Blackouts Present Biggest Risk to South Africa’s Economy

By Paul Burkhardt

Photographer: Nadine Hutton/Bloomberg

Electricity power lines are seen at Eskom Holdings Ltd.'s Kendal power station in... Read More

South Africa has an electric bill coming due that’s threatening everything from its swimming pools to its sovereign debt.
Consumers are asked almost daily to switch off their water heaters, pool pumps and anything else that will save power during peak periods. Industrial customers are also asked to conserve energy, even if it means reducing production. And when that’s not enough, Eskom Holdings SOC Ltd. orders managed blackouts.
The state-owned utility can’t provide reliable electricity to run Africa’s second-largest economy. It has a long-term plan to expand generating capacity by more than 40 percent, while facing a 225 billion-rand ($20 billion) funding shortfall through 2018. The company has faced supply shortages for years and has said it may be another five years before it can
guarantee the lights will always be on.
“Eskom is in dire straits,” said Anne Fruhauf, southern Africa analyst at New York-based risk adviser Teneo Intelligence. Electricity shortages pose the biggest risk to the country’s economy, and in the long term “South Africa cannot dream of reaching a higher-growth path without an increase in baseload capacity.”
Once a powerhouse that drove the Apartheid economy and even delivered energy to neighboring nations, Johannesburg-based Eskom today is struggling to keep decades-old plants running while completing new ones that are years behind schedule. Five days of blackouts in 2008 shut down mines and were considered a national emergency. Outages this year served as a reminder that industry relies on an inadequate infrastructure.

Rescue Package

“Eskom is committed to keeping the lights on whilst at the same time maintaining a sound basis for sustainable operations,” the company said in an e-mailed response to questions.
The government proposed a rescue package this month that includes a capital injection and an increase in government-guaranteed debt. It’s aimed at propping up Eskom’s credit rating after Standard & Poor’s warned the utility that it was on the brink of a downgrade to junk status.
Allocating resources to the utility will strain the country’s finances and increase the chance of a sovereign downgrade, according to Standard Chartered Plc. National Treasury spokesman Jabulani Sikhakhane said details of the package will be provided in the mid-term budget next month.
“Eskom needs money, loads of it,” Peter Attard Montalto, an economist at Nomura International Plc in London, said in an electronic message. Besides controlling the country’s energy supply, its ability to deliver electricity also influences “sentiment itself for investment -- especially by foreigners.”

Aging Facilities

Eskom provides more than 95 percent of the country’s electricity. Its aging fleet of power plants has a total of 42 gigawatts of nominal capacity. That would be enough if the company could keep them all running -- daily capacity available this year has averaged about 33.2 gigawatts, according to data compiled by Bloomberg.
In the Apartheid era, Eskom had a capacity reserve of almost 40 percent. The international norm for this measure, comparing the amount of power it can produce and total demand, is 15 percent, which allows for routine maintenance and unexpected closures. After decades of underinvesting, the company’s reserve slipped to about 6 percent this year. Generating capacity increased by 12 percent since 1994, while South Africa’s gross domestic product more than doubled.

New CEO

The company is on its third chief executive officer in six years, Tshediso Matona, who was appointed Aug. 21 and officially takes over Oct. 1. Previously director general of the country’s department of public enterprises, he’s a career civil servant with no work experience in private companies listed on his background page on the department’s website.
Matona takes the reins as the company pursues a plan to add 17 gigawatts of capacity by 2019. The biggest projects are a pair of coal-fired power plants, the 4,764-megawatt Medupi and 4,800-megawatt Kusile projects.
Medupi, which requires more steel than the tallest building in the world, will be Eskom’s first new power station in more than 30 years. The plant is expected to add about 0.35 percent a year to South Africa’s gross domestic product.

Construction Delays

Construction began in 2007 and it was initially scheduled to begin producing power by 2012. Labor strikes and contractor errors pushed that back and Eskom said this month it was 73 percent done. The first of its six units is expected to be connected to the grid this year.
The Kusile plant is about 56 percent complete. Eskom is also building the 1,332-megawatt Ingula pump storage power project and developers are planning about 3,725 megawatts of renewable power projects in South Africa. The country also signed a agreement this week laying the groundwork for Russia’s state-owned Rosatom Corp. to build as many as eight nuclear reactors.
For now, Eskom is making do with 27 power plants, some dating to the 1960s. The company must juggle regular maintenance and unplanned outages that reduce output. It had about 34.5 gigawatts available on Sept. 22, with an estimated peak demand of 31.8 gigawatts, according to its most recent biweekly bulletin.
“Effectively they’ve lost about 15 percent of their fleet through poor maintenance and now unplanned outages which is a polite term for just a whole lot of breakages,” said Anton Eberhard, a professor at University of Cape Town’s Graduate School of Business.

Apartheid Era

The utility was at its highest level of reliability in the early 1990s, after sanctions crimped the economy and created an energy surplus, said Jacob Maroga, 54, who served as Eskom’s chief executive officer during the 2008 power cuts.
When the African National Congress took power in 1994, signaling the end of the Apartheid era, the utility wasn’t a top priority “because it looked good then,” Maroga said at a cafe across the street from his former office at the company’s Megawatt Park headquarters.
Abundant power helped the new democracy draw companies including BHP Billiton Ltd. to build energy-intensive smelters. While these ventures helped grow the economy, they also needed lots of electricity. That ate away at the capacity reserve. “It was a double-edged sword,” Maroga said.
Some of the first signs of trouble came in 2005, when capacity shortfalls forced Eskom to implement rolling blackouts in the Western Cape, Maroga said. The power shortage became more serious, leading to nationwide blackouts in 2008 for five days.
With Medupi’s first unit about to go into operation, the question now is how long it will take for Eskom to distance itself from the shadow of blackouts, not whether it will happen, Maroga said. “It has to succeed. It’s the heartbeat of the economy.”