Growing challenges, not enough solutions at Eskom

Government must urgently implement the promised reform of the electricity sector. “Whether we like it or not, Eskom has to be unbundled. We need comprehensive, well-structured and well-thought out plans,” says Ronald Chauke, OUTA’s Portfolio Manager for Energy.

The Organisation Undoing Tax Abuse (OUTA) welcomed the announcement of the appointment of the long-awaited Chief Restructuring Officer, SAICA CEO Freeman Nomvalo, to oversee this unbundling.

There were some welcome gains in the move to good governance in Eskom's report – such as the referral of more than 40 senior employees to the Special Investigating Unit after lifestyle audits – but the financials look terrible with many items showing worse performance year-on-year.

The expected loss for the year was R20.729bn, nine times the previous year’s loss of R2.337bn.

Eskom reported revenue of R179.892bn (this is essentially what’s billed to customers) but collected only R33.257bn (cash flow from operations), against debt repayments for the year of R35.845bn. Thus, Eskom spent more on debt than it collected from selling electricity.

Revenue increased only 3% although electricity prices were hiked 5.23% for that year as sales slumped by 2%.

Customer debts and Eskom costs rocketed.

Municipal arrear debt increased by R6.3bn to R19.9bn and Soweto small power users arrears increased by R3bn to R18bn (both including interest). The payment level by municipalities (excluding metros) was 81% and by Soweto was 13%.

Chauke called for a political solution and urgent action on these debts, led by the Cabinet and the Presidential Eskom Sustainability Task Team. The municipal debt has been endlessly discussed in Parliament and at national level to no effect.

“Eskom operates like a charity organisation but expects to make a profit. People cannot expect to receive electricity for free. It is very important to pay for services,” says Chauke. “Eskom should be encouraged to operate as a commercial entity in order to become independent and sustainable.”

Eskom has yet to address the overstaffing and uncontrolled costs: the staff numbers dropped 4% to 46 665 people, but costs increased 13% to R33.3bn. “This is a reality which they need to confront if ever they want to bring Eskom to sustainability,” says Chauke, calling Eskom to explain how they are engaging with staff and unions to resolve this.

Poor plant performance added to the costs. There were 30 instances of load shedding and the energy availability factor (the measure of power station availability) drop to just 70% from last year’s 78%, mostly due to breakdowns. Eskom blamed the load shedding on poor plant performance and industrial action. “Eskom should have disclosed the cost of this load shedding,” says Chauke.

Although Eskom generated and sold less electricity, primary energy costs jumped 17% to R100bn. This was due to increased use of the prohibitively expensive diesel generators and a big increase in Independent Power Producer usage in the face of breakdowns, and higher coal costs although less coal was burnt.

Eskom is desperate to increase prices, relying on this to make ends meet. It has filed court challenges to NERSA’s decision on the price for 2018/19, the backward-looking RCA decisions for 2015, 2016 and 2017. Eskom says it will apply for a R27bn RCA application for 2018/19. It’s waiting for NERSA to publish reasons for its 2019/20 pricing decision and is likely to challenge that too.

Chauke said Eskom should focus on its own costs.

“Eskom must eliminate what we can call embedded, unnecessary expenditures in its own operations,” he says, calling for transparency in the internal cross-subsidisation of one business unit by another as essential for unbundling the entity and ringfencing business unit costs.