Eskom haunted by a mistake it made 40 years ago

Eskom is still feeling the aftereffects of its decision to conduct a massive buildout programme over the three decades to 1990, with the cheap power it created being unsustainable. 

This cheap power was used to attract smelters and heavy industry to South Africa to use Eskom’s capacity, boosting the local economy. 

However, this was never going to last forever, as the price Eskom offered was artificially low and insufficient for it to adequately recoup the cost of the buildout programme. 

The overbuild also resulted in the government’s misconception that Eskom did not need to plan or think about investing in building new power plants in the 1990s and 2000s. 

Another problem with building the majority of the generation capacity during a short period of time, and then not building any more new capacity, is that Eskom’s plants are scheduled to be decommissioned within a short period of time. 

This gives the utility and the country a relatively short window in which it can add new generation capacity to make up for the looming decommissioning. 

As a result, the overbuild is one of the long-term drivers behind South Africa’s load-shedding crisis over the past 15 years and the soaring electricity prices being passed on to consumers. 

This is feedback from energy expert and EE Business Intelligence managing director Chris Yelland, who outlined the consequences of the buildout before the 1990s on the State of the Nation podcast. 

“In the 1970s and 1980s, Eskom overbuilt power stations. The reason for that was there were projections of increased demand for electricity on the back of faster economic growth,” Yelland explained. 

“But, then, mismanagement of the economy and Apartheid-related sanctions tanked the South African economy, resulting in lower demand for electricity than projected.”

As a result, South Africa had a substantial surplus of electricity, which ensured that prices for power fell drastically. 

“When it had this surplus, Eskom was just desperate to sell electricity, because they had all these costs associated with the buildout but no sales,” Yelland explained. 

“In that situation, if they give a special pricing agreement, it is better than nothing. You could sell at a heavily discounted price because it is better than not having any revenue at all.” 

In effect, Eskom was trying to sell electricity at whatever price it could, resulting in smelters and heavy industry investing in South Africa to make use of the low electricity prices. 

This boosted the local economy and helped Eskom sell its excess electricity. However, the good times were never going to last. 

Disaster strikes

The major problems with Eskom’s solution to its problem of overcapacity stem from the false sense of long-term security it created at the utility. 

“Because it had this surplus of electricity, Eskom stopped building new power stations. They actually mothballed a number of power stations and stopped all their new builds,” Yelland said. 

Eskom did not build a new power plant for 20 years after its buildout in the 1970s and 1980s was completed, despite demand increasing. 

Demand increased strongly in the 1990s and 2000s as the South African economy began to grow once again and the ANC implemented the Reconstruction and Development Programme. 

Under this programme, access to electricity increased significantly, with rural access doubling by 1997 and nationwide access rising by 20%. 

This greatly increased the strain on Eskom’s existing infrastructure and added significant demand to the grid. All the while, the utility built no new power stations. 

All the blame cannot lie with Eskom, with the Mbeki administration rejecting its request for additional budget allocations to expand its generation capacity. 

However, Yelland pointed out that Eskom should not have needed these additional allocations had it been prudently planning for the eventuality that, at some point, it would need new generation capacity. 

“Eskom had a Capital Development Fund. Effectively, what this means is that Eskom would put away money every year into a ring-fenced fund that was invested,” Yelland said. 

“When the time came to build a power station, it had the money available. After the overbuild, Eskom abandoned the fund, saying it did not need to build new power stations.” 

This reduced Eskom’s cost base, as the utility was no longer putting money away to build future power stations. Thus, it kept electricity prices low from 1993 to 2004 at the expense of future investment. 

“From 1993 to 2004, the price of electricity in real terms actually declined year-on-year, because they were not incurring the costs of the Capital Development Fund and they were not building new power stations,” Yelland said. 

Things changed drastically for the worse when Eskom had to build new power stations, Medupi and Kusile, which began construction in 2007. 

There was no money set aside for their construction, so Eskom had to borrow heavily to get these projects off the ground. 

“Then, in 2008, we had a price shock which continued for the next 15 years. Ideally, the fund would have caused a smoothing effect in the price of electricity, with prices rising steadily at a pace the economy could withstand rather than with a huge shock,” Yelland said.  

“Instead, the price had declined steadily, and then rose sharply, creating a price shock that we are still dealing with today.