IN THIS WEEK’S BOTTOM LINE

CONTRIBUTED BY GIELIE FOURIE | OVERBERG ASSET MANAGEMENT

A BLACK SWAN EVENT: A Black Swan event hit SA on 9 December 2019. Eskom introduced stage 6 load shedding for the first time in history. It was a Black Swan event, meaning nobody, not even Eskom expected it, but afterwards there were several logical explanations for why it did occur. Hindsight is a perfect science. Stage 6 clearly demonstrated Eskom’s inability to keep the lights on. On 13 December, at the last cabinet meeting of 2019, Eskom was discussed. The president promised the nation that there would be no more load shedding before 13 January 2020. His gift to the nation - one month of UPS (uninterrupted power supply). In the post-cabinet news conference on 17 December Ramaphosa added that André de Ruyter, the newly appointed CEO of Eskom, would start working sooner, on 25 December 2019 - not on 15 January 2020, as was originally announced. This was the cabinet’s lame response to the stage 6 disaster. This was not good enough. Load shedding hit us way before 13 January 2020. On 18 December 2019 Ramaphosa published an opinion piece titled “A New Era in Energy Generation”, in the Daily Maverick, an independent online publication. The piece set out government’s strategy to close the electricity supply gap.

IRP: There are two strategies to close the electricity supply gap. Firstly, the government will “open up the space” for households and businesses to generate electricity for their own use - they will allow them to either partially or completely, go off the grid. Secondly, and this is a big priority, they will allow independent electricity producers to feed electricity into the grid and pay them for it. Both these strategies will take pressure off the grid, ensuring greater stability. Ramaphosa wrote: “In keeping with the Integrated Resource Plan (IRP) of 2019 … the path has been cleared for the expansion and diversification of electricity production on a significant scale.” This is exactly what we need soonest.

RFI: On 10 Jan 2020 government published a Request for Information (RFI). The purpose of the RFI is to launch a power purchase program to fill the current supply gap during peak times. The deadline for the RFI is 30 January. Eskom will negotiate the price they are willing to pay for electricity. Eskom will also “approve” producers in the shortest possible time. Unfortunately, the process will take time. It could take up to twelve months. This is unacceptable. The process needs to be fast-tracked. Buying electricity from entrepreneurs is a priority. When you have a bottleneck, you remove it by throwing all your resources at it.

THE SUPPLY GAP: Eskom is a monopoly. And monopolies hate competition. But strangely, Eskom will benefit from having competitors. The IRP estimates that Eskom has a supply gap of 3,000MW maximum. However, Eskom says it is much more, closer to 5,000MW. Eskom is unable to fill this gap of 5,000MW mainly because it will have to take power stations off the grid for extended periods to work on long-overdue maintenance. Overdue maintenance is central to Eskom’s problems. Eskom needs reserve capacity to do maintenance. We know Eskom does not have the luxury of reserve capacity. Strangely, here Eskom’s competitors can help by generating 5,000MW. They will take the pressure off Eskom. Eskom can then start working on long-overdue maintenance without disrupting power supply. Load shedding will be a thing of the past.

ROADMAP: The above approach aligns with the “Roadmap for Eskom” published in October 2019. It outlines the strategy of splitting Eskom into three smaller subsidiary businesses – generation, transmission and distribution. Whether this strategy is workable or not, it will not address the challenges of Eskom’s severe financial situation, nor will it address the challenges of its severe shortage of technical skills. There are more challenges than just these two. The map is not the territory. The “Roadmap” is not a silver bullet that will magically remove all challenges.

NINE-POINT PLAN: Eskom adopted a nine-point plan in November 2019 to address its challenges. We know, plans don’t guarantee success. Implementation of plans guarantees success. Eskom has mentioned that continuous load shedding may be a reality in future. The only way to prevent the spectre of continuous load shedding, is to generate 5,000MW more electricity as mentioned in the IRP.

SUMMARY: In his weekly newsletter this week, Ramaphosa lamented the service delivery failures in Kimberley and its surrounding area. Ramaphosa wrote: “We need to embody the principles of Batho Pele – Put people First.” He added: “Where government needs help, we should be prepared to draw on the skills, expertise and resources of the private sector.” Eskom sourced its new CEO, André de Ruyter, from the private sector. De Ruyter means “horse rider”. De Ruyter has mounted a terminally sick horse, called Eskom. We wish André all the best in nursing this sick horse back to life and riding Eskom out of its current woes. We don’t want Black Swans events, especially for Christmas.

Read More: Overberg Market Report 21 January 2020