Eskom peers into an abyss. The second batch of diesel is expected to run out by the end of January 2023, write Mariam Isa and Chris Yelland from EE Business Intelligence.
Eskom lives hand-to-mouth in its efforts to obtain the diesel fuel needed to run its open-cycle gas turbines (OCGTs), which, despite extended blackouts, is the only way the utility is facing severe and ongoing curtailment of electricity supply. of South Africa.
Over the past two years, Eskom has been forced to rely increasingly on its OCGTs – which were intended for emergency or peak use only – due to a steadily increasing number of outages within its aging coal-fired power fleet. Over the past few months, the OCGTs have become essential in light of the loss of 4,500 MW of generating capacity due to problems at Medupi and Kusile, Eskom’s two newest coal plants, and a life-extending refurbishment at Koeberg, its nuclear reactor.
Jan Oberholzer, Eskom’s chief operating officer, says this combined outage equates to about five stages of shedding. Kusile Units 1, 2, 3 and 5 — which account for nearly 3,000 MW of the amount — will not be available until the end of this year, he told EE Business Intelligence. The complex life extension of Units 1 and 2 in Koeberg will not be completed until March 2024, if all goes well. Medupi Unit 4 will not be operational again until September 2024 following a hydrogen explosion in August 2021.
When you add this large, combined outage to the country’s existing power generation gap of 4,000 MW to 6,000 MW that Eskom pointed out more than three years ago – and which has still not been remedied – it is clear that South Africa is on the brink of an electricity emergency.
The diesel emergency
Eskom’s management team angered the government in November 2022 when it stated that the utility had run out of diesel and could not afford to buy more, having spent roughly double the R6 billion diesel budget on the financial year ended March 31, 2023.
When money ran out from the treasury, Calib Cassim, Eskom’s chief financial officer, managed to scrape together R1.5 billion from his budget for the rest of the year, earmarked for other purposes, to immediately buy 50 million liters buy diesel from PetroSA. That provided enough diesel to keep the OCGTs running as needed through December 2022. When the fuel ran out, Cassim came up with another R1.5 billion from Eskom’s treasury for another 50.4 million liters of diesel. According to Oberholzer, this should last until the end of January 2023.
“From an operational point of view, I can tell you that we need diesel,” he told EE Business Intelligence. “We need at least – and this is based on certain assumptions – an extra 200 million liters of diesel to get us by the end of March 2023. It could be less and it could be even more, it all depends on what happens regarding unplanned outages. This is the best assumption we have, based on the outlook ahead,” he said.
Cassim says this would cost Eskom another R6 billion. When added to the eleventh hour R3 billion he just coughed up, and the previous diesel spending of about R12 billion, the utility’s diesel spending for the full fiscal year 2022/23 will be about R21 billion. This is more than double the 2021/22 financial year when Eskom spent R8 billion on diesel. It is easy to see that the government is very upset by the financial and political fallout, as Finance Minister Enoch Godongwana stated in Davos on January 16, 2023: “I don’t think Eskom has a diesel problem, I think it’s a management problem”. .
The cost impact of load shedding
But despite the prohibitive cost of diesel, there is broad consensus that the burden on the economy from a heavy tax is much higher.
Estimates vary widely. However, based on 11,797 GWh (gigawatt hours) of undelivered electricity in calendar year 2022, calculated using load shedding data from EskomSePush, and a very low assumption of R10/kWh for undelivered energy as suggested by Eskom, the total cost to the economy during the year would have been R115 billion. This very conservative estimate does not account for the long-term effects of missed opportunities due to prolonged tax outages on business, industry, agriculture and investment in general – and the money that households, businesses and industry spend on back-up power systems .
Taking this into account, the cost of unoperated electricity is likely to be much higher. At 50 R/kWh or even 85 R/kWh (based on a study by the CSIR), the cost to the economy in 2022 would be R590 billion or R1 000 billion respectively.
The worst-case scenarios began to emerge when Eskom was forced to implement Stage 6 shutdown on January 11, 2023 after 11 generating units failed unexpectedly, taking the total amount of generating capacity offline to more than half of the installed capacity of approximately 46 000MW. The occupancy rate of Eskom’s OCGTs skyrocketed to 48% at that point – meaning they were running at full capacity for about twelve hours a day – and this enabled South Africa to avoid a crippling Phase 8 load shedding for the first time.
There is mounting evidence within the ANC that Eskom is deliberately implementing load shedding to reduce the ruling party’s chances in the 2024 national election.
This is reinforced by statements by Minister of Minerals and Energy, Gwede Mantashe, who claimed that Eskom is leaving more than 20,000 MW of installed generation capacity “idle”.
In reality, Eskom’s system operator implements load shedding to balance supply and demand on the grid to avoid a national blackout. The risk of this catastrophe is still considered low – provided Eskom has enough diesel for the OCGTs, as well as other emergency levers available to the system operator. Eskom’s own OCGT power plants – Ankerlig and Gourikwa – can generate up to 2 067 MW of power, reducing two phases of load shedding. There are also two more OCGT power stations – Dedisa and Avon – owned and operated by Independent Power Producers (IPPs), capable of generating 1,005 MW to avoid another phase of load shedding.
The IPP OCGTs are not part of Eskom’s diesel headache as they buy their own fuel. A look at the occupancy trend for Eskom’s OCGT usage over the past year tells the whole story. In fiscal year 2021/2022, it averaged 7% and year-to-date 14%, Cassim said. This compares to an OCGT utility load factor of just 6% factored into Eskom’s latest electricity tariff approved by Nersa for FY 2023/24 as of April 1, 2023.
The diesel outlook for the future
Now Eskom again peers into an abyss. The second batch of diesel is expected to run out by the end of January 2023 and the Eskom board is looking at ways to raise funds to keep the OCGTs running until the start of the new fiscal year on April 1, 2023.” We need to find cash somewhere now, and as soon as possible. We’ve got some actions that we’re actively and urgently pursuing to see how we can get funding to address this challenge of not being able to run the OCGTs,” Oberholzer said.
But none of the options on the table resemble a quick fix. One option would be to collect some of the over R50 billion arrears debt that Eskom is currently owed by councils. Another possibility is the receipt of a hefty tax credit on diesel claimed from the South African Revenue Service (SARS), amounting to just over R3 billion for the year ending March 31, 2022, according to Eskom financials.
In terms of an amendment to Section 75 of the Customs and Excise Act, from 3 August 2022 Eskom will be allowed fuel and traffic accident fund tax credits totaling R4.04/litre of diesel used for power generation. From estimates of the diesel fuel burned in Eskom’s OCGTs, this R3 billion could therefore easily have risen very significantly.
However, the diesel fuel discounts expected by Eskom have been contested by SARS for over a year and the clock is ticking.
Oberholzer claims that Eskom has no problem sourcing diesel, although most of it is imported, and that South Africa has no official strategic reserves. The country as a whole uses between 12 and 14 billion liters of diesel per year, and at a load factor of 15%, the diesel used by the OCGTs operated by both Eskom and the IPPs would be about 1.13 billion liters – less than 10% of the total.
Chris Yelland and Mariam Isa is with EE Business Intelligence. News24 encourages freedom of expression and the expression of diverse views. Columnists’ views published on TBEN are therefore their own and do not necessarily represent TBEN’s views.