Andrew Kenny
Eskom, once one of the best power utilities in the world, has been laid low by corruption, mismanagement and renewable energy. Its annual report for the year ending 31 March 2018 gives grim testimony to its present plight. In the light of the ill-informed comment, if not utter nonsense, now being written about Eskom, the reasons for its fall and the threats to its future need to be clearly understood. Electricity supply is of the highest importance to the welfare of South Africa and if our economy is ever going to grow healthily again we shall soon need lots more good, reliable, affordable electricity.
Until about 1990, SA had two absolute advantages in the world economy, great mineral treasure and very cheap electricity. The success of Eskom, the state electricity utility, was one of the few triumphs of apartheid SA. The Government did Eskom an inestimable favour: it left it alone. Eskom was given this simple brief: make sure the country always has enough electricity and cover your costs. Nothing else. Eskom was a technocracy controlled by engineers not accountants, who ran Eskom according to a simple and highly successful plan.
Eskom saw that SA had a massive abundance of cheap, easily mineable coal. It was poor coal, high in ash and low in energy, and all of the big coal fields were inland in the north east of the country but Eskom became a world leader at burning bad coal and it located all of its major coal power stations in the north east. From about 1966, when SA had high economic growth and was industrialising rapidly, Eskom saw that she was close to running out of electricity. Eskom then embarked on a program of building huge standardised coal stations, each consisting of six identical units (“six-packs”). Because of the massive program, engineering suppliers around the world tripped over themselves to give Eskom the best prices possible. The new stations were funded on cheap debt, implicitly if not explicitly under-written by the state – sovereign debt in practice. The low cost of capital is the one supreme advantage of state industry over private industry. The stations were usually built on time and on budget, and the debt was responsibly managed by Eskom and paid for from its revenue. The power stations did not cost the tax-payer a cent. Because of the huge amounts of coal required (typically 16 million tons per year per station), the stations were built right next to the coal fields and were supplied by conveyor belt by dedicated coal mines (which sometimes exported its good coal and sent the bad to Eskom). The system worked like a charm and for decades provided SA with the cheapest electricity in the world.
The cherry on the cake was the nuclear power station at Koeberg, about 30 km north of Cape Town, which first began producing electricity in 1984 and has been doing so ever since, very safely, cleanly, reliably and cheaply. It was built there because there is no coal in the west of the country, and you can locate a nuclear station wherever you want.
Since democracy in 1994, almost everything has gone wrong with Eskom. The ANC Government immediately began meddling with it and giving it all sorts of political and ideological directives rather than just asking it to make electricity, which indeed seemed of minor consideration. Eskom and the Government together refused to build new stations when it was perfectly obvious we were running out of power. Affirmative Action swelled the workforce so that today Eskom has far too many employees, most earning high salaries. In a mad system of BEE coal procurement, Eskom bought coal from small suppliers not according to the price and quality of the coal but according to the BEE credentials of the supplier. The result was that Eskom’s perfectly good coal supply was perverted into a dreadful supply of bad, wildly varying and expensive coal, which had to be trucked in by road, causing awful environmental and road damage in Mpumalanga. This sub-standard coal lead to the calamity of January 2008, when a large number of coal station shut down, plunging the country into black-outs, forcing the gold mines to stop and causing irreparable damage to the SA economy.
Then came the horrible corruption of the Gupta era, which not only caused enormous losses to Eskom and the country but poisoned relations within Eskom and between Eskom and the people of SA. Now Eskom has another huge burden, this time not of its own making: it is forced to buy ruinously expensive and very bad “renewable” electricity, which it doesn’t want, under the “Renewable Energy Independent Power Producers Procurement Program” (REIPPPP). This is driven primarily by a world-wide ideological folly, and secondarily by greedy private power companies hoping to make fat profits from the gullible people of SA.
The 2018 Eskom report is sombre but fascinating. It reveals R19.6 billion of “irregular expenses”, which might or might not be caused by corruption but probably is. Eskom’s new leaders, who seem honest and concerned, are investigating this. They admit, “Eskom has suffered an absence of ethical leadership at the highest level for some time, but we aim to rectify that as a matter of urgency.” They say, “No-one can deny that Eskom has experienced a tumultuous year”. For the first time in years it has made a slight loss after tax; although looking at the financial statements I find it is in not so bad an economic state as some commentators suggest. It admits to its problems with coal supply.
The problem with renewables is entirely different, and it is certainly going to get worse if the green ideologues and avaricious renewable companies have their way, as they seem to be doing. Eskom’s figures only reveal part of the problem but here are some of them.
Eskom’s average selling cost is 85 cents/kWh (SA cents/kilowatt-hour). Its average operating cost of production is about 63 cents/kWh. The price it is forced to pay for electricity from IPPs (Independent Power Producers) is 222 cents/kWh. Most of these are REIPPPP renewable suppliers. So it is forced to pay more than twice as much for renewable electricity as its own selling price. And this is for electricity it doesn’t need. But it’s much worse than this. The 222 cents/kWh is the price Eskom must pay for this “green” electricity not the cost to Eskom, which is much higher, as will be explained.
REIPPPP electricity is sold in 20 year PPA (Power Purchase Agreements) contracts. They are inflation-indexed. Rounds 1 to 3 of these PPAs are now in operation. I estimate that over their 20 year spans they will cost Eskom over R450 billion – a colossal and complete waste of money, which you might like to contrast with Eskom’s R19 billion of “irregular expenses”. But of course Eskom merely passes on these costs – or tries to - to the people of SA in rising electricity prices.
All around the world, including Germany, Denmark, the USA, the UK and Australia, renewable energy for grid electricity has proved an expensive failure. (It is very good for off-grid applications.) But here is the paradox. Every week, you hear green ideologues or renewable salesmen telling us that the price of renewables is falling; however, as they speak you can see the price of electricity going up and up the more renewables are added to the grid. There are no exceptions, anywhere in the world. Why?
The answer is simple. All the ideologues and salesmen ignore the biggest cost of all for renewable energy, which is the system cost. Electricity only has value if it can be delivered on demand, when you want it and for as long as you want it. Otherwise it is useless. Wind and solar PV (photovoltaics, which converts sunlight directly into electricity) cannot do this. Wind is hopelessly unreliable and unpredictable. Solar PV is somewhat reliable during daylight hours but non-existent at other times, which is usually when electricity is most needed. When Eskom is forced to buy this unreliable, intermittent electricity, it incurs massive costs by having to compensate for the awful fluctuations of the renewables. It must pay for storage (extremely expensive, especially with batteries), back-up generators, spinning reserve (generators at less than full power), extra transmission lines and the inefficient operation of its generators forced to ramp up and down to match the renewable generators. These are the system costs, always very expensive and sometimes astronomically expensive. If solar PV panels were free, the system costs of solar power would still make it prohibitively expensive. Wind is worse. Renewables will always be horribly expensive.
The advocates of renewable energy always ignore the system costs; they always look into a fantasy world of computer models or “thought experiments” rather than the real world. The absurd models of the CSIR are a spectacular example of this nonsense.
After the disastrous failure of Rounds 1 to 3 of the REIPPPP, the then Minister of Public Enterprises, Lynn Brown, ordered Eskom to sign up for 27 new contracts, including Rounds 3.5 to 5 of the REIPPPP. The Minister of Finance, Malusi Gigaba, supported her. So we now face appalling future losses for our electricity supply and our economy.
The best you can say for renewable electricity for the grid is that occasionally, in ideal circumstances, it might save Eskom on energy. Because it is so unreliable it can never save Eskom on capital or operations and maintenance. Eskom’s energy costs are a bit below 30 cents/kWh. Let’s push that up to 35 cents/kWh. This means that if a REIPPPP supplier can sell electricity to Eskom at 35 cents/kWh, Eskom might just break even on it. Anything above that is a certain loss to Eskom. Unfortunately, because of the extreme secrecy that surrounds renewable energy, I don’t know the prices of the 27 new IPPs. I have heard rumours talk that some of them might be as high as 62 cents/kWh, which would be disastrous. But maybe this is just malicious rumour.
Renewable power is characterized by gargantuan machines (giant wind turbines and vast solar arrays), highly centralised grids, massive use of materials (a wind turbine needs ten times as much concrete and steel per kWh as a nuclear plant), enormous environmental footprints and a rather worse waste problem than nuclear (renewable toxic wastes remain dangerous forever). The greens just seem to love the spectacular, invasive, dominating scale of renewable energy.
Our best option for future electricity is nuclear. It is the safest and cleanest source of energy we know. It is reliable and affordable. Koeberg is probably the most successful power station in SA history. All around the world, you see that the more nuclear there is on the grid the cheaper the electricity. There have been some recent problems with first of a kind (FOAK) reactors and with countries that have not kept up a nuclear building program. But with countries of continuous nuclear build, including South Korea, China and Russia, nuclear stations are being built on time and on budget, and are delivering good, clean, cheap electricity.
Unfortunately politics and ideology control so much of energy policy around the world. The engineers are cast aside and political activists and green ideologues take over. This is happening right now in SA, adding to all Eskom’s problems of corruption and mismanagement.
Andrew Kenny is a contracted columnist to the Institute of Race Relations (IRR, a think tank that promotes political and economic freedom.
NOTES:
1. I am a Professional Engineer, with degrees in physics and mechanical engineering. I’ve worked about 17 years in industry, including over 3 at Eskom in coal and nuclear, and worked for 7 years in energy research at UCT. For over 25 years I have been writing about Eskom and electricity supply and have massive files to back up everything I say in this article.
2. Here’s my calculation of the total price Eskom will have to pay for the first 3 rounds of REIPPPP:
Total price = 20(years)*8760(hours in a year)*3774(capacity in MW)*0.315(load factor)*2.22(Rand/kWh)*1000 = R462 billion
3. Germany, in a fit of madness, decided to phase out her clean, safe, cheap nuclear power and replace it with very expensive wind and solar. The result has been rising electricity prices and electrical instability. Ironically it has also meant a rise in CO2 emissions. Thanks to “energiewende”, Germany is now the biggest emitter of greenhouse gases in Europe.
4. South Australia, by coincidence I’m sure, actually implemented the absurd CSIR energy plan of wind, solar and “flexible” energy (meaning gas). It was as disastrous as expected. Electricity prices shot up into the stratosphere and there were two long state blackouts. Now South Australia has installed the world’s biggest battery, supplied by Musk at enormous cost. It has 0.5% of the capacity of Ingula Pumped Storage and is totally inadequate.
