KHOLOFELO MOLEWA: Can the principles of project finance save Eskom?

In most countries at SA’s level of development, candlelight is a romantic cliché. For South Africans these days, it’s a lighting solution. After decades of underinvestment Eskom is creaking. Its recovery will require a combination of political will, technical skills and a lot of capital. The private sector will be a critical partner in financing Eskom’s recovery.

The organised chaos of load-shedding is a disconcerting spectacle for a country with ambitions to lead the African continent. In this article, we will examine Eskom’s options in relation to its existing fleet of thermal power stations. The power utility finds itself caught in a vicious circle, which can be simplified as follows:

• It has neither the fiscal nor the operational capacity to properly execute planned maintenance ...
• which leads to an increase in unplanned outages ...
• increasing Eskom’s reliance on its open gas cycle turbines and therefore its cash spend on diesel ...
• leaving little money for planned maintenance.

On paper, at least, the technical challenge should not be insuperable, but plans are worth nothing if they never make it off the drawing board. Eskom needs capital to make its recovery a reality, and private capital has an important role to play.

While Eskom undoubtedly needs to build more generation capacity to end load-shedding, fixing its existing baseload capacity must be its immediate priority. At the peak of stage 6 load-shedding the utility had lost about 21GW of its total available generation capacity of 46GW. Part of this (7GW) was planned maintenance, but the vast majority of outages were breakdowns.

These unplanned outages, the result of a 15-year backlog in maintenance across the coal fleet, are the biggest catalyst for load-shedding and should therefore be the immediate focus of recovery efforts.

The most important Eskom metric to keep an eye on is its unplanned capability loss factor (UCLF), the ratio of unplanned outages to total net-installed capacity. In September nearly 70% of all Eskom outages were unplanned. UCLF is a critical factor in the much-discussed energy availability factor (EAF), which was just more than 55% for the month of September. Eskom can only reduce load-shedding if it can prioritise maintenance and thereby minimise unplanned outages.

Its current difficulties reflect decades of underinvestment. Any meaningful attempt to solve them will inevitably involve significant capital expenditure and a sustained increase in operational expenses. Given the government’s constrained fiscal position a partnership with private sector capital will be crucial.

Private capital providers such as Stanlib are actively looking for infrastructure-related investment opportunities, especially given recent changes to regulation 28 of the Pension Funds Act, which are designed to encourage longer-term investment in infrastructure by retirement funds.

To attract the necessary capital Eskom must transform its planning and execution of systemic maintenance. One option would be for it to create ring-fenced entities responsible for engineering, procurement & construction (EPC) and operations & maintenance work (O&M). With the right contractual structures these new O&M and EPC arrangements would be able to leverage public and private capital and the technical expertise to execute Eskom’s maintenance programme. This would cover the full spectrum from maintenance to wholescale repurposing of plants, where appropriate.

The accountability and transparency demanded by such project finance structures would impose welcome discipline on Eskom. Contracts would be designed to align incentives, share risk and ensure accountability. For example, O&M contractors deployed to undertake maintenance would be paid only if metrics such as EAF and UCLF met agreed targets. If implemented correctly, Eskom would effectively be able to outsource its most pressing maintenance work in a co-ordinated manner.

We do not have to reinvent the wheel: the independent power producer (IPP) office has been designing these types of project finance arrangements since the first Renewable Energy IPP Programme rounds. SA has delivered some of the most innovative project finance approaches in the world. We must leverage this experience in pursuit of Eskom’s recovery.

This proposed approach can also support SA’s “just transition” to a lower-carbon future, especially with labour as a formal stakeholder. The O&M and EPC contracts could explicitly provide for skills transfer to Eskom’s existing workforce, particularly in projects that will shift plants from coal to natural gas and ultimately to greener alternatives. Labour can be fully enfranchised in these new arrangements, perhaps even as a shareholder in these new O&M/EPC entities.

Fixing Eskom will not be easy or cheap. It will require an enlightened alliance of politicians, technicians, investors and workers to escape the cycle of inefficiency, waste and chaos. However, if Eskom fails to innovate its maintenance arrangements it is likely to continue to lurch from one crisis to another, and load-shedding could become a permanent feature of the SA economy.

• Molewa is portfolio manager at Stanlib Khanyisa Impact Investment Fund, Stanlib Credit Alternatives.