On a dark and stormy morning in January Eskom made a decision that was to have a huge impact on the economy and on the political landscape. It declared an emergency, “force majeure: it told its largest customers that it could not guarantee them power.
It was a decision that resulted in a five-day shut down of South Africa mining industry, dented investor confidence and put question marks over South Africa economic growth prospects. Though the power crisis had been building for some time, and is indeed, still with us, that January day was the moment of crisis, the defining moment.
There is a standard explanation that is often heard from Eskom, and from government itself. That is that the government left it too late to give Eskom the go-ahead to start building the power stations South Africa needed, because of its failed venture into privatisation policy before 2004. That “mistake” led to a situation where the reserve margin – the gap between power supply and power demand – became so slim that it left the power system extremely vulnerable to anything going wrong.
This was certainly the context of the January crisis. But what I want to argue this evening is that what happened after 2004 is at least as important in explaining it as anything that happened before then.
In 2004, the government finally changed its mind about privatisation and told Eskom to go ahead and build. But it didn’t accompany that build decision with the changes to policy, regulatory or governance frameworks to support it and to ensure the system could be managed through some tough years. The forecasts said those tough years would come: yet there was no sense of crisis, nor the capacity and leadership within government to respond as the risks mounted.
So it took a crisis to provide the catalyst for action, to break the deadlocks. But crises can go either way: “There are possibly as many examples of crises leading to bad choices as there are cases of crises leading to good ones, the international Commission on Growth and Development wrote in its recent report on economic growth.
Is SA on course to make the right choices to avert future crises? Or will panic have prompted choices that could come back to haunt us? The emergency posed a series of questions about policy and power, in both the political and the energy sense. How they are addressed will shape how history will judge that moment in January.
Eskom had at that stage been load shedding intensively for two weeks, because its power stations could not supply enough power to meet demand. Maintenance was the one problem: the power stations were taking units down for maintenance but failing to get them up again in time. Coal was the other: the boilers were struggling to burn it efficiently because it was wet from weeks of rainy weather. The rain might not have been a problem had there been healthy stocks of quality coal. But quality was below par and coal stockpiles, inexplicably, had been allowed to run down since May and then sharply over the December holidays.
Then, very early on that Thursday morning of January 24th, what should have been a minor incident a single generating unit going down at the Kriel power station had a shockingly large impact on the stability of the system.
“We were running flat out at 5 in the morning and there was nothing, nothing says Erica Johnson, the engineer who is now one of Eskom two chief officers (but at that time was head of system). “There was no form of reserve left. If anything had happened in that time there is a very strong chance that our system protection would not have held.
Eskom CE Jacob Maroga then took the decision to declare a contractual emergency. That afternoon he wrote to all of Eskom’s 138 key industrial customers asking them to reduce power usage to the minimum. He told them that Eskom could not guarantee their power supply and, crucially, that they must make their processes safe.
For some customers, making safe was something they could do without reducing their output too much. Not so for South Africa’s deep level gold and platinum mines. They could not risk endangering the lives of workers underground. They rightly took the make safe instruction to mean they must get their workers out immediately. By that evening , the mining industry, which uses about 15% of the power Eskom generates, had closed down.
It looked from the outside as if the shutdown was a carefully devised move by Eskom to get the extra few thousand megawatts it needed to save the system. But it was not nearly that deliberate: Eskom in effect took a huge macro-economic step without really knowing the impact.
We now know that mining production fell by more than a fifth in the first quarter of this year. The economic growth rate for the quarter slowed to little more than 2%, from 5%. The emergency put new investment projects at risk and raised threats of job losses.
But the morning after, at a press conference at the Union Buildings, when a journalist asked about the mining shutdown, Eskom chief executive Jacob Maroga, public enterprises minister Alec Erwin and minerals and energy minister Buyelwa Sonjica didn’t seem to know anything about it.
It took until 5 o clock that Saturday afternoon, some 24 hours into the shutdown, for Erwin and Sonjica to sit down to a meeting with mining industry executives and trade unionists. A task team was set up that met on the Sunday. Eskom agreed to restore enough power to allow some miners to go down and shore up shafts so they could be safely opened up later. Later in the week Eskom guaranteed the mines 90% power, so they could start up again. (They are now at 95%).
There had been a perception, I think, that if anyone had to bear the burden of load shedding, it should be Eskom’s big customers, not ordinary working people who had to suffer darkness and traffic jams. It took a shutdown of the mines to quash that notion. As the presidency’s Neva Makgetla has succinctly put it: “If you ask workers, do they want lights or do they want a job, what will they choose?
But with jobs and growth now clearly at stake, politicians and trade unionists suddenly took note that January weekend. And an initially reluctant Eskom was pulled into a process in which its operations and decisions were subject to scrutiny and debate.
A coal forum was formed to sort out the power stations coal problem, along with forums for mining and industrial users. There emerged a series of committees, in the Nert (the National Electricity Response Team) that brought together; business, labour, government, Eskom and the municipalities. An inter-ministerial committee was formed, and a presidential joint working group.
Fast forward almost exactly five months, to a little known incident in June when Eskom lost an entire power station (but found it again by supper time). One unit of Lethabo power station was down for planned maintenance; the other five units suddenly tripped. At Eskom they debated whether to go public. But the power station was largely up again by the evening peak hour. A month later, further flutters. A unit went down at Koeberg.There were technical failures at Majuba and Duvha power stations. This time Eskom did go public, warning that the risk of load shedding had increased and asking consumers to save electricity. In the event, no load shedding. There has now been none since 1 May.
What has changed?
It has been a mild winter, and winter is usually easier because Eskom only does planned maintenance in summer. Also those months of load shedding helped to provide Eskom with some breathing space to catch up on maintenance and build up coal stocks. And the mines are still not back to full power.
But there have been substantial changes. Eskom’s management team was quietly restructured soon after the January crisis. The head of power generation was replaced (and the man in charge of coal procurement was fired). The new chief officer for generation (and new build) Brian Dames, acted fast to implement the recovery plan, visiting all the power stations, asking managers what they needed to keep the lights on, and rewriting their performance contracts to ensure this was their priority. A mining industry executive, Ras Myburgh, has been seconded to Eskom to tackle the coal deficit. International consultants have been brought in.
Eskom’s management clearly had dropped the ball. No-one, it seemed, had really understood the implications of not having sufficient reserves. The shortage of power meant Eskom had to run its power stations much harder than it ever had before. It simply did not anticipate the toll that that would take on plant performance, on coal usage, and indeed on people. An organisation that had been used to the fat years, when it had a surplus of power, hadn’t really adapted to the lean years. It became like a lottery, says one executive: you just didn’t know whether plant would be available on any given day or not.
Nor did the people at the top of Eskom shout loudly to alert the board or the cabinet that it had a real problem. There seems to have been a feeling, almost right up to the moment of emergency, that they could get through it somehow.
But if they had shouted would they have been listened to? Eskom’s big users monitor the quality of their power supply carefully, and they could see that things were getting worse throughout last year. But when the big business group tried to sound the alarm at its meetings with president even late last year, they were not taken especially seriously.
It took January to force the government to take electricity seriously. ((The crisis redefined the power shortage as an issue of national importance not just an Eskom problem. It forced Eskom and the government to start to work directly with business, labour and municipalities to try to solve the short term problems of stabilising the system, but also to tackle the longer term issues of how to curb demand and boost supply.
In theory, the second Mbeki administration should have taken these seriously from the time it was elected in 2004. It had moved away from privatisation to a notion of the developmental state in which public enterprises such as Eskom and Transnet were “in the vanguard, to use Erwin’s words, “the agents of the developmental state.
It had long been known that the surplus of power that had prevailed since Eskom over-invested in power stations in the 1980s was going to end and that SA would run short of power some time between 2007 and 2010. It takes at least four years to build large power stations and so when Eskom was finally given the go-ahead to build several new power stations in October 2004, it was well known that this was cutting it fine. Even by then, the reserve margin had already fallen far too low for comfort (it was 10% in 2004, it is about 5% now, Eskom’s aspiration is 15%). That was why the government approved the building of two smaller diesel fired stations, and the re-commissioning of old power stations, alongside the large new coal fired stations, to plug the shortfall.
But that was about it. The build decision did not go with other policy changes to support Eskom’s renewed role at the centre of supplying power to the nation. No particular priority was given to measures that might have mitigated a crisis. (It was to an extent because of the way Eskom was regarded. It looked financially healthy, and except for a long-forgotten rough patch in the 1970s when power last ran short, Eskom had never failed to keep the lights on. “There was a halo around Megawatt Park says former chairman Valli Moosa of the period in which he took office three years ago).
Even on its own terms, the developmental state failed in at least four areas:
PRICE was one.
Policy failed before 2004 to bring private sector players into the power sector because the electricity price was, even then, too low to make building new power stations viable. Then policymakers went and made exactly the same mistake after 2004.
Eskom was told to build new power stations: but the government didn’t follow that through with a new approach to pricing policy that would make it viable for Eskom to spend the hundreds of billions required and still meet the financial targets set for it by the state. (Electricity was our inflation buster: no-one wanted to take the political consequences of starting to put up prices. And Eskom was making money: no-one wanted it to make even more.)
That the price stayed so low gave all the wrong signals to the market. There was little incentive for customers to use energy more efficiently and reduce demand; nor was there much incentive for potential private sector investors to invest in power generation projects that could have augmented supply. SA had, and still has, the cheapest power in the world even though we don’t have any power to spare.
The National Energy Regulator (Nersa), which decides electricity tariffs, must bear some of the blame. But the department of mineral and energy affairs sets the framework for Nersa. It didn’t review the rules. Nor did Eskom’s shareholder, the department of public enterprises, show any great appetite for sizeable increases in electricity tariffs until all of a sudden it backed a 60% tariff increase in the wake of the January crisis.
The political outcry that followed the 60% application was arguably the best thing that could have happened for Eskom and for the regulator. Without the crisis, the deadlock over pricing might never have been broken.
It certainly wouldn‘t have been broken with as much national debate and public consultation as it was. The ANC called the electricity summit that in May brought together business, labour, government, community and Eskom to talk tariffs. Nersa’s public hearings turned into a forum in which not only price, but other energy policy issues could be aired. Whether the 20% plus increases it now envisages for the next few years will prove to be enough, we still don‘t know.
PARTNERSHIP with the private sector was another area in which the power crisis served to break deadlocks. The developmental state was supposed to involve partnerships. But it didn’t do; that effectively on either the supply or the demand side of the power equation. Eskom was never expected to build more than 70% of the power SA needed: private producers were meant to do the rest. But an ambivalent attitude to the private sector, a lack of skill in contracting and the big issue of electricity prices combined to prevent this.
Not only did government and Eskom fail to sign up larger power deals with independent producers. They also kept out another source of private power co-generation that would have been easier and quicker, not to mention environmentally more friendly to tap into. But though companies such as Sasol, Arcelor Mittal and Tongaat were keen to invest in producing power from their waste products that could have fed into the national grid, prior to the crisis it simply didn’t happen. It is now.
Third, there is the matter of what it was we told Eskom and its executives to do. Eskom’s shareholder, the state, sets the targets the key performance indicators it wants it to meet, in an annual shareholder compact. And its board, in turn, sets performance targets for the company’s executives, and awards them bonuses if they meet those.
If Eskom’s management failed to keep the lights on, that was ultimately because its shareholder and its board didn’t ensure it was incentivised to do so nor monitor that it could. The government, in effect, put Eskom back in charge of security of supply in 2004. But it didn’t make keeping the lights on a priority for Eskom’s board, which in turn didn’t do so for its executives.
The shareholder compacts the DPE signed with Eskom have tended to contain a laundry list of performance indicators that range from profitability to black empowerment to operational efficiency. They set the kind of financial targets a private company would be expected to meet without really trying to find a balance with more urgent strategic imperatives.
So saving on coal costs, for example, may not have been as irrational as it now seems, given that the regulator wouldn’t allow the extra funds but the shareholder still wanted Eskom to meet demanding profit targets.
Multiple, and often competing objectives, have a lot to do with the failure in the past three to four years to focus on averting a crisis. Eskom has “many masters, in the words of one of its executives, with responsibility for power fragmented between different government departments and the regulator. Prior to the crisis no particular attempt had been made to overcome that fragmentation or bring coherence even within departments themselves. Was the DME, for example, much more focused on and concerned about black empowerment in the coal industry than it was about security of power supply?
But it hasn’t been just a matter of policy lacking coherence. The dearth of expertise and experience within the state is one of the factors the Mbeki administration has long identified as a constraint to growth. The key departments responsible for Eskom probably didn’t have enough of the capacity to craft the policies and form the partnerships to steer the power sector through a vulnerable few years. That they didn’t work together didn’t help either. Leadership was needed but in the run up to the crisis, with Polokwane looming, it was in particularly short supply.
So was it a good crisis? There can be no doubt that the events of that January day focused national attention on power. That in itself served to remove some of the political and policy obstacles that had stood in the way of finding solutions – not to mention putting a rocket under Eskom’s management and its board.
Partnerships have been formed to try to boost supply, by sorting out Eskom’s coal problem and by measures such as co-generation. Energy efficiency is now high on the national agenda and households and busiensses have responded to some extent to calls to save at latest count, residential customers are saving about 4% while industrial and mining customers are saving about 6%. The issue of electricity pricing is up for debate and there is a fairly broad consensus that cheap electricity is no longer an option. The issue of what it is that Eskom should be expected to do is under scrutiny.
But it is early days. These initiatives are in their infancy.
It’s not clear that any of this is enough to prevent renewed load-shedding this coming summer, never mind in the next few years. Holding on to that sense of crisis, of urgency, is crucial but it’s not clear that it can be maintained and without it solutions will be that much harder to devise. As we go into next year elections, coherent leadership is likely to be even more elusive and consensus less likely.
And the crisis could yet prompt some bad choices. That’s especially so because we still haven’t faced up to some of its implications.
SA is one of the world’s most energy intensive economies, and even if we’d had so much power that we didn’t need to bother about conserving it, concerns about climate change should have prompted some thinking about what kind of economic growth we could afford. The crisis has raised the question, of whether we want aluminium smelters that use much energy and employ little labour, for example. But its not clear economic policymakers have taken them on board.
They also don’t seem to have taken another look at the projections of electricity demand on which the build programme is based. The build programme aims to double Eskom’s size in th next 20 years, adding two new coal fired stations, a couple of hydro stations and the nuclear equivalent of about ten Koebergs, at a cost of at least R1,3 trillion.
The projections on which the build programme is based assume the economy will grow by 6% a year a scenario that is no longer looks within reach any time soon, partly because we don’t have enough power. But even if the economy did speed up again, the point surely is to move towards a more energy efficient economy which will be able to grow faster but use less power.
In the next several years the priority will be to build new power stations that can get the reserve margin back up to comfortable levels. But what happens beyond that? The danger is that SA could over-invest in power again just as it did the last time. It could find itself committing to long term investments it may not be able to afford, and may not ultimately need.
And that not the only problem. It is also that the potential for high level corruption when contracts are being signed at this level is enormous. Tenders for the first new nuclear power station, by France’s state-owned Areva and the US Westinghouse, are said to have come in at upwards of R180bn. This would be by far the largest contract the SA government has ever signed certainly much larger than the arms deal. The danger is that the nuclear programme could become SA’s next arms deal.
To conclude: South Africa is not alone in all this. We are not the only country to have run short of power, nor even the only one to experience power outages. Managing and regulating power utilities, public or private, is no easy matter. Many countries are grappling with how to price power and how best to ration it when it runs short, of how much infrastructure to build and how to fund it, of how to balance the tradeoffs between energy efficiency and growth, between having cleaner energy and having more of it. These are not easy questions, and there are no easy answers.
The trick is to keep them at the centre of national debate even when the lights are on.
Hilary Joffe is senior associate editor of Business Day. This lecture was the seventh annual Ruth First Memorial Lecture, delivered on 18 August 2008.