Thursday 18 June 2015

 Introduction:

The National Union of Metalworkers of South Africa (Numsa) vehemently rejects Eskom’s selective re-opener of the third Multi-Year Price Determination (MYPD3) for 2015/16 and 2017/18. More objectionable is the requirement of the cost recovery of the R32,9-billion for operation of open cycle gas turbines (OCGTS).

It is Numsa’s view that the re-opener is nothing else but mere tinkering when what is required is a fundamental restructuring of how Eskom is managed, how the utility operates and how it is restructured.
Eskom’s application is honest enough to admit that what faces the utility are assumptions within Eskom, the National Energy Regulator of South Africa (Nersa) and government that have proven to be way off the mark. The application lists the following as assumptions that have not been borne by reality: demand forecasts; commissioning dates of Medupi, Kusile and Ingqula; the expected of performance of the current Eskom generation fleet; and challenges in coal supplies.
The reality since November 2014 has been rotational loadshedding; unplanned outages of the of the generation fleet;  the drop in the availability of Eskom power plants to 74%; and operational challenges such as what happened with the Duvha Unit 3 and Majuba silo incident. But more serious has been the inefficient use of diesel to keep the lights burning at all costs.
How does one explain that Nersa granted Eskom R2.54-billion for OCGT generation costs for 2013/14 but the utility spent R10.6-billion for the same period?
For us as Numsa this is nothing else but an abuse by Eskom of its license conditions. The Electricity Regulation Act requires that every licensee must operate its business efficiently. We don’t think that Eskom has done this which is why as Numsa we are opposed to the tinkering that is proposed in the selective re-opener application.
Our demand as Numsa is for a judicial commission of enquiry that will investigate delays and cost overruns. The commission must also investigate contracts and tenders that Eskom management has entered into with contractors; senior management packages and remuneration; the voluntary retirement packages; and the relationship between consultants and Eskom employees. Forming part of the terms of reference of the judicial commission enquiry must be the conditions and impact of loans that Eskom receives from capital markets.
Our industry and members are hit the hardest by increasing electricity prices:
Numsa is the biggest union in South Africa with a membership of 364 499 members. These members are mainly found in the following industries – metals & engineering industries; smelters, auto assembly; tyre & rubber manufacturing, motor component manufacturing; motor retail and repair sector and within Eskom. The sectors that we organise in are at varying degrees, highly energy intensive sectors. The most energy intensive sectors in South Africa are the non-ferrous metal and iron & steel industries.
The electricity share of input costs in our industries is huge. An electricity cost survey that we conducted on the eve of the introduction of MYPD3, the manufacturing, mining and smelter companies reported that electricity costs comprised 10.33%, 5.37% and 37.5% of the their total business respectively. Even more distressing is the fact that all but one company that we surveyed stated that they would have to retrench workers as a result of increasing electricity tariffs. The companies stated that the job losses would range between 300 and 600 jobs in the five year period per company.
As we know and is shown by the graph below, in the last ten years electricity prices have averagely increased by 327% from R17.91 in 2006 to R76.41 in 2015. If the changes that Eskom is asking for will come into effect, then by 2018 the price of electricity would become R89.13; that is a 398% increase compared to 2006 numbers. This will definitely decimate jobs in the sectors that we organise in and lead to increase unemployment in South Africa.
Graph 1:
Electricity price increases: 2006 -2018

Numsa members are not affected by electricity increases at work only. A Numsa members’ survey conducted by University of the Witwatersrand’s Society, Work and Development Institute (SWOP) in March 2012, shows that four-fifths (80%) of Numsa members have access to prepaid electricity where they live, with 15% having a main supply and 3.7% with no access to electricity at all. Almost a third (31%) report that they pay their electricity bill. 10.8% of Numsa members reported that they have had their electricity disconnected in the three months before they were interviewed .

 Table 1
Access to electricity where you live

Nersa must not allow Eskom to use expensive Open Cycle Gas Turbines and insist on a comprehensive maintenance plan by the utility:
Eskom is requesting R32.9-billion for OCGT (Open Cycle Gas Turbines) and R19.9-billion for STPPP (Short Term Power Purchase Programme) for the period of 2015-2018 citing further deterioration of generation plants performance, unexpected collapses of different units and power stations, and challenges in terms of coal supply as the reasons for the re-opener for selected items.
Eskom paper states that it needs on average additional 5 401 Gigawatt Hour (GWh) from OCGT, and 1 651 Gigawatt Hour (GWh) from the Short Term Power Purchase Programme (STPPP). There are a number of issues with such a request and application.
Firstly, Eskom has failed to provide the reasoning behind such an extensive use of OCGT. The submission does not specify the average shortfall between demand and supply of electricity on a daily/weekly/monthly or even annual basis. Without information on Eskom’s potential output of electricity and the economy’s demand of it, it is virtually impossible to see the need for the OCGT requests.
Secondly, with respect to the OCGT, Eskom has surpassed what it was allocated in 2013/14 only. In total, Eskom had spent R10.561bn on OCGT, which amounted to
3 621 Gigawatt Hour (GWh) worth of electricity. For the years to come, however, Eskom is estimating its OCGT needs at 5 401 Gigawatt Hour (GWh) per annum. There is a difference of 1 780 Gigawatt Hour (GWh) between the forecast for the coming years and the previously needed additional electricity. This difference was left unaddressed and unexplained throughout the submission. The 1780GWh difference per year according to Eskom estimates will cost close to R4.1bn per annum, which would lead to the OCGT cost being R12.3bn less than demanded.
Thirdly, Eskom fails to explain the price of diesel mentioned in the submission. Eskom bases its estimates at the diesel price of R10.61, amounting to R7.21 after rebates and wholesale discounts. The average price of wholesale diesel according to the Department of Energy does not go below R11.31.
Conclusion:
Numsa’s view is that Nersa must not grant the re-opener that Eskom is applying for as the utility has shown to be running the utility on inefficient grounds. We also don’t think that the reopener solves the serious challenges that face Eskom. Numsa believes that the electricity supply industry is very a sick sector.
Financially, between now and 2018, Eskom has a R200bn budget shortfall. The country’s distribution grid infrastructure has maintenance and refurbishment backlog of between R35 and R50-bilion.
Eskom’s energy availability factor has dropped from 82 % to about 74 %. Lack of proper maintenance and the age of existing fleet, has led to an increase in unplanned breakdowns of Eskom power stations. But more serious is the coal shortfall. A recently released Eskom Corporate Plan for 2015/16 to 2019/20 acknowledges that the current mining of coal will not meet the growing demand.
Although in 2009 there was talk of opening up to 40 new collieries to supply Eskom, the electricity utility will face a 17-million tonne coal shortfall by 2017 at its coal-fired power plants. The shortfall is anticipated in 2015 at the Matla, Tutuka and Hendrina power stations and in 2016 at the Kriel and Arnot Power Stations. The price of coal is a very large input cost in electricity generation, costing around R50-billion a year.
The delays in delivering on the new build programme such as Medupi and Kusile is a further sign of how sick South Africa’s electricity supply industry is. The whole new build programme has been characterised by cost and time overruns. While the Medupi tender came in, it was R32-billion. It was ratified by the Eskom Board at R91-billion. Presently cost escalations are reported to be about R300-billion and the power station that was meant to come on stream in 2011 is four years late. Kusile is expected to balloon from R81 billion up to R172-billion.
For Numsa, the solution is a judicial commission of enquiry that will investigate how Eskom is run.
Contact:
Castro Ngobese
National Spokesperson
Mobile: +2783 627 5197
Tel (dir): +2711 689 1702
Email: castron@numsa.org.za
Twitter: @castrongobese