Eskom’s catch 22 will result in everyone sooner or later going solar. Why? Because the consumer will wake up to the reality that solar is much cheaper in heating water than using mains power.
Electricity price increases of 20%-37% in 2018 are almost inevitable. The probability is that this will be followed every year by more huge increases beyond inflation.
Again, the question is why?
Eskom is bust, or very nearly so, and in order to be a viable business generating and distributing electricity, its revenues need to be more than its expenses.
So, either the sales of electricity need to increase, (they are declining), or the price per unit sold needs to go up.
Alternatively, in order to balance the ‘books’ they need to cut expenses.
OUTA are suggesting that 15,000 jobs could be cut to save around R10 billion, and admittedly with a higher headcount than almost any utility in the world per GW produced this would seem logical. However, cutting staff is easier said than done, with both government and trade unions looking to create jobs, rather than adding to the 27% unemployment rate.
Where else can expenses be cut? Unfortunately (or fortunately depending on how you look at it) Eskom and government embarked on a build program of 2 of the world’s largest coal fired power stations in both Medupi and Kusile. Already running many years late, the build costs have escalated to almost double the original estimates to approx. R250 billion.
Can these build programmes be stopped dead in their tracks and mothballed, and why have the costs escalated out of control? The answer to stopping the build is a ‘No’ because long term contracts have been entered into with hundreds of contractors and subcontractors.
As to why the build costs have spiralled, it is essentially down to the fact that Eskom, having deliberately shed thousands of jobs late in the 1990’s and early 2000’s lost much of their in-house expertise needed to contract and manage a new power build program.
Without the required internal resources to accurately define requirements or negotiate and manage the build programme, the opportunities for contractors and subcontractors to renegotiate, add extra expense, has run rampant and with it of course the opportunities for corruption.
At its simplest, Eskom has been out of its depth since the beginning of the builds, and the inevitable result has been the huge cost and time overruns. As an aside, if Eskom included all of these contracted people, the Eskom headcount would probably be double.
Compounding the expense problem is the cost of money and what happens when any of the power units come on line. Rather than being a capital expense (a below the line figure in the balance sheet), when a new unit starts producing electricity, its costs including debt cost move above the line. In other words, the interest on the capital expense becomes an expense in the profit and loss, adding to Eskom’s operational expenses.
In addition, when the units become operational, depreciating the unit over time becomes as above the line expense for profit and loss purposes.
Making Eskom’s life more difficult is the perception of the business, with ratings agencies lowering their credit rating to junk status. This in turn results in the interest costs rising, adding further to the operational expenses. No end of massaging existing assets for revaluation purposes (in the balance sheet) will overcome this problem.
Where do Eskom go from this scenario of declining revenues and rising expenses? Using the government balance sheet, they can continue to borrow (using an analogy) with yet another credit card being used to pay the interest on all the credit cards they already have maxed out.
This in turn takes us into the world of politics and government policy. As was predicted by many, under the current political regime, not only has South Africa become unattractive as an investment destination, but the policymakers have created an economy bumping along recession with negligible growth. Tax revenues are falling with an estimated R50 billion imminent shortfall.
Where to from here? Max out more government credit cards from the international community, to keep the ship afloat.
Add in all the corruption, the gross mismanagement of state owned enterprises, the lies and non-accountability of numerous government ministries, spice it up with Gupta ‘State Capture’ and it is not a pretty picture.
The harsh reality is that South Africa and its state-owned companies are junk. Electricity price increases can only increase and the results will be painful for both business and consumer alike.
For us the consumer we do have choice as to whether we will use more expensive electricity or not.
With water heating being 35%-60% of a home’s monthly electricity bill, getting a solar water heater can remove most of this cost. Efficient systems can have a payback on investment as little as 2 years and provide electrical savings for 25 years or more.
Generating electricity at home using solar electric generation is an option.
In our opinion, it is not really economically viable yet, as the payback on investment in the home is around 9 years without storage, and up to 14 years with battery storage. For commercial users operating 7 days a week, it is viable today with a payback of around 6 years (with minimal battery storage).
But, as the price of electricity continues to go up and up, this will make all ‘behind the meter’ energy efficiency options more and more attractive. Saving electricity by using solar water heaters, LED lighting and cooking with gas, and generating one’s own electricity through solar PV, will further compound Eskom’s catch 22. They need to sell electricity and the public will be going in the opposite direction, saving it and generating their own.
Throughout history dictators have believed they will rule for thousands of years, irrespective of whether they are serving the interests of the people. Most recently Mugabe, a man obsessed with power, fell, and his clinically insane wife’s hopes of ruling were dashed.
Eskom’s future is yet to be determined. The reality is that it must not be allowed to fail, the consequences would be overwhelmingly negative, but as was proposed 20 years ago (at the same time as Zimbabweans looked for Mugabe to leave), it needs to rapidly restructure in order to survive or thrive.
So where to from here? With a surplus of power producing ability currently running at around 5,000MW (sufficient to power most of SADC in addition to South Africa) the opportunities for large scale renewables are on the back burner.
Any nuclear proposals are in reality a sign of madness, stupidity or complete lack of common sense in the current economic climate. All the independent surveys show that it is not needed before 2050, if ever.
For you the consumer, end user renewables starting with solar water heaters and LED lighting, will move from a ‘nice to have’ to being an essential necessity for every home and business.
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