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Financial and technical nous needed to rescue and rebuild Eskom

​The Vice-Chancellor and Principal of the University of Johannesburg (UJ), Prof Tshilidzi Marwala recently penned an opinion piece, ‘Financial and technical nous needed to rescue and rebuild Eskom’, published by the Sunday Times, 03 March 2019.

Recently I received a message from a colleague David Monyae who offered the critique that I have been speaking much about the fourth industrial revolution while SA is fraught with the problems of the second such as security of electricity supply.

It is a misconception that one needs to be able to master technologies from earlier revolutions to understand the technologies of the fourth industrial revolution. Nonetheless how is electricity generated and why are we struggling to supply it? There are two main ways of generating electricity.

The dominant way is to place an electric conductor such as copper wire close to a magnet and move it. This process makes an electric generator. Eskom generates electricity by moving a giant electric conductor located close to a giant magnet. The second way of generating electricity is to harvest it directly from the sun using devices such as solar panels. If generating electricity is as simple as moving a giant conductor located close to a magnet how come Eskom is struggling to achieve it?

To understand this we need to understand how such giant conductors close to magnets are moved. There are many ways in which these conductors are moved and one of these is to use coal to heat water which generates steam to push the conductor. Another way is to use nuclear fission where the atoms of radioactive materials such as uranium are separated thereby releasing heat which boils water which becomes steam which moves the conductor.

Once electricity is generated it is transmitted from the power station to a location or a city from where it is distributed to houses. Eskom generates transmits and distributes electricity. However some municipalities such as the City of Johannesburg distribute electricity within the city. The concept of municipalities generating electricity was so difficult that all of them abandoned it. What remains are unused electricity generation plants like the one in Soweto overlooking the University of Johannesburg campus in the township. It is now used for bungee jumping. So why is Eskom struggling to deliver electricity? The first problem is commercial.

Eskom is unable to collect its revenue. It is reportedly owed more than R28bn by municipalities. Soweto residents reportedly owe it as much as R15bn. Furthermore it is unable to optimally price coal and carries a huge debt of R450bn. The other commercial problem is that the business model adopted after the construction of the Medupi and Kusile power stations was based on high tariffs and the National Energy Regulator of SA has stopped this model.

Eskom requires a complicated treasury department that is skilled in pricing options and derivatives instruments and thereby is able to handle future costs of debt coal and accounts payable.

The second problem is technical. The people who designed the Medupi and Kusile power stations may have been brilliant engineers but they were not practising in SA. They designed the two power stations and worked with locally registered engineers to evaluate the designs. Medupi and Kusile are the largest supercritical power stations in the world.

Supercritical power stations involve a complicated design and have never been constructed at this scale. They have to operate at specific temperature and pressure and unlike ordinary coal power stations where steam is used to move the conductor in supercritical power stations it is a superfluid neither liquid nor gas that moves the conductor. Why we pursued this difficult and untested technology on this scale needs to be understood.

The construction process followed was not based on the turnkey principle where the project is constructed and handed over to the customer as a completed product but on the order to build principle. The question why we did not have adequate professional engineers, engineering technologists, project managers, and financial specialists to be able to negotiate a good construction deal especially given that it was a first of its kind needs to be answered. The result is that the construction of these two power stations which was expected to cost approximately R200bn ended up escalating to R450bn.

The technical problem became the commercial problem. This naturally led to maintenance problems. If a company is short of money and the skills balance sheet is also weak maintenance is compromised. Three maintenance strategies are deployed in industry run to failure scheduled maintenance and predictive maintenance. Run to failure is where assets are used until they fail. The disadvantage of this is that it leads to unplanned power cuts. In scheduled maintenance assets are replaced when they reach the end of their life cycle. In this strategy assets that still work are replaced to prevent unexpected power cuts. When there is a scheduled time for power cuts it is because the power supplier is performing scheduled maintenance.

The maintenance strategy of the fourth industrial revolution is predictive maintenance. The question we ought to ask is what strategy is Eskom using to maintain its assets? President Cyril Ramaphosa announced in his state of the nation address that he will break up Eskom into three parts generation transmission and distribution. The idea of breaking up Eskom is not new. In the previous decade the government established Electricity Distribution Industry Holdings meant to consolidate all electricity distribution in one company. Ultimately this was abandoned.

It is important that this time we pursue what is optimal for SA and create structures that are efficient from financial technological and operational perspectives. To run an electric company is a multiple objective and complicated exercise optimising the commercial objective acts against intensifying maintenance and technical capacity. We need to be decisive and understand that to sort out Eskom we need to invest and this will require financial sacrifice. Second we need to technically capacitate Eskom from the board to the lowest levels.

Third we need to adopt a maintenance strategy and stick with it.

The views expressed in this article are that of the author/s and do not necessarily reflect that of the University of Johannesburg.

 

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