Western funds for South African power decarbonization only a down payment: Eskom CEO

Funding from Western nations for decarbonization of South Africa's power sector announced at COP26 last November is merely a small down payment on the level of backing that will be needed, according to Andre de Ruyter, CEO of the country's state-owned monopoly Eskom.

Eskom, Africa's largest power utility, is responsible for 25% of the continent's GHG emissions and as its top executive, de Ruyter will be responsible for directing where much of the $8.5 billion promised in November will be spent. South Africa is the globe's 12th largest GHG emitter. South Africa's emissions increased by 10.4% between 2000 and 2017 to 531.33 million mt, according to the latest government data, released in August 2021.

Speaking at the Edison Electric Institute (EEI) Global Electrification Forum 27 April, de Ruyter said the company had yet to receive any of the funds promised, which are supposed to come in the form of grants, concessional loans and investments, and risk-sharing instruments. The $8.5 billion will be just the first part of the necessary funds, said the executive.

Five G20 members—France, Germany, the UK, the US, and the EU—are providing the funding through the "Just Energy Transition Partnership." The premise of the partnership is to prevent up to 1.5 billion mt of emissions over the next 20 years, and accelerate South Africa's transition to a low-emissions, climate-resilient economy, they said.

Plans for spending the financial aid for South Africa and Eskom need to be put in place carefully, de Ruyter said. He said the donors shouldn't rush things, given Eskom and South Africa's history of corruption.

"It takes time to identify projects, and time to set up the checks and balances; you don't rush with our history of corruption, you don't want to hose money into a system that lacks a bit of creditability," he said. "We are at pains to emphasize to the [Western political and financial leaders] that we want to ensure good governance and make sure the money is well spent," he added.

Emerging from turmoil

Making sure the money is well spent is doubly important, given how much work is needed. Eskom operates 96% of South Africa's power generation, as well as the country's transmission and distribution grids, but since 2007 the company has been forced to impose rolling blackouts on a regular basis due to the decrepit state of its largely coal-fired fleet.

De Ruyter is now the longest serving Eskom CEO of the past 15 years, which, he told conference attendees, was a "fairly dubious distinction." Power is such a sensitive topic in South Africa de Ruyter said he holds daily briefings on the blackouts, or load shedding as it is known locally, on national television. In such a position, de Ruyter said the basic departure point is to be brutally honest about why yet more load shedding is required.

That level of honesty from de Ruyter extends to other parts of Eskom's past. The company is "slowly emerging from a period of immense turmoil," he said, that had been "characterized by grand-scale corruption," or what has been termed "state capture."

The history of the plundering was laid out in minute detail on 29 April when the Commission of Inquiry into State Capture issued one of its latest reports focusing on the actions of an Indian-born family, the Guptas, their businesses, and influence on South African government decisions due to links with then President Jacob Zuma. The report was titled "The Capture of Eskom."

Eskom said in response to the report 29 April it was working with special investigators to recover funds lost as a result of the actions of Gupta businesses, then company executives, and politicians. The company has already recovered funds from global consultancy McKinsey and engineering firm ABB.

Cost of retrofitting coal fleet too high

While fixing the culture at the company, de Ruyter has also had to start shifting the company's generation fleet from old coal units to cleaner sources of power. Eskom has 46 GW of capacity that has an average age of 41 years old. To make the fleet environmentally compliant would require $20 billion, which is "something we cannot afford," said de Ruyter.

It has now decided to accelerate the retirement of its coal-fired units and by 2035 some 22 GW of capacity will have been put out to pasture, which is 47% of the company's nameplate capacity, its top executive said.

The government was warned as early as 1998 that Eskom needed more generation capacity. The government disagreed. When the capacity crunch came, the government gave a buildout the green light, but it was done in great haste, de Ruyter said. Like any project carried out in great haste, he said, there were overruns, it was over budget, and didn't work very well.

The coal-fired capacity will largely be replaced by wind and solar. De Ruyter expects about 9 GW of coal-fired capacity to remain online in 2050 as well as 6-7 GW of gas-fired units.

Eskom carried out extensive system modeling, and the optimal portfolio mix is likely to involve 82% or 83% renewable generation by 2050, he said. The company, he added, ran "more than 100 different scenarios."

"Possibly" there will be some gas-fired capacity, he said, or "even nuclear," although that option is controversial from a number of perspectives, even without addressing the cost factor.

South Africa currently has one nuclear plant with two reactors that were connected to the grid in the mid-1980s, but under Zuma, it inked a deal with Russia's Rosatom to build a 9.6-GW fleet at an astronomical cost of $76 billion—or nearly 23% of the entire country's 2020 GDP, based on World Bank figures. The deal fell apart in 2018, the same year Zuma was forced out amid graft scandals after nine years leading South Africa.

Transforming the company's generation fleet was "one of the great strategic conundrums when I joined Eskom," de Ruyter told the EEI event. His challenge was to improve energy security while migrating to a lower carbon footprint, and at the same time avoiding causing "more economic hardship and misery," he said.

Putting the transformation into action, Eskom on 12 April sought to attract developers interested in leasing land across some of its many sites for constructing renewable power generation. Eskom is offering access to existing generation sites in Mpumalanga province—east of the country's administrative capital of Pretoria and bordering Mozambique—that already have transmission connections. It hopes as much as 4 GW of capacity can be added over time. Each facility where land will be leased will be limited to 100 MW of capacity.

The company said it hoped the leases could "give impetus to collaborative efforts to resolve South Africa's electricity crisis," although bidders had until just 29 April to submit their proposals. The turnaround did indeed prove to be too quick. Eskom representatives said on 5 May that the RFP deadline had been extended to 17 May at the request of bidders.

Load shedding continues

On 3 May, in the company's latest warning of imminent load shedding, Eskom said it had 3.875 GW of capacity on planned maintenance, while an additional 15 GW or more was unavailable due to breakdowns.

In April, Eskom issued nine warnings to the public about load shedding. The most serious in April reached stage four load shedding. The outages start at stage one and the most serious is stage eight.

The latest load shedding, it said was caused by a shortage of generation capacity owing to delays in returning generators to service, as well as breakdowns of nine generators.

The company's aging coal-fired power plant fleet has been "quite poorly maintained," de Ruyter told the EEI event. Eskom, prior to de Ruyter's tenure, ran the fleet much harder than international norms, he said, and as a result has "less and less headroom for maintenance."

Eskom's load shedding and its impact on the country's quality of life and economy cannot be underestimated. The International Monetary Fund (IMF) said in a February report that Eskom's operational and debt problems raise macro-critical challenges. Eskom should abandon its outdated business model, reduce its footprint in the electricity sector, and compete on a level playing field with private participants, including the producers of renewable energy, the IMF added.

Analysis by S&P Global's country risk team added that South Africa's potential growth rate has been slowing consistently in recent years and is expected to drop to a meager 0.9% in 2022-23, noting that the load shedding had placed a significant damper on the country's growth potential since 2015.

Posted 05 May 2022 by Keiron Greenhalgh, Senior Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.