Rising renewable energy expenditure weighs on Eskom

Financially-constrained Eskom has lamented that expenditure on renewable independent power producers (IPPs) increased to R22.2 billion for the year from R19 billion in March 2018.

This emerged when the power utility, which supplies about 90% of SA’s power needs, yesterday announced its annual results for the year ended 31 March.

Although Eskom says there is encouraging progress to instil governance and root out financial mismanagement, malfeasance and maladministration at the utility, one of the biggest highlights from the results was the company posting a record loss of R20.7 billion.

According to Eskom, the group recorded a net loss after tax of R20.7 billion for the year (March 2018: R2.3 billion), and earnings before interest, tax, depreciation and amortisation (EBITDA) of R31.5 billion (March 2018: R45.4 billion).

It notes the EBITDA margin declined to 17.5% (March 2018: 25.6%), mainly due to increased primary energy and employee benefit expenditure, combined with largely-stagnant revenue growth during the year.

The utility adds there was a substantial increase in depreciation and net finance cost, resulting in a growth in net loss.

Primary energy costs (including coal, liquid fuels and IPPs) increased to R99.5 billion (March 2018: R85.2 billion), it says.

Usage of open cycle gas turbines and IPPs increased substantially, driven by poor plant performance and supply constraints at a cost of R6.5 billion (March 2018: R0.3 billion), it notes, adding that expenditure on renewable IPPs increased to R22.2 billion for the year (March 2018: R19 billion) primarily due to the commissioning of new renewable IPPs during the year.

Meanwhile, Eskom says irregular expenditure for the current year totalled R6.6 billion, of which R1.5 billion relates to new transgressions.

The remaining R5.1 billion is attributable to issues which had been detected previously and are continuing until the related contract is condoned, or to prior year transgressions identified during the year as part of the clean-up process.

Although SA's energy sector is still largely coal-driven, government is making efforts to support renewable energy in the country’s energy mix.

In August, SA’s then energy minister Jeff Radebe released the long-awaited Integrated Resource Plan, a 20-year energy roadmap to meet the country’s future power needs.

In 2030, the government envisages SA's energy mix will consist of 34 000MW of coal, representing 46% of installed capacity; 11 930MW of gas, or 16% of installed capacity; 11 442MW of wind, or 15% of installed capacity; 7 958MW of photovoltaic (PV, or solar); and 4 696MW of hydropower, or 6% of installed capacity.

Last year, government signed a R58 billion contract, expected to add 2 300MW of electricity to the national grid over the next five years, with 27 independent renewable energy power producers.

The total of 27 new projects is the biggest IPP procurement by the Department of Energy, to date.

However, controversy has already shrouded these multibillion-rand IPP contracts, with reports saying public protector Busisiwe Mkwebane is looking to probe the agreements.

According to an IOL report, in a letter to Eskom board chairman and acting CEO Jabu Mabuza, Mkhwebane said a complaint laid by Phapano Phasha of the Anti-Poverty Forum alleges that the signing of the alleged contracts was improper and unlawful.

Eskom’s management has since committed to complying with the latest investigations by the office of the public protector.

The complaint alleges Eskom pays R93 million per day to IPPs and the power utility will lose up to R34 billion a year as a result of the agreement.

Responding to Eskom’s net loss, renewable energy industry body, the South African Wind Energy Association (SAWEA), reiterated the state utility’s losses are by no way due to IPPs or the Renewable Energy Power Producer Procurement Programme.

The renewable energy IPPs are, in fact, cost-neutral to Eskom, as their cost is passed directly on to the consumer, the organisation says.

“It’s important to understand that the tariffs are regulated to ensure that independent power purchase costs are a direct ‘pass-through’ to the consumer and thus don’t have any effect on the utility’s balance sheet,” says Mercia Grimbeek, chair of SAWEA.

The body says the Department of Energy (DOE) and energy regulator NERSA have consistently rejected Eskom’s claim that its losses are due to energy purchases from renewable energy producers.

It adds the DOE reaffirmed earlier this year: “The assertion therefore that Eskom incurs losses as a result of the independent power producer programme is without foundation, misleading and false.  Since 2013, Eskom has not incurred a cent in buying electricity from the independent power producers which they have not been able to recover through the tariff allowance.”

The energy minister at the time, Radebe, stated: “Eskom’s financial problems are mostly related to the cost increases, including the increased interest during construction, associated with the delay of the new-build projects, Medupi, Kusile and Ingula.

“Eskom is not borrowing money for buying the electricity generated by IPPs, or for funding the construction of the IPPs.”

 For Melita Steele, senior climate and energy campaign manager at Greenpeace Africa, Eskom’s current investments in renewable energy are negligible, and it is the utility's almost complete reliance on coal that has led SA to the situation where Eskom is literally facing a death spiral that could sink the country’s economy.

She argues that the construction of mega coal-fired power stations – Medupi and Kusile – was ill-advised at best, and suicidal at worst, since we are facing a climate emergency, and the coal power stations are massively over-budget, delayed and underperforming.

“Greenpeace believes that if Eskom had instead invested in renewable energy, we would be in a very different situation today, and we believe that the best way forward is for Eskom to get out of coal through a just transition process, and into the production of electricity from renewable energy as quickly as possible,” says Steele.

She adds that costs from the construction of Medupi and Kusile are escalating, while the costs of new renewable energy continue to reduce at a rapid rate.

“New renewable energy is the cheapest source of electricity in South Africa, and Greenpeace Africa believes that it is a no brainer for the country to remove the barriers to renewable energy in order to fully benefit from the fact that South Africa has some of the best renewable resources in the world.”

Steele notes that Eskom's coal-fired power stations are hugely polluting, badly maintained and very old.

“They [coal mines] are causing thousands of premature deaths, sucking up scarce water supplies, pushing up the price of electricity, driving climate change and severely damaging people’s health.

“This is nothing less than a recipe for disaster, particularly given that we are in the midst of a climate crisis. Eskom's debt crisis is killing our economy, but the utility is also literally killing people. Eskom cannot continue as it is, and expect that there will be any kind of improvement. There is a need for fundamental reform in the electricity sector, and at the heart of that, is the urgent Just Transition from coal to renewable energy,” she concludes.