Eskom in trouble

While Eskom’s performance has improved recently, it is still struggling with severe maintenance and investment challenges. 

This is according to Investec’s head of Energy and Infrastructure Finance, Martin Meyer, Investec investment strategist Ayan Ghosh, and Project management head in the office of the Presidency, Rudi Dicks.

On Investec’s podcast, The Current, they shared their insights on tackling issues around some of Eskom’s core problems.

Dicks said that Eskom’s coal fleet is currently unreliable and ageing, “but we cannot walk away from that”.

“So while we wait for more megawatts, we have to fix the fleet as we go along,” Dicks said. This means ensuring we have the right quality of coal and water and investing in repairs and maintenance.

He explained that by staying focused and addressing specific problem areas, the situation can be improved.

Meyer said that coal power stations were originally designed with maintenance plans that include regular and major maintenance. However, in recent years, these plans have been neglected. 

“So you’re sitting with a coal fleet that not only is it aged, but it also hasn’t been maintained properly,” Meyer said,

Eskom has limited resources, and when it tries to perform both scheduled and emergency maintenance, it leads to problems. 

While reliability may improve slightly, unexpected breakdowns are likely due to the fleet’s poor condition. 

Meyer said this constrains capacity even more, and solely relying on the coal fire fleet to solve this issue will not work.  

However, Eskom’s maintenance issues make it significantly more difficult to repair these issues. 

Dicks explained that fixing a power station, especially when dealing with structural issues or auxiliary plants, can take 3 to 6 months.

“Can we afford to lose 3,500 megawatts? This is the kind of situation that we’re looking at,” he said. 

He explained that Eskom needs a reserve margin – ideally above 10% – to perform long-term maintenance. 

However, this reserve margin can only be achieved if spare megawatts are available. Without these, the necessary long-term maintenance would result in higher stages of load-shedding. 

This puts Eskom in a difficult position where they need to do the maintenance but don’t have the extra capacity to do so without causing more disruptions.

An independent report commissioned by the Treasury in 2023 and conducted by an international consortium led by the VGBE Energy Association, found a number of issues with the coal-fired fleet. 

It attributed these problems to a dysfunctional and overly complex management system. 

Addressing these issues will require massive administrative intervention and cash injection, but raising investment in South Africa’s energy sector has proven difficult. 

“I think confidence is critical for any investment, and that appears to be lacking among offshore investors at this point in time. I think the government needs to address that first,” Ghosh said. 

The sector also faces other challenges, such as a skills crisis, limited construction capacity, shortages of specific equipment, and overly long time frames for approvals and funding. 

He added that South Africa, shockingly, only has one supplier of fabricated structured steel used in transmission equipment and one supplier of large power transformers. 

Meyer also pointed out that the stop-start nature of South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has hindered consistent investment in building generation plants.

“We’ve seen investment into this area, but when you’ve got a five-year hiatus in terms of awarding projects, these manufacturing plants can’t sustain that,” Meyer said. 

However, if there’s a more regular and steady schedule of awarding REIPPPP projects and constructing new generation plants, investor confidence should return.

He noted that while there is already international interest in investing in these plants, these investments are typically project-based. 

This means manufacturing facilities aren’t being set up with the expectation of continuous future work, which is necessary for their long-term viability.

Gross fixed capital formation, which involves investing in fixed assets like plant machinery and equipment, also adds to Eskom’s difficulties. 

In South Africa, this investment is currently low, making up only about 15% of the country’s GDP. This is 5% to 10% lower than what foreign investors would prefer to see.

According to Ghosh, upgrading Eskom’s transmission infrastructure would be a crucial step in boosting this investment figure.

He said grid expansion has been much slower than expected, contributing to the current challenges.

“Eskom needs to reconfigure the grid at three times the capacity that they have done in the last 10 years,” he said.

Additionally, Eskom’s ageing infrastructure needs to be upgraded, and the contribution from renewable energy sources must double or even triple and be integrated into the grid. 

“There’s a need for significant private sector participation and that would close South Africa’s investment gap,” Ghosh said.