Matshela Koko. Picture: FREDDY MAVUNDA
Matshela Koko. Picture: FREDDY MAVUNDA

The opinion column by Duma Gqubule (Report challenges myths about Eskom, October 15) is misleading on many fronts. There are numerous reasons why Eskom finds itself in its current predicament, but being undercapitalised is not one of them.

The three main reasons are: the cost overruns on Medupi, Kusile and the Ingula pump storage scheme;  Eskom’s bloated and expensive workforce; and the coal procurement strategy implemented by Matshela Koko and Brian Molefe.

Had Medupi, Kusile and Ingula come in on time and on budget, the total debt on Eskom’s balance sheet would be about R159bn (R70bn + R80bn + R9bn, respectively). Instead, it is R455bn (R195bn + R225bn + R35bn, respectively).

The projects fell behind because there were no penalties for late completion and the contractors were given full inflationary indexation to the contract price each time the completion date was pushed out. So there was little incentive to complete the plants on time and on budget. Both Medupi and Kusile are still not fully commissioned.

Gqubule refers to a declining “staff cost to revenue ratio” and that the ratio has come down over the past 13 years from 24% to 18.5%. What this ratio does not tell you is that staff numbers have increased from 32,672 in 2007 to 46,665 in 2019 while the total number of gigawatt hours sold by Eskom has declined over the period from 218,120 GWh to 208,319 GWh. Therefore the number of staff at Eskom increased by 42.8% while turnover in GWh fell by 1.5%. It is difficult to comprehend how this kind of growth in staff numbers could ever have been justified in the past, let alone sustained into the future.  

The coal costs of Eskom have ballooned significantly. The coal purchases were 117.4-million tonnes in 2007 and 118.3-million tonnes in 2019 which is a 0.8% increase in volume. But the cost of this coal increased from R10bn in 2007 to R58.5bn in 2019 — which is a 485% increase. The principal reason for this is that in 2016 Koko insisted on “procuring coal from 50%-plus black-owned coal miners”. This move paved the way for the Gupta-owned Optimum Colliery to supply coal to Eskom. Most of this was trucked in to the Eskom power plants at great expense.

Eskom continues to live with Koko’s legacy. It has cost SA  billions in excessive coal and coal transportation costs. It is this same legacy that (mineral resources and energy minister) Gwede Mantashe is now trying to undo in the form of collective bargaining with coal suppliers to ensure that Eskom does not overpay for its fuel.

Gqubule needs to clarify his facts.  “While coal accounts for the bulk of primary energy costs, it has grown 6.7% a year in the past six years. But renewable energy costs soared to R24.9bn in 2019 from R3.2bn in 2014, or 50.2% a year.” As mentioned above, Eskom’s coal consumption has remained largely static over this period but the cost has gone up 485%.

By contrast, the total amount of power that Eskom has purchased from renewable energy projects has grown substantially. By the end of 2014 a total of 1,520MW had been installed and these projects produced approximately 2,190 GWh. By March 2019 a total of 4,115MW had been installed and production had risen to in excess of 10,684 GWh, which is an increase in output of 487%. It follows that that the total cost of power from these IPPs (independent power producers) should increase, given the output increase. 

Gqubule also trotted out Eskom’s often-quoted numbers that  IPPs make up 25.1% of its primary energy cost but only contribute 4.7% of  electricity output. The “primary energy cost” is its fuel cost (ie coal and diesel) which makes up only about 30% of Eskom’s total cost of producing electricity. This comparison is akin to comparing the monthly fuel bill of one car with the total running cost of another car. The total cost of running a car includes the monthly instalments, insurance, servicing costs, replacement parts and fuel, etc.

Eskom paid R22.3bn for power purchased by IPPs in 2019 and it recovered R24.2bn, earning Eskom R1.9bn.

It is time that Eskom presents a fully transparent picture to its customers. To do this, it must remove the cost of IPPs from its primary energy cost line item in its profit and loss statements. The income and the cost of IPPs must then be shown separately in its annual financial statements.

Eskom’s financial predicament is entirely of its own doing. If past performance is an indicator of future success then recapitalising Eskom is no solution. It will serve only to perpetuate what has been a disastrous decade of mismanagement and corruption. 

Alastair Campbell
Vantage Greenx MD

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