De Ruyter affidavit points the load shedding finger at government, Nersa

An affidavit by Eskom’s recently-removed CEO Andre de Ruyter provides a fascinating look into the reasons leading up to the load shedding crisis that has crippled the country.

It points the finger of blame squarely at government and the National Energy Regulator of SA (Nersa). Government, because it ignored repeated calls to invest in new generating capacity from 1998 onwards, and Nersa because for 15 years it refused Eskom’s request for “cost-reflective tariffs”, leading to a revenue shortfall of between R40 billion to R60 billion.

De Ruyter’s affidavit is in reply to an application before the Pretoria High Court, brought by the United Democratic Movement (UDM) and 18 others seeking to compel Eskom to provide sustained, reliable electricity to all South Africans in line with their rights and basic service delivery needs.

A full bench of the Pretoria High Court will hear the case on 20 March.

“These two factors have had a mutually reinforcing adverse effect. Insufficient generation capacity has meant that Eskom has had to run its power stations at a higher-than-benchmarked EUF (energy utilisation factor – simply put, it has had to run its stations too hard. It has also had to defer the maintenance of its power stations which require it to take them off-line,” says De Ruyter.

This does not count the impact of fraud, reckoned by the Judicial Commission of Inquiry into Allegations of State Capture (Zondo Commission) to have cost the utility R14.7 billion, though De Ruyter says it is likely significantly higher than this.

One of the more egregious examples of Eskom corruption highlighted by De Ruyter was the 2015 contract to supply coal to Eskom’s Majuba power station, awarded to Tegeta Exploration and Resources, owned by the Guptas. Tegeta’s coal failed numerous quality control tests before Former Eskom CEO Matshela Koko intervened to ensure Tegeta’s coal was given the approval required.

Between 2015 and 2017, former Eskom CEOs Brian Molefe and Koko refused to conclude agreements with renewable energy independent power producers – inhibiting the growth of SA’s generating capacity.

Eskom estimates that 96% of load shedding today would have been avoided had the Renewable Independent Power Producer Programme (or Reippp) not been halted.

Eskom’s ability to maintain its power stations and introduce new generation capacity has been hampered by a host of regulatory obstacles, as well as outstanding debt from municipalities totalling about R57 billion.

“State capture, and corruption more generally, have hollowed out Eskom’s financial resources and its experienced and skilled personnel,” says De Ruyter. “Eskom’s various power stations have experienced widespread sabotage, criminality and destructive and unlawful industrial action.”

In 2021 and 2022, units at Medupi and Kusile power stations suffered catastrophic failures, requiring sustained outages, for reasons that remain under investigation.

The utility is spending R3.2 billion a year on private security “due to the sustained sabotage and criminality it and its personnel have experienced,” says De Ruyter.

A long and shameful story

How one of the world’s best run power utilities in the 1980s and 1990s ended up among the worst in 2023 is a long and shameful story of government neglect, ineptitude and corruption.

In the early 1990s, Eskom had surplus power which was put to use connecting hundreds of thousands of homes to the grid. Demand for electricity was further increased by strong economic growth in the mid-1990s.

By 1998 it became apparent that extra generation capacity would be needed by 2007, based on Eskom’s forecasts of 4.2% annual growth in demand.

This was detailed in an energy white paper produced by government, which envisaged the unbundling of Eskom’s generation, transmission and distribution divisions. It was hoped that this unbundling would contribute about 30% of the country’s generation needs and delay the need for building more Eskom power stations.

Eskom’s dwindling reserve margin

Government’s refusal to procure additional generation capacity in the face of rising demand for power started to eat into Eskom’s reserve margin, or surplus generating capacity, which should be run at about 15% in a well-run power utility. In 1992, Eskom had a reserve margin of 40%. This fell to 30% by 1998 and 5% by 2008. It was only in 2004, when the reserve margin was at 8.2%, that government green-lighted construction of the Kusile and Medupi power stations, each capable of generating about 4 800 megawatts.

But by this time, Eskom faced two problems. First, given its dangerously low generation capacity, the tender process and construction of Medupi and Kusile would have to follow impossibly short timeframes, says De Ruyter. That decision should have been made in 1999 at the latest.

Second, because Eskom by 2005 had not built a new power station in 16 years, it had lost the skills and capacity to execute mega-projects.

The first units of Medupi were commissioned in August 2015 and its last units in August 2022. The first units of Kusile were only commissioned in August 2017 and the last of its units have still not been commissioned. “Regrettably, these delays appear to have been caused in part by a series of corrupt tender awards,” adds De Ruyter.

Given the urgency of adding new generation capacity to the grid, normal tendering processes were by-passed and in October 2007, Japanese company Hitachi – with no experience working with SA coal – was awarded the construction contract. Medupi and Kusile have been plagued with performance problems, much of them stemming from design and construction failures.

Kusile and Medupi had nominal capacities of only 2 880 MW and 3 600 MW, respectively, below the 3 720 MW that each station was intended to produce.

The ANC connection

In September 2015, the US Securities and Exchange Commission (SEC) charged Hitachi with various violations of the Securities Exchange Act in relation to its award of the Medupi and Kusile contracts, after it emerged that Hitachi had sold 25% of one of its subsidiaries to Chancellor House Holdings, a known funding vehicle for the ANC.

This arrangement would allow the ANC to share in any profits from power station contracts won by Hitachi. In September 2015, Hitachi agreed to pay the SEC $19 million, without admitting liability.

It’s load shedding or blackout

Load shedding is critical to avoid total blackout, says De Ruyter.

From 2008 onwards, Eskom deferred critical maintenance and ran its units at higher than benchmarked energy utilisation factors because of a government mandate to “keep the lights on”. The graph below shows Eskom’s planned capability loss factor (PCLF) falling consistently below the globally-benchmarked VGB amount since 2008. VGB is a European-based technical association for electricity and heat generation industries.

Regulatory obstacles

Eskom also ran into regulatory obstacles in trying to maintain its fleet, such as the refused request to National Treasury to allow WBHO Construction to complete work urgently required at Camden power station, at a cost of R212 million.

Treasury refused this request, despite the fact that WBHO was already on site and that unless the work was completed timeously, it would cost Eskom R1.2 billion to make up the generation shortfall elsewhere.

As a result, Camden remained offline for four months, depriving the grid of 1 600 MW.

In another case, Eskom asked Treasury in June 2020 for approval to appoint Tenova Mining and Minerals to complete work upgrading the coal-offloading facilities at Majuba, at a rough cost of R108 million. Majuba’s conveyor belt had caught fire as a probable result of sabotage. Delays in fixing the belt would incur costs, including contractual penalties, of about R6.5 billion. After 110 days, Treasury’s acting chief procurement officer Estelle Stefan refused the request.

After appealing to Treasury and the government, Treasury reversed its decision in November 2020.

It cost Eskom R276 000 a day to transport coal by truck instead of via conveyor belt.

Despite the above setbacks, Eskom had a plan to end load shedding, including recovering the performance and supply capacity at its power stations, adding additional generation capacity to the grid, and restructuring the utility, which includes opening access to the grid.