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Eskom Holding SOC Limited: Financial woes derail expansion plans [free access]

July 15, 2016

South Africa’s Eskom Holdings SOC Limited (Eskom), which is a vertically integrated power utility, is a key player in the country’s power sector. Currently it operates 88 per cent of the country’s installed generation capacity and also holds a monopoly over the transmission, distribution and trade of electricity.  

 

Despite the rising participation of independent power producers (IIPs), the country is presently reeling under its worst power crisis since 2008. Due to years of underinvestment in the sector, the utility is finding it difficult to keep pace with the growing demand for electricity. Most of the power infrastructure is aged, and Eskom is finding it challenging to undertake high-level maintenance due to low reserve margins. Further, delays in completing new build initiatives have created additional pressure. Moreover, the declining plant availability over the last five years has reduced the opportunity to undertake timely maintenance of its generation assets. This is confirmed by the unplanned maintenance (UCLF) performance of 15.22 per cent for the year ended March 2015, which deteriorated significantly from 12.61 per cent at the end of the 2014 fiscal. This has forced Eskom, which supplies power for approximately 90 per cent of the demand in the country, to resort to load shedding and curtailment.

 

In addition, the arrear debt from municipalities and residential customers has badly impacted the financials of the company. Owing to its worsening financial position, Eskom has received a bailout of ZAR18 billion from the government. After withholding a transfer of ZAR5 billion, which was due in December 2015, the Ministry of Finance approved the transfer of ZAR3 billion for the company in February 2016.

 

Meanwhile, owing to capital constraints, Eskom has reprioritised some long-term projects that were planned in the previous year for the 2016-25 period. The reprioritised projects are expected to maximise the benefits accruing from the available capital, while minimising the risks to security and reliability of supply.

 

Existing network

Eskom’s transmission network comprises high voltage lines ranging from 132 kV to 765 kV. As of March 2015, the utility owned a line length of 31,107 km, recording only marginal growth over the previous year. Around 60 per cent the country’s high voltage network is at the 400 kV level. As of March 2015, the total high voltage transformer capacity in South Africa was 139,610 MVA, of which 2,090 MVA was installed during 2014-15. In addition, Eskom owns and operates around 48,278 km of distribution lines.

 

The majority of South Africa’s high voltage network is based on alternating current (AC) technology, with the exception of a 1,035-km-long, 533 kV direct current (DC) monopolar line that links the Cahora Bassa hydroelectric generating station in Mozambique to Johannesburg.

 

Eskom has also established several interconnections with neighbouring countries to support the exchange of power. It is a net exporter of energy and has high voltage interconnections with Mozambique, Namibia, Zimbabwe, Swaziland, Botswana and Lesotho.

 

In 2005, the country launched the New Build Programme aimed at expanding the country’s power sector. Under the plan, which is reported to cost over ZAR361 billion, Eskom plans to add 17,384 MW of new generation capacity, 9,756 km of transmission network and 42,470 MVA of new substation capacity by 2021.  Since the launch of the plan, Eskom has added 6,237 MW of generation capacity, around 5,816 km of transmission line network and 29,655 MVA of substation capacity.

 

Figure 1: Eskom’s growth in transmission line length (km)

gi3_878_02

Note:  Data is as of March 31 for the mentioned year.

Source: Eskom; Global Transmission Research

 

 Operational and financial performance

Eskom’s performance with regard to transmission energy losses continues to improve, with the utility incurring energy losses of 2.53 per cent for the year 2015 as compared to the target of 3.3 per cent. Moreover, Eskom was able to successfully meet the targets set for system interruption incidents of less than one system minute as well as line faults. In 2014-15, the total system minutes lost for events <1 minute was 2.85 minutes. Eskom’s high voltage grid experienced only two major faults during the same year. However, performance risks still remain with the ageing assets and vulnerabilities due to network infirmness.

 

Eskom earned revenue of ZAR147.7 billion during the fiscal year 2014-15, marking an increase of 6.9 per cent over the previous year. The company’s net profit for the year stood at ZAR3.6 billion. For the 2014-15 fiscal, Eskom’s revenue from the transmission segment was ZAR18.9 billion and it earned a profit of ZAR 3.3 billion. During the year, Eskom spent around ZAR1.1 billion on expansion, refurbishment and modernisation of its high voltage grid assets and it also invested ZAR712 million in repairs and maintenance of its transmission network.

 

However, the revenue gap for the company’s generation segment has risen rapidly over the past few years, mainly due to multi-year price determination (MYPD) the significant increase in primary energy costs, and the high cost of running the open cycle gas turbines (OCGTs) during periods of constrained capacity. Furthermore, the arrear debt from municipalities and residential customers has also gone up significantly during the past year. Specifically, the municipal arrear debt increased from ZAR2.6 billion to ZAR5 billion during the period between 2014 and 2015.

 

Future plans and investments

South Africa’s future plan for developing the transmission grid is largely driven by new generation addition plans, in which IIPs are being encouraged to participate. Eskom has adopted a two-pronged approach to strategically prepare the transmission grid for the creation of additional generation connection capacity. The first approach involves proposals for the immediate to medium-term period, which will indicate the available connection capacity across the entire transmission grid. The second approach puts emphasis on securing power corridors for the longer term to enable a faster response to changing IPP generation programmes.

 

Further, during the 2016-25 period, a significant amount of new transmission line length and associated substations will be added to the system. A total of 9,969 km of transmission lines are planned to be added to the system over the 2016-25 period. Of the total line length planned, 2,110 km will be at 765 kV and another 7,504 km will be at 400 kV. These additions are mainly due to the major 765 kV network reinforcements required for supplying power to the Cape and KwaZulu-Natal.  Overall, Eskom plans to add 75,395 MVA of transformer capacity over the 2016-25 period, which is an indication of rising future load demand.

 

These new transmission lines are part of the long-term strategy to develop a transmission backbone, which will in turn support regional power corridors. These power corridors will connect generation pools to one another and also to the major load centres in the country. These developments are expected to better serve the rising system demand and efficiently integrate the power to be generated by new stations into the transmission network. Also, large-scale renewable energy generation options are being explored and they are becoming the primary drivers of network development in the country.

 

Among the many planned projects is the Vaal strengthening scheme, which proposes the construction of two 400 kV lines and the up-rating of terminal equipment in order to reduce the burden on some of the overloaded lines in the region. These lines are expected to be developed by 2018. Another project is the Johannesburg strengthening scheme, which is expected to resolve the low voltage constraints and potential overloads in Johannesburg by 2024.

 

Another planned project is the Simmerpan strengthening project, which is expected to address unfirm transformation at the Jupiter substation. The scope of work includes establishing a 275 kV transmission substation adjacent to the Simmerpan distribution substation and installing two 275 kV transformers with a total capacity of 160 MVA. The works related to these projects are expected to be completed by 2025.

 

Other key projects include the Cape Corridor (Phases 2 and 4) project entailing the construction of the 765 kV Gamma–Kappa, Zeus–Perseus and Gamma–Perseus lines, aggregating 1,900 km; the 395-km-long 400 kV Upington solar park integration project, Phase 1; the Tubatse strengthening project, Phase 1, entailing around 220 km of 400 kV and 765 kV lines; and the 700-km-long, 765 kV southern grid project, Phases 3 and 4.

 

The total capital expenditure on transmission including capacity expansion, refurbishment, capital spares, production equipment and land acquisition has been estimated at over ZAR208.3 billion for the 2016-25 period.

 

Table 2: Planned additions to Eskom’s transmission network

Transmission assets

2016–2020

2021–2025

Total

Transmission line length (km)

2,958

7,011

9,969

–765 kV

3,50

1,760

2,110

–400 kV

2,589

4,915

7,504

–275 kV

19

336

355

Transformer capacity (MVA)

29,240

46,155

75,395

Number of transformers

71

94

165

Number of capacitors

15

6

21

Number of reactors

6

15

21

Note: Data for the 2016–2020 period is from April 2016 to March 2020 and for 2021–2025 is from April 2020 to March 2025.

Source: Eskom

 

Challenges and way forward

Eskom has formulated ambitious plans for expanding its infrastructure facilities. However, lack of funds is expected to postpone/put on hold transmission plans deemed less critical. Further, in view of the rising capital expenditure on high-level maintenance of its ailing infrastructure, Eskom requires a predictable electricity price path migrating to cost-reflectivity. This will help the company to ensure its long-term financial sustainability. While Eskom’s key focus will be on improving the availability of its power plants, it must pay adequate attention to maintaining grid reliability and stability, in order to avoid a total grid collapse.