in the organisation and at more closely managing its costs. Progress was made on the support systems and functions. However, more work needed to be done to move from a vertically integrated utility to a functionally separated business. Progress was being managed from a transformation management office. He said that he considered the finalisation of the operating model to be the first important step as it was a key element in achieving its objectives.
Business model roadmap
Eskom referred to this as a baseline and said it needed to be evolved to accommodate for what it would look like for when the legal separation took place. He said that the entity needed to gain a better understanding how this translated into resourcing plans going forward. He assured the Committee that work was being done on the matter. The operating models needed to be developed for responsibility and accountability while also ensuring that there would remain an Eskom way of doing things. Therefore, Eskom would still retain oversight over corporate strategy policy and over who may appoint resources and what level, and for what remuneration, as well as who would be able to spend what capital for which projects. There had been engagements with organised labour subsequent to Eskom’s year end. These conversations would continue, as will key activities including programme management – which remained critical. This was in order to prepare for legal separation as it was a complex process.
Plan for Complete Legal Separation is government-dependent
In answer to a question asked, the CEO said that Eskom had not yet appointed any consultants and was doing all the work internally with internal resources. The CEO was not prepared to commit that it would not require outside advice once things get particularly complicated in order to make sure that the entity followed due process. However, thus far it was currently doing the work on a low-cost basis using its own effort. It was a complicated effort and Eskom took advice from shareholders, the board and its own staff. This communication process was continuous.
R450 billion debt
Eskom found it challenging to address this debt. It had finalised the income and cash flow statements but not the balance sheet. Eskom still needed to consult with its lenders on this matter. When it went through the corporate re-organisation process such as the divisionalisation programme, there were concerns which may be raised by lenders and Eskom intended to bring them aboard. Eskom was not going slow by divisionalising and said that the process allowed it to prototype and road test the three different divisions before pursuing a legal unbundling. This would de-risk the legal separation programme.
Co-Chairperson Matibe thanked the CEO and asked the Minister to add comments if he had any.
Minister Gordhan said the recovery process was going to take time because it was uneasy and would require the right kind of people, as Mr Nhanha pointed out. He expressed that he had every confidence that the CEO was taking the organisation in the right direction in terms of making the plant more reliable and in implementing the roadmap plan. Given more support, in terms of management and other skills, Eskom could make faster progress in relation to both reliability of plants and implementing the roadmap paper. The fact that there was more information, on which plants had what kind of problems, and how the Eskom team intended to deal with these problems, was a welcome development giving greater transparency and helping both Parliament and the Department to hold Eskom accountable. He reminded the Committee that the Deputy President led a ministerial task team which met virtually every fortnight to receive various kinds of reports. That that team was an additional method of oversight.
He noted that the board depleted slightly at the beginning of the year, followed by the COVID-19 interruptions. However, government was intending on refreshing the board and ensuring the lessons learnt from the past and the need to bring in new blood and experience was taken into account.
Once some of the COVID-19 concerns had been dealt with, the Department would look at the debt problem more thoroughly; so he asked for the Committee to please give a little bit more time and be patience on that issue.
The Minister said that this matter was discussed in the NEDLAC context. There was a broad framework agreement which needed to be finalised. Owing to current circumstances, the Department had not yet looked at the proposal, but in the next week it would look at it to see if there was meeting ground on some of those issues.
Energy availability factor
Improving to 74% was something which some people in ministerial ranks were unhappy with, given that optimal performance was above 80%. He suggested a target should be set for the Eskom team and then a review should be done to see how close the entity comes to the 80% mark, henceforth. The plant would not be completely reliable until a major maintenance was undertaken. He said in some instances maintenance had taken place; one of the Medupi units had been through a 75-day maintenance period and came out in good shape. He said that this was an example of the kind of work that needed to be done for many of the units across the different power stations.
For now, the Minister accepted that the entity needed to proceed with caution whilst aiming at meeting the timelines. He urged Members to look at the roadmap paper to remind themselves about the rationale underpinning the decision to pursue unbundling. He explained that the paper was only the beginning and that Eskom and the country needed to look at the electricity market as a whole. He suggested this be done so that the Committee could begin to understand what the future of this utility was, versus production or generation by the private sector, households and other providers, and how this would impact the structure of the electricity sector. This was a matter that would continue to be discussed with the Department of Energy into the future.
The Minister said that training did not just happen in a classroom as it involved mentorship of young people. A two-year programme involving holding young people by hand, with 30 or 40 years of experience, would ensure that people became good operational engineers in many of the plants in Eskom’s charge.
This was a matter that the Deputy President structure was also looking at. There had been suspicious events in the past, but the various agencies looked into the matter and as far as he knows, no action had been taken at this point in time. However, it was getting further reports in this regard. Eskom was a national key point and no interference or improper interventions within its context could be allowed to mess up Eskom on the one hand or the country’s electricity supply on the other hand. He said that this was a warning that he was sure the Committee would share going forward.
The Minister said that there were also initiatives by the Deputy President’s task team to address this debt. A team consisting of National Treasury, CoGTA and Eskom led by Treasury, was put in place to look into the question of payments by municipalities to Eskom and water boards as well. The task team was looking into the culture of payment and this was something that the Committee should also apply its mind to. Thirdly, there was a paradox to deal with as on the one hand there were municipal administrators, and sometimes politicians, who deliberately withheld money they had collected and need to pay over, but rather used it for other purposes. On the other hand of the paradox, when Eskom took action against the municipality, or attempts to interrupt power supply in some cases, there was a nasty reaction from the community. He said that the Department needed to ensure that municipalities understood why they needed to pay. The Minister said that the both Committees may consider calling some of these municipalities before the Department did so that the municipalities could answer why they were not paying. The Committee may find that some of them say that there was a difference between what Eskom thought it was owed and what the municipalities thought they owed.
Prof Makgoba agreed with the Minister’s comments and said that unlike before, Eskom now had a plan that was more than theoretical, but one which was actually being implemented. He said that when he mentioned the 78 days without load shedding, he was trying to provide hope.
Report on the Chief Operating Officer (COO)
The CEO said that this report was created by senior council and Eskom would look through the report and would consider which aspects of the report it may share with the Committee.
The CEO asked Mr Bheki Nxumalo to deal with the remaining questions.
The possibility of load shedding remained at 80% certainty that there would not be more than three days of stage one load shedding. He said that Eskom had a meeting with technical specialists regarding the summer time, and was considering lessons from 2019 to build on these.
The negotiations had started. The difficulties with some of the negotiations were the fact that suppliers felt that they would benefit more from short-term contracts. Eskom stood to benefit more from long-term contracts and was currently negotiating around these concerns. It planned to finish these engagements come the end of July and would report again at that point.
There were some trips that were coming from the delayed refurbishments which Eskom was trying to do in its control systems. Support from equipment manufacturers was low and many of the systems were very old. There were also some trips which were skills-based. Therefore, it had intensified what it called simulator training for operators and for operating teams in the new built environment. Eskom was starting to see benefits of implementing its nine-point plan when compared to previous years.
Duvha Unit 3
This unit failed in 2014. Plans to do with the unit were interrupted by legal challenges, which were a hindrance. Legal advisors said that they were nearing the end of the issues around the unit.
Short-term maintenance during lockdown
One of the focuses of the nine-point plan was to focus on the high partial load losses. When demand in April dropped, there were already teams in place to work on units so that it could regain some of the losses.
Availability of electricity and clean coal
Part of the major maintenance being referred to included retro-fitting of the environment; this included the implementation of clean technologies. What Eskom was doing at some of its older power stations was retro-fitting and installing new burners. These improvements affected the EAF but would be beneficial as they dealt with creating a cleaner environment. Underground gasification had also been explored but the gas under Medupi was not of good quality.
The Chairperson of Eskom asked if the CEO has anything else to add.
The CEO said that by the end of FY2019/20, Eskom had a cost-saving target of R6.2 billion and it exceeded it by delivering R15.3 billion. The utility had now set itself another aggressive target for the FY2020/21 which would include rationalising its capital expenditure as well.
Lower demand and loss of revenue
Particularly when stage five was applicable, the net cash loss was between R2bn and R2.5bn, but as demand recovered slightly, things were looking significantly improved.
The CEO confirmed that the tariff was charged to Mozal. This was because the tariff was linked to the Cahora Bassa hydro scheme. Therefore, although the scheme gave Eskom a lower income, the utility derived a lot of benefit from the electricity that it received from Cahora Bassa. The Mozal smelter did not pay a distribution tariff, which customers in SA would pay; there was no transfer from industrial customers to lower income customers as was the case in the SA tariff structure. This explained the deferential between the Mozelle Smelter and the South African tariff. He also emphasised that the smelter played a key role in the stability of the system as it gave Eskom the flexibility to shed some of the electricity intensive pot lines when its system was constrained. It was also used to arrest frequency decay in the system.
Eskom had not embarked on forced retrenchments. The utility was using the approach of natural attrition and the freezing of intakes. It had been quite successful thus far, having been able to reduce its numbers from some 48 600 employees in 2018 to 44 400 by the end of that financial year. The 184 voluntary severance packages that were applied for were managed whilst having strict regard for the need to retain scarce and critical skills. Therefore, the entity did not lose any critical skills in this process.
Throttling of municipality demand
This was also called the maximum demand. Where a municipality bought electricity from Eskom, it had a maximum demand that it was allowed and which it nominated. When a municipality had not been paying its account, it restricted the amount of electricity supply to the contractual maximum that had been set. This was purely because the utility was obliged to provide municipalities with electricity in terms of various court orders and interdicts, but it was not obliged to provide them with more than the maximum demand that had been nominated for them.
The Committee Chairperson thanked the CEO and asked the Members to ask their questions.
Mr A Cloete (FF+) said that he had asked a question about the retired engineers and how they would be applied.
Mr G Cachalia (DA) asked when details of the divisional balance sheets would be reduced. He asked when the details of the divisional balance sheets would be released and why there had been a delay. He asked why there is an absence of timelines for divisional separation.
He pointed that in the balance sheet restructuring, something like R250 billion of debt seemed to disappear and where it went. He said that this would still need to be serviced; asked what the risk would be and who would carry it.
On his reading of the roadmap, it seemed to be based mainly on bailouts; he said that surely it should be better for it to be based on competence instead. He asked how much of the work required to deliver on the roadmap was going to be contracted out and at what cost.
On design changes to increase boiler size, he asked who was going to run this operation and fix the boilers when things went wrong. Much of the R450 billion of Eskom debt came from new build. All the previous boilers went to Hitachi and the turbines went to Alstom; now Eskom was working with EPRI and Hitachi on design. Why use the same people who got Eskom in this position in the first place? Why not look to countries like Korea who are far nimbler?
He said that before lockdown Eskom planned for 33 000 MW but 13 years ago this was the same; this indicated that there had not been much growth in the economy. He asked whether the utility had mapped post-COVID-19 demand. He asked how this demand was intended to be met apart from saying that all would be well in 18 months’ time. Finally, he asked what would happen if the bailouts continued, if in 18 months’ time Eskom was in the same position financially or operationally.
Ms V Malinga (ANC) asked how far the process of unbundling was and which stakeholders had contributed to this.
Ms O Maotwe (EFF) thanked Eskom for the presentation. She asked when Kusile and Medupi power stations would be completed. She then asked for the racial breakdown of the 1 384 vacancies filled.
She said that the Committee would not accept the Prof Makgoba’s response that only portions of the report of the COO would be selected by Eskom to pass onto the Committee. She said that there was surely nothing to hide unless the Committee was informed that there was classified information which was not for the public. She would like to give feedback to the nation as to what was going on.
She asked about the pensioners who were brought – a racial breakdown as well as how much they were being paid. She noted that although the CEO said that no contractors had been appointed to assist with unbundling, the report said that ‘external contracts form part of the legal unbundling scope.’ She asked for clarity on that point and continued to ask about handpicked contractors were who were mistakenly paid R5 billion. Has the R5 billion been returned and has the contract been cancelled? In conclusion, she asked how much money was being saved by continuing with the unbundling as opposed to the current structure of Eskom.
Ms J Tshabalala (ANC) said that Eskom’s key cost drivers in the previous few years had been coal prices, personnel and the interest on debt. She asked the Minister what progress had been made in re-negotiating the long-term contracts with Eskom suppliers, particularly in mining and asked which companies were involved in selling. She said that the Eskom debt problem was created largely due to cost over-runs and inflation of prices during the construction of the Medupi Kusile power stations. The Minister had informed Parliament that the debt was also due to design problems and corruption. She asked which companies were involved in selling defective designs and technology. What is government doing to penalise these companies and recover the money into the fiscus? She asked how many individuals or companies had been held accountable for the corruption and how much money had been recovered.
She said that electricity tariffs in the next few months would push South Africans over the edge and asked what government was doing to deal with the deepening unease. On Soweto debt, she said that communicating with Eskom had not been prudent when trying to assist citizens who were not empowered enough to have communication with Eskom. She said that when cuts happened in rich areas there was communication but when it happened in areas of Soweto, people went without electricity. This was not because people were failing to pay. For some they may have listed their properties as businesses and this affected other people who were residents. Eskom needed to create a proper strategy of engagement. She recounted that the Minister previously indicated that Soweto debt was going down because Eskom inflicted high tariffs. She said that she welcomed the new management and asked that there not be load shedding because COVID-19 did not like cold surfaces.
The Chairperson of Eskom said that the entity would follow the law in order to provide the report.
Ms Maotwe asked when it would be sent.
The Professor responded by saying that this would happen as soon as possible but within the bounds of the law.
The CEO said that the former Eskom employees who offered to assist the utility were unsolicited. He said that all racial groups came forward from amongst the retirees and that Eskom had no desire to pay for these services.
The balance sheet and the apportionment of the debt was a challenging issue. It was not a simple matter and related to each of the individual divisions’ capacity to service debt based on their asset bases; their worth and what revenue could be generated from them. A lot of detailed financial modelling needed to take place and this was one of the reasons why the entity had chosen to set up divisions before creating separate legal entities. This process allowed the entity to engage with its lenders and ensure that they were comfortable whilst it migrates to legal separation. The entity was very aware that debt would not magically disappear and was grateful for the offer of support received from National Treasury over a ten-year period. It was aware that the fiscal space was very constrained and even more so after COVID-19, and it had indicated that it would require no additional bailouts within the current financial year from Treasury.
The cost of each of the design modifications would come at a cost of R300 million. In the interest of ensuring that these units come online, Eskom agreed with the contractor that the entity would pay for three of the units and subsequent to that, it would address commercial and contractual issues. He said that the EPRI was not an Original Equipment Manufacturer but was rather an industry association to which Eskom belonged. He said that it was a useful association to belong to because it provided Eskom with very useful benchmarking information which it found useful in measuring themselves against other countries.
The estimates for future load shedding were based on statistical modelling and were not figures which were plucked from the air. Eskom had a number of data scientists who took into account whether patterns, school holidays, long weekends, industry feedback and economic growth to develop demand profiles. He added that in the past number of days, it was within 50 and 75 MW of its forecast and the actual demand that arose. He was impressed with the accuracy of the forecasts and in response to questions about who would take accountability, the CEO said he would take accountability.
Completion dated for Medupi and Kusile
- Unit six was completed and reached commercial operation in August 2015.
- Unit five reached commercial operation in April 2017.
- Unit four reached commercial operation in November 2017.
- Unit three reached commercial operation in July 2019.
- Unit two reached commercial operation in November 2019.
- Unit one was anticipated to reach commercial operation by December 2020.
- Unit one reached commercial operation in August 2017
- Unit two was anticipated to reach commercial operation in July 2020.
- Unit three was anticipated to reach commercial operation in September 2020
- Unit four was anticipated to reach commercial operation June 2022
- Unit five was anticipated to reach commercial operation in June 2023
- Unit six was anticipated to reach commercial operation by December 2023.
He added that all of the units at Ingula, which was a pumped storage scheme, had reached commercial operational and was completely functional.
Racial breakdown per grade
This work could be done and Eskom would report back to the Committee with it.
The CEO said there might be a slight misunderstanding around these contracts. External contracts referred to contracts signed by Eskom Holdings State Owned Company (SOC). If it embarked on legal separation, it was clear that not all of the contracts could continue to reside in Eskom Holdings SOC and would have to move to the distribution, generation and transmission companies. These contracts had to be re-assigned with the consent of the counter-parties to the new legal entities intended to be set up.
Payment of R5 billion
The narrative of a R5 billion mistaken payment seemed to be mistaken. A press statement was released about the only amount of R5 billion being made for Tegeta. The claim for this amount was one which Eskom had against the business rescue practitioners amongst other competing creditors to try and recover the money. This was the only amount of R5 billion and there was no other accounting error or erroneous payment made of that amount.
The CEO said that the Committee was quite right to point out that the new builds played a significant role in this debt. The defects that had taken place were very unfortunate but now that the utility had these units, it was the entity’s responsibility to service and repair them. There were a number of contractual negotiations going on in order to resolve warranty and guarantee claims.
Pipeline of talent
He was sure that the pipeline needed to be filled continuously as everyone continued to age. The staff needed to constantly be filled with new, energetic and well-trained young people for this purpose. The entity it would continue to supply bursaries.
Part of the challenge with electricity supply in Soweto was that there was significant overloading of distribution assets. The overloading of assets created significant risk for Eskom’s transformers, which the entity could not cope with. This was due to the fact that there were sometimes illegal connections and electricity theft that took place. It was challenging for its employees to enter areas where there were a high number of non-paying consumers and illegal connections. When the infrastructure suffered under the overloading, then supply interruptions occur. However, it was not Eskom’s policy to cut off supply to those who did pay.
Where private companies owed money, Eskom would cut them off if they did not pay, which served as effective incentive to pay and, therefore, the outstanding private debt was negligible. This area was one that was managed well and in a strictly commercial fashion.
Minister Gordhan said that the recovery of money and taking action against corrupt individuals had been taking place over the last few years and that these matters, along with other matters, were with the National Prosecuting Authority (NPA); and which matters that were with the Zondo Commission ought to be compiled and presented to Parliament., He said that this information would take Eskom a few weeks to gather, but the entity would do so.
The restructuring issue was very sensitive and complicated. He recalled the fact that the President said that Eskom was too big to fail, which was why the State was so involved. This was not any ordinary entity; it was an entity that was at the heart of State Capture and until it got it back onto its feet, government had to take responsibility for it because of the important role it played in the economy in general.
There were other answers due and they would be forthcoming in due course. He thanked the Committee for the chance to present.
Co-Chairperson Magaxa thanked the Minister for his Presence and the Deputy Minister, Mr Phumulo Masualle, who was also present. He thanked the CEO and the Chairperson of Eskom for presenting. He appreciated the presence of the Acting Deputy Director-General of Public Enterprises. Finally, he thanked all the Members of the Portfolio and Select Committees for being in attendance.
The meeting was adjourned.
Magaxa, Mr K
Matibe, Mr TB
Arnolds, Mr A
Bebee, Ms LC
Cachalia, Mr G K
Cloete, Mr AB
Gordhan, Mr PJ
Gumede, Mr SN
Malinga, Ms VT
Maotwe, Ms OMC
Masualle, Mr PG
Mkhwanazi, Ms JCN
Modise, Ms TC
Ngwenya, Ms W
Nhanha, Mr M
Phiri, Ms CM
Smit, Mr CF
Tshabalala, Ms J
Waters, Mr M
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