South_Africas_Electricity_Crisis_How_did (1)

CDE An occasional publication by the
July 2008
Number 10 ROUND Centre for Development and
Enterprise relecting discussions
TABLE held on key national issues
SOUTH AFRICA’S
ELECTRICITY CRISIS
How did we get here? And how
do we put things right?
In the third week of January 2008, more than 20 per cent of South Africa’s
electricity-generating capacity was out of commission. By the fourth week,
a quarter of Eskom’s capacity was unavailable. Huge blackouts occurred
throughout the country.
The major cities were paralysed by traffic gridlock. Many food-processing enter-
prises lost their entire stock. At least one person died on the operating table.1 he
national grid almost crashed. If this had happened, the entire country would have
been completely without electricity for several days. In order to prevent this, gold and
platinum mines were forced to stop all production for ive days on 25 January, a date
that became known as Black Friday in the mining industry. he mines were only per-
mitted to resume work after agreeing to an ongoing 10 per cent reduction in their
electricity consumption.
South Africans quickly learned a new term – ‘load shedding’ – a euphemism for
planned blackouts imposed by Eskom, the country’s state-owned electricity monop-
oly. In Johannesburg and Pretoria, these blackouts lasted for several hours at a time,
sometimes more than once a week. Despite being more or less predictable, they
caused immense disruption to the economy and to everyday life.
Load shedding lasted until early May. he mining sector experienced a 22,1 per
cent contraction in output for the quarter. One major mining company was forced
to lay of 5 000 workers.2 Manufacturing, services and tourism were also badly hit.
CDE Round Table Number 10
Participants
Frans Baleni, general secretary, National Union of Nelisiwe Magubane, deputy director-general:
Mineworkers electricity and nuclear, Department of Minerals
John Barrow, chairman, B & W Instrumentation & and Energy Affairs
Electrical Limited Dr Neva Makgetla, chief director: sector
Roger Baxter, chief economist, Chamber of Mines strategies, The Presidency
South Africa Phuti Malabie, managing director: energy,
Ann Bernstein, executive director, CDE Shanduka Group
Dave Brink, deputy chairman, ABSA Group Jacob Maroga, chief executive oficer, Eskom
Holdings
Paul Boateng, High Commissioner, United
Kingdom Michael McDonald, head: economic division, Steel
Themba Camane, executive director, & Engineering Industries Federation of South
Infrastructure and Services Department: City of Africa
Johannesburg Metropolitan Municipality Ian McKechnie, president: South African Institute
Gary Clarke, company secretary, JSE Limited of Electrical Engineers
Dr Rod Crompton, regulator member, National Louis Meintjes, Gauteng chairman, Transvaal
Energy Regulator of South Africa Agricultural Union of South Africa
Dr Simon Dagut, research manager, CDE Jean-Francois Mercier, chief economist, Citigroup
Johan de Koker, president, South African Institute Dr Velaphi Msimang, acting general manager,
of Civil Engineers Department of Science and Technology
Prof Anton Eberhard, professor, Graduate School Prof David Newbery, professor: Electricity Policy
of Business, University of Cape Town Research Group, University of Cambridge
Amira El Ibiary, project oficer, Friedrich Thami Ngqungwana, infrastructure and logistics,
Naumann Foundation for Liberty Department of Trade and Industry
Belinda Gallagher, trade commission, United Marian Nieuwoudt, Councillor, City of Cape
Kingdom Town Metropolitan Municipality
Bobby Godsell, chairman, Business Unity South Anton-Louis Olivier, managing director,
Africa Bethlehem Hydro
Rudolf Gouws, chief economist, Rand Merchant Ade Onitolo, economic policy director, British
Bank High Commission
Roslynn Greef, mayoral committee, City of Alain Jacques Renard, vice president,
Johannesburg Metropolitan Municipality Johannesburg Chamber of Commerce and
Ludovic Haren, department of industry, ICT and Industries
energy, Republic of France Wouter Roggen, resource conservation, City of
Dr Peter Inman, infrastructure development, Cape Town Metropolitan Municipality
Coega Development Corporation Michael Solomon, chief executive oficer, Wesizwe
Brian Jones, manager, Green Energy: City of Cape Platinum Limited
Town Metropolitan Municipality Michael Spicer, chief executive oficer, Business
Clive Justus, Councillor, City of Cape Town Leadership South Africa
Metropolitan Municipality Navdeep Suri, consul-general, Republic of India
Jack Koolen, global partner, Monitor Group Ethel Teljeur, regulator member, National Energy
Jac Laubscher, group economist, Sanlam Regulator of South Africa
Investment Management Andries Tshabalala, director, Alstom SA
Pieter Laubscher, chief economist, Bureau for Eugene van As, former executive chairman, SAPPI
Economic Research, University of Stellenbosch Dr Michael Wimmer, head: economic division,
Keith Luyt, energy affairs, PG Group Federal Republic of Germany
Megan MacGarry, researcher, CDE Dave Young, energy oficer, United States Embassy
2
South Africa’s electricity crisis
GDP growth fell to its lowest rate in more than six that was available was often of very poor quality,
years, and business confidence reached a 24-year yielding relatively little energy. he cold caused an
low.3 he country’s international image was seriously unusually high demand for electricity, and the rain
damaged, reducing South Africa’s ability to attract made it more diicult to deliver coal to stations and
investment and therefore to achieve our economic to keep the coal dry. About 3 700 MW of capacity had
growth targets. already been taken of the system for planned main-
Although experts in the ield had known for years tenance, and another 5 000 MW were lost as a result
that South Africa was running out of electricity, the of unplanned breakdowns, caused in large part by
crisis came as a grave shock to most South Africans running plant too hard with poor quality coal.
and – apparently – also to government. Communica- he same questions were heard everywhere: Why
tion about the crisis was poor, and the national mood was the coal stockpile so low? Why was it so diicult
was as confused and low as it had been at any time to keep plant running? How did we get into this mess?
since the early 1990s. And how do we put things right?
Why did this happen? The immediate causes CDE brought together senior government, busi-
were a dramatic decline in Eskom’s coal stockpile ness and trade union leaders for a day-long round
and unseasonably cold, wet weather. he little coal table discussion to ind answers to these questions.
Introductory remarks
Ann Bernstein, executive director, CDE causes and consequences of the crisis, and the rem-
edies required to resolve it.
CDE doesn’t claim to have any special expertise on To get the ball rolling, I’ll ask a few questions.
electricity – but we are specialists in policy analysis. First, to what extent has this culture of intolerance of
We are good at thinking through policy choices and criticism actually led to the crisis we’re in now? Sec-
asking questions about their costs, beneits and pos- ond, what about taking responsibility? As a citizen,
sible unintended consequences. So today we’re going I don’t ind it satisfactory that the president or the
to ask some basic questions about the electricity cri- minister says in a brief statement: ‘We made a mis-
sis and how we can minimise its negative impacts on take, now let’s move on.’ I don’t think it’s acceptable
our country over the years that it’s going to take to get that we haven’t heard from the Eskom board. hey
out of this emergency. have responsibilities, they get paid. We have a right to
Over the past ive years we’ve increasingly had know how they see the situation. So I’m interested in
a political culture that was intolerant of criticism. knowing a lot more about who is accountable for this
And one of the good things about the ANC’s new crisis. We have a right to know what happened; we
direction after Polokwane is that it has opened a need to know what’s happening now and how we’re
window of much greater freedom to discuss how moving forward. And are we moving forward with the
things have been going in South Africa and what we same people and the same structures that got us into
would like to change. For instance, I was intrigued to this mess? If I were writing a thriller about this situa-
read recently what the secretary general of the ANC, tion it would be titled ‘he strange case of the missing
Gwede Mantashe, had to say. He thought that the board’. Third, this crisis raises some fundamental
current electricity crisis was a disaster for the coun- issues for those people who advocate a develop-
try. He likened it to what he saw as a similar disaster mental state – a state that aims to do more and more
in health and education and said, ‘he beginning of – when we’ve just had such a dramatic illustration
wisdom will be in the Alliance acknowledging the cri- that they’re struggling to do something very basic.
sis, rather than just waiting for opposition parties to The corollary is to ask what the role of the market
hurl insults at us.’ should be in this. Are we making best use of one of
I certainly don’t think we should hurl insults, but South Africa’s great strengths – its robust and vigor-
I do encourage everyone to speak frankly about the ous private sector – to help us out of this emergency?
3
Acronyms and abbreviations
AsgiSA Accelerated and shared growth initiative for South Africa

BEE Black economic empowerment
Cogen Cogeneration
GDP Gross domestic product
IPPs Independent power producers
MW Megawatts
NEDLAC National economic development and labour council
NERSA National energy regulator of South Africa
OCGT Open cycle gas turbine
PPA Power purchase agreement
SMMEs Small, medium and micro enterprises
The real causes of the crisis, and what

needs to be done to restore supply security
Presentation ity generation. It’s very important that we unpick this

argument. What happened between 2001 and 2004
Anton Eberhard, professor, Management was that government had intended to introduce a
Program in Infrastructure Reform and competitive electricity market in which the private
Regulation, Graduate School of Business, sector would invest. It hired consultants and in fact
University of Cape Town it got very far down the track in designing a market,
but it didn’t actually implement it. he reason the pri-
How did we get into this crisis? he most convenient vate sector did not invest was not lack of interest, but
excuse is that somehow economic growth was higher because the market structure was not in place. here
than expected. That’s wrong. Eskom’s forecasts of are 40 independent power producers (IPPs) across
electricity demand have been remarkably accurate. Africa – most in investment climates more diicult
hey expected we would run out of electricity in 2007. than ours.
he 1998 energy policy White Paper made the same Let’s set these excuses aside, and look at the real
prediction, and suggested that the next investment in causes of the crisis. First, we now have insuicient
generation capacity needed to be made by the end of capacity because there was a moratorium on Eskom
1999 at the latest. building new generation plant while the market was
Another very widely held view was that the being designed. As a result, the ‘reserve margin’ – the
national energy regulator (NERSA) didn’t allow the gap between Eskom’s maximum generation capac-
price of electricity to rise in the early 2000s, and this ity and electricity demand – fell from a somewhat
meant that Eskom couldn’t invest. hat’s also wrong. If worrying 15 per cent in 2001 to a gravely alarming
you look over that period, Eskom generated increased 7 per cent last year. A 20 per cent margin is required
proits each year. Its balance sheet was not the rea- to cater comfortably for planned maintenance and
son why it didn’t start investing in the early 2000s. unplanned breakdowns.
Yet another widely held view – at least in govern- Second, Eskom has been unable to keep its exist-
ment – is that the lights went of because the private ing kit running at adequate levels. Eskom used to aim
sector has not been interested in investing in electric- for 90 per cent plant availability, 7 per cent downtime
4
Frank talk about the crisis: Key points from the discussion
Participants in the Round Table were remarkably frank and direct about the causes of the crisis and the
steps that now need to be taken to put things right.
Jacob Maroga, chief executive oficer, Eskom Holdings:

‘We don’t have adequate reserve margins because we didn’t start our new build programme in time.
… We have to accept that this is a ive-to-eight year emergency. I don’t want to give anybody a false sense
of comfort. … My biggest concern is funding for our build programme. There’s been lots of talk, but the
long-term funding model is still not sorted out. … The quicker we deal with this, the better … we may
well have to change key institutions to be able to manage this properly. We cannot assume that the current
institutions, in their current form, will be able to get the job done.’ (from page 16)
Frans Baleni, general secretary, National Union of Mineworkers:

‘Eskom has lost the conidence of stakeholders and investors, and staff morale is low. The impression
out there is that the board is on sabbatical leave and that the company is being run by the Department
of Minerals and Energy. … Eskom’s leadership needs to take urgent steps to correct these impressions.
It’s time to rally the troops – and also to recruit some more skilled troops.’ (from page 17)
Prof David Newbery, Electricity Policy Research Group, University of Cambridge:

‘There was not nearly enough thinking about what the price of electricity should be. … You need
prices that accurately relect the true cost of production.. Who’s going to pay? I think the answer to this
question is remarkably simple. … You want to make sure that if people take more than some amount of
electricity, they are confronted with the true scarcity value of that electricity.’ (from page 20)
Bobby Godsell, chairman, Business Unity South Africa:

‘An owner who doesn’t have a funding model to fund growth or the routine replacement of his assets
is an incompetent owner. … There’s no point in having the cheapest electricity in the world if you don’t
have any electricity. … The challenge now is whether our leadership can be both cohesive and decisive
in the way it was in 1994. We’ve had too many summits about this crisis. It’s time to get on with it.’ (from
page 21)
Dave Brink, deputy chairman, ABSA Group:

‘Eskom should be an enterprise which is set free to operate as a world-class company, governed and
led by a world-class board that delegates operational management … to a world-class management team
… the government as shareholder must change the way the board works. At the moment, we have an
enterprise where the shareholder dictates strategy, appoints every member of the board, including the
chairman, and limits the board’s responsibility to operational management. This structure is so outdated
as to be weird. Eskom needs a chairman who is willing and able to defend his management. … If Valli
Moosa asked me for advice, I’d tell him to resign. And I’d advise most of the board to do the same.’ (from
page 23)
CDE 2008
5
for planned maintenance, and a 3 per cent allow- one day, one week, one chance event. here’s been
ance for breakdowns. hey exceeded that target over a trend of declining plant availability, caused ulti-
many years. In recent years, as plant has aged and mately by failures of governance and management.
they’ve dealt with deteriorating coal quality, that tar- How are we responding to the crisis? here are
get has come down to 86:9:5. But what we’ve seen in lots of committees, lots of work streams, and lots
recent months is that Eskom has sometimes had only of activities. his work can be grouped into six cat-
around 75 per cent of its plant available – which is egories: restoring the coal stock piles, improving
when load shedding had to be imposed. Plant avail- plant availability, Eskom’s new build programme,
ability is the deciding factor in whether the lights are contracting co-generation capacity from existing
on or not at any moment. And plant availability is industry, contracting new private sector independ-
determined by whether equipment is in good repair ent power producers (IPPs), and power conservation
and whether there’s enough coal. and demand-side management. All of these activi-
here have been real problems with coal contract- ties are connected by a single variable: the price of
ing. Eskom traditionally had favourable contracts electricity.
with the major coal suppliers. hese contracts gave here’s been some real progress on ensuring that
Eskom a reliable supply of very cheap coal. Eskom’s Eskom’s kit operates satisfactorily. here are welcome
decision in the early 2000s to increase procurement signs of new urgency in management. Eskom has
from small BEE contractors exposed the company to brought in the top German utility, RWE, to do tech-
the spot price of coal, and to less secure delivery by nical audits across plants. hey are now confronting
road. hat policy choice, which favoured and gave the extraordinary negligence that led to their coal
transformation beneits to a relatively small group, stocks being reduced to levels that prejudiced power
has to be weighed against the net economic costs to generation. But Eskom is now increasingly exposed
the country. to the spot price of coal and will pay dearly to rebuild
We’ve seen deterioration in the reliability of sup- its stocks. In fact, increased coal prices are the main
ply and in the quality of coal supplied. It’s not enough reason why Eskom requested a 53 per cent real price
to say that plant failed because an unusually rainy increase.
January meant that the coal got wet. It wasn’t just Eskom’s new build programme is slipping some-
Warnings ignored
The government has known for 10 years that South Africa would run out of electricity around now. This
information was even included in the government’s most formal policy statement on energy, the 1998
White Paper on Energy Policy.The White Paper clearly stated that demand for electricity would very likely
exceed supply in 2007 and it warned that the decision to build new power stations would need to be
made by 1999 if a crisis was to be avoided. ‘The next decision on supply-side investments will probably
have to be taken by the end of 1999 to ensure that the electricity needs of the next decade are met.’4
Media reports suggest that over the following several years, NERSA, Eskom, and other industry players
frequently warned government about the looming crisis, but that these warnings were also ignored.5
For instance, government oficials were apparently told again that South Africa would run out of
generation capacity at workshops in October 2000 and November 2001. In May 2001, Eskom reportedly
tried to use the example of the California crisis to draw government’s attention to the problem, repeating
its warnings in July 2002.6 It was only in 2004 that government permitted Eskom to start building new
generation capacity, but by then it was too late to prevent the crisis.
CDE 2008
6
what. For example, Eskom is not on track in bringing inancial closure, the plant would only have come on
online either its next diesel-fired peaking units line in 2010, seven years after the process started. A
scheduled for this year, or its next big coal-ired sta- similar tender in Jordan started later and the same
tion, originally slated for 2010. hey are building as bidder, AES, is already producing power.
fast as they can, but building base load stations takes We need to learn how to contract with private sec-
a long time and they probably won’t start coming on tor suppliers quickly and eiciently. In order to create
line before 2012. If we have to rely on Eskom’s build certainty and encourage investment, power purchase
programme alone, the reserve margin will fall below agreements need to be fair, simple, and transpar-
zero around 2010 and there will be major blackouts ent. There is a huge amount of good international
every day.
he only way we’ll restore supply security is by
increased contracting of co-generation and IPPs, and
Eskom has been unable to keep its existing
by achieving more energy eiciency. If we get large- kit running at adequate levels
scale private sector cogeneration and IPPs, along with
improved energy eiciency, we could move back to a
tolerable reserve margin by 2010. he critical issue is: experience about how to contract the private sector
will these programmes materialise in time? efectively that we can learn from.
As I’ve said, some people still believe that the pri- There is also a huge potential for power con-
vate sector isn’t interested. Wrong. he key issue is servation. South Africa is very electricity-intensive.
contracting. We need to accept that a large part of the he only places that use more electricity per unit of
problem is South Africa’s inexperience in contract- economic output are Russia and the other ex-Soviet
ing public-private partnerships. For example, the countries. But so far there have been mixed signals
Department of Minerals and Energy has just failed on power conservation and poor execution of load
to secure a contract with an international company reduction. Load reduction has been disproportion-
to build and run a new private power station. The ately borne by mining and heavy industry and, in
bid process was excruciatingly slow and complex. any case, load shedding is the least economically
housands of pages of clariications were issued to eicient mechanism for dealing with power scarci-
bidders, while key issues remained unresolved for ties. he most efective way to induce load reduction
long periods. Even if the department had reached and more eicient use of electricity is by increasing
Eskom’s capacity and reserve margin
• Eskom’s total installed capacity is 39 955 megawatts.

• The ‘reserve margin’ is the difference between total installed capacity and total demand for
electricity.
• The international standard for an adequate reserve margin is 20 per cent, meaning that an electricity
utility should be able to produce 20 per cent more electricity than maximum demand.
• This margin is required to cater for planned maintenance and unplanned equipment failures with very
little risk that supply to customers will be interrupted.
• In 1994, Eskom’s reserve margin was 31 per cent.
• In 2001, the reserve margin was 15 per cent.
• By the end of 2007, it was 7 per cent.
• Even taking Eskom’s new build programme into account, South Africa’s reserve margin will fall below
0 per cent by 2010 unless new private sector generation capacity is created.7
CDE 2008
7
the price. International experience suggests that if we 10 per cent saving that Eskom has been calling for. A
had a 50 per cent price increase, we would get the higher electricity price is also needed to help pay for
new generation capacity. he real price of electricity
has been falling since the late 1980s, and is now well
Figure 1: Reserve margins based on Eskom capacity below the level required to fund new investment.
expansion plans only South Africans need to develop a consensus on
Reserve margin based on the upward ‘price path’ that needs to be followed over
Eskom and imports the next few years to induce the required demand
Reserve margin Eskom only response, fund Eskom’s investments, and minimise
30% inlation impacts.
here are serious concerns about how the whole
25% power crisis has been managed. Leadership is felt
to be absent. here are many committees, response
20% safe reserve margin teams, work streams, and so on, but there are still
15% serious problems of coordination and communi-
cation. There are also very serious worries about
10%
accurate and on-time execution of plans. A central
5% project management oice could make a positive dif-
ference here.
0% here’s also been an absence of direct personal
-5% accountability. Yes, there’s been an acceptance of
2001 2003 2005 2007 2009 2011 2013 2015 collective responsibility, but we still need a thorough
review – and extensive reform – of the electricity
industry’s governance and management.
Finally, I want to draw your attention to our seri-
Figure 2: Projected improvements in reserve margins:
ous and growing problems in electricity distribution
Eskom plus private sector cogeneration, IPP projects
– what I call the ‘second electricity crisis’. We tend
and improved energy eficiency
to forget about this because of all the emphasis on
Reserve margin based on improved energy eficiency, generation, but actually we can’t aford to neglect it.
Eskom and imports here’s been insuicient investment in capital and
Reserve margin based on improved energy eficiency, human resources in distribution and now we’ve got
Eskom only
some extremely serious backlogs in this area too.
Reserve margin based on Eskom plus improved energy
eficiency and proposed co-gen and IPP projects:
3000 MW co-gen and3500 MW IPPs
30%
Discussant
25% Michael Spicer, chief executive oicer,

Business Leadership South Africa
20% safe reserve margin
he numbers are big, the ramiications are big, and
15% the fact is the crisis is going to last for a long time.
We’re going to need much higher levels of leadership
10% if we are to successfully navigate through this. Organ-
ised business feels very strongly that we need to see
5%
higher levels of leadership. We’re realistic enough to
understand that this is diicult, given current political
0%
2001 2003 2005 2007 2009 2011 2013 2015 circumstances. But we continue to ask government to
put in place structures that are much more purpose-
8
Electricity distribution: Shooting ourselves in the foot again?
‘In a way we are continuously shooting ourselves in the foot with our inability to come forward
and ind ways to work together and close the gaps where they exist.’ – Deputy President Phumzile
Mlambo-Ngcuka at the Electricity Distribution Maintenance Summit, 9 June 2008.8
In June 2008, 500 delegates attended an Electricity Distribution Maintenance Summit co-hosted by NERSA
and the Department of Minerals and Energy. The summit heard that there had been far too little invest-
ment in South Africa’s electricity distribution system over the past decade. The distribution network now
needs around R26 billion in maintenance if major failures are to be avoided. As the minister of minerals
and energy said at the summit, ‘the lack of maintenance and refurbishment of the electricity redistribution
infrastructure poses a threat to our economy.’9
According to the CEO of the state-owned electricity distribution company, the structure of the dis-
tribution industry needs a major overhaul. As he put it, ‘Without an accelerated consolidation and reform
process, the fragmentation in the industry, maintenance and refurbishment backlogs, inconsistent tariff
and customer service approaches, and the skills shortage will not be addressed ...The current business
approach … is a recipe for disaster.’10
CDE 2008
ful and that can provide greater clarity and strategic General discussion
guidance. One possibility would be a dedicated elec-
tricity ministry.
We run the real risk in this country of slipping Did BEE policies play a role
back into something that we ind ininitely preferable in causing the crisis?
to the hard task of making decisions and implement- • I get the impression that some people perceive
ing them. What we tend to prefer is endless process, criticism of Eskom’s procurement and main-
endless consultation. We can’t aford to have 100 per tenance systems as illegitimate – just whites
cent of Eskom’s management time spent simply going complaining about airmative action and trans-
around the plenitude of committees and structures formation. But the depth of the failures and the
and conferences and reporting systems. seriousness of their consequences surely must
South Africans are champions at designing Rolls mean that we need to rethink the costs and ben-
Royce policies. We are not champions in imple- eits of these policies. he skills shortage is now so
menting even Ford policies, and that’s where we acute that anyone with competence and experi-
need to put the emphasis. So if the policy is a bit ence must be called in to help.
rough and ready, that’s ine, as long as we get to the • When the crisis hit in January, Eskom was buying
implementation. around 20 per cent of its coal from hundreds of
If you do not communicate then you risk under- small BEE contractors. his coal was expensive;
cutting all the policies and all the implementation, no it was often of poor quality; it was arriving in
matter how good they are. And so far we haven’t done hundreds of trucks along roads that were never
a good enough job collectively in communicating designed to carry these kinds of loads. In efect,
with the public. Government, Eskom, and organised Eskom was choosing to support a few hundred
business all need to do better here. new entrepreneurs at enormous cost to the econ-
omy, to jobs, and to the well-being of all South
Africans. Isn’t this BEE gone mad?
9
How much responsibility should the governance arrangements for this industry
the regulator bear for the crisis? are not well designed.
• Where was NERSA in all of this? Why didn’t they
alert us to the looming disaster? Why couldn’t they Were government oversight
insist that Eskom start building new power stations? structures too complicated?
• he model of regulation adopted by South Africa • Eskom reports to the Department of Public Enter-
was designed to regulate industries in which pri- prises, operates in a policy environment created
vate owners are operating with assets that are by the Department of Minerals and Energy, pays
correctly valued. Neither of those conditions was dividends to the Treasury, and has its prices set by
satisied in this country. the National Energy Regulator. his is a very com-
plicated oversight structure, and often if you have
more than one boss, nobody takes the can. How is
We continue to ask government to put in
this working? Is it really the ideal structure?
place structures that are much more purposeful
Is government’s failure to implement
and that can provide greater clarity and its own policies the ultimate
strategic guidance root cause of this crisis?
• Many of the points that were agreed in the 1998
Energy Policy White Paper between labour,
• The regulator has no authority to make Eskom government and business were never really efec-
invest. here were lots of behind-the-scenes com- tively implemented. For instance, we’re ten years
munications with government, both from Eskom down the road and we still don’t have a proper
and from the regulator. The record shows the restructuring bill inalised and actually in place.
regulator wrote to the responsible ministers on • Wasn’t this crisis ultimately caused by govern-
a number of occasions expressing concern that ment sitting on the fence and ducking hard
we had already passed the time when investment decisions? First we said we were going to liberal-
decisions needed to be made. It was only in 2004 ise the electricity industry – but we weren’t willing
that the urgency of the situation was recognised to actually implement that policy. hen we said,
and the moratorium on new investment by Eskom no, Eskom is going to be the lagship of the devel-
was lifted by the minister of public enterprises. opmental state. But then we wouldn’t let Eskom
• he fact that Eskom didn’t build for so long, and invest until it was too late to avoid a massive crisis.
reduced its net debt to almost zero, meant that In both cases, it seems to me, government wasn’t
if the regulator had increased prices without willing to admit that new plant costs money. Gov-
Eskom investing in new capacity, this would have ernment was afraid to let prices rise to where they
resulted in hugely increased proits. It shows that needed to be.
The economic impact of the power crisis
Presentation ity response team has been focusing on inding the

most eicient responses to this problem. Our aim is to
Neva Makgetla, chief director: minimise the social and economic costs of the crisis.
sector strategies, he Presidency What are the key impacts? One major concern
is the export industries – especially mining and the
his is a big challenge for the economy. But I’m not mining value chain. his still comprises close to 60
going to focus on the overall impact on GDP – it’s too per cent of all our exports. Another big concern is
early to assess what that will be. he national electric- employment, and we should recall that industries that
10
Is this the right way to empower black South Africans?
In 1997, Eskom began setting very demanding BEE targets – which it soon exceeded. The expenditure
target set for BEE procurement between 1998 and 2003 was R14,9 billion. Actual spending on BEE pro-
curement exceeded R20 billion over that period. Eskom achieved its target of ensuring that 50 per cent
of middle to upper management was black by 2000; an extremely rapid increase over three years.11 In
2002, Eskom’s purchasing managers were directed ‘to maximise procurement of products and services
from black-women-owned, small black, and BEE suppliers’ and to give the highest preference to small,
black-women-owned suppliers.12 By 2004, Eskom had spent over 52 per cent of its procurement budget
with BEE companies, with more than 60 per cent on SMMEs.13
In 2006, Eskom declared that it aimed to spend 67 per cent of its procurement budget with BEE sup-
pliers. A separate target was created for primary energy procurement: henceforth 30 per cent of coal
was to be sourced from BEE companies, with 18 per cent of this coal to be procured from black-women-
owned enterprises. Reportedly, several of these companies had little or no experience in providing any
form of transport service.14
In 2006, Eskom put a ban on hiring white men, and then on hiring any men at all.15 In 2007, Eskom’s
human resources director stated that the company would need ‘at least another 470 engineers, 700 tech-
nical staff, 90 quantity surveyors, and 600 buyers over the next ive years. We will have to employ two
new people every working day.’ An additional requirement, in line with Eskom’s employment equity targets,
was that one of these daily hires had to be a black woman.16 This decision was made at a time when there
were approximately 230 fully qualiied black civil engineers in South Africa, and a total of around 1 000
black people in the civil engineering profession at any level.17
In the same year, afirmative action targets were revised upwards to achieve 65 per cent black mana-
gerial staff, and 40 per cent women by 2010. In fact, the company had nearly reached this level by 2007
– three years ahead of target. In 2007, management was 63 per cent black and 33 per cent women. Nev-
ertheless, it is reported that the ban on white male recruitments was re-imposed for the 2007/8 inancial
year, and that white male employees had a strong perception that they were unlikely to be promoted.18
The ban on white male recruitments was lifted in early 2008, in conjunction with a major drive to
attract former employees back to the company to alleviate its shortage of appropriately trained and
experienced staff.
Were these choices worth it? The number of people who beneited from Eskom’s decision to set
very high BEE targets and then to exceed them is far smaller than the number of people – almost all of
whom are poor black South Africans, many of them women – who have been hurt by Eskom’s lack of
capacity to procure coal eficiently, to maintain its power stations, and persuade its shareholders to let it
build more plant. The effects of Eskom’s choices reach far beyond Eskom. They have negatively affected
very large numbers of black South Africans.
CDE 2008
may not have a huge impact on GDP can still have a investment because the uncertainty around electric-
big impact on employment. hen we need to think ity obviously makes it diicult for people to invest.
about the impact on poor households. hey’re not big he preferred solution is to fast track new genera-
users of electricity, but some of the proposals for sav- tion. My impression is the main obstacles to this are
ing electricity would have a disproportionate impact price and the regulatory framework for cogeneration.
on them. And of course the employment impact also On price, you end up saying to Eskom that they will
hits the poor hard. hen there’s the impact on future have to pay a lot more for the new electricity they buy
11
‘There is no crisis’
In response to questions in Parliament about a series of major blackouts in the Western Cape in 2006,
President Mbeki is reported to have replied that the failures posed no crisis and were in fact an oppor-
tunity for economic growth through infrastructure expansion
‘We shouldn’t frighten ourselves too much,’ the president said. ‘Yes, indeed, there was a problem. There
were regrettable losses suffered by many businesses, but there is no crisis. Whatever needs to be done to
make sure that the economy grows and new investors come into the economy is being done….’ Enough
power was available to meet the country’s needs, and work was being done to expand that, Mbeki said.
‘We shouldn’t be holding out as threats to local and foreign investors that something disastrous is going
to happen….’
The president said there was no evidence of the blackouts having had any adverse impact on investment.
‘The notion that there has been a rush away from investment in South Africa is not correct.’19
CDE 2008
in. It may cost two or three times as much as Eskom’s nomic cost? It might be better to have the mines and
current average price to consumers. How one man- smelters go of in emergencies for a couple of days a
ages that is something I haven’t yet seen a whole lot month rather than on a planned basis for a shift every
of work on. he people who want to do cogeneration week, which is what was happening under pre-emp-
tell us the contracts they’ve been ofered by Eskom tive load shedding. A better option would be if we
are very complicated and put the entire risk on them. could shift more of the burden of demand reduction
hey ind this hard to live with. We need to ind a way onto households, commerce, and government. Most
to balance the risk. estimates say they could save 15 to 20 per cent much
I think most stakeholders now agree that the con- more easily than manufacturing and mining.
tracts have to become simpler and the price will have What mechanisms can we use to get these reduc-
to be higher. he question is how do we move on this? tions? Different mechanisms impose different
Who makes these decisions? How do we inalise the patterns of costs. We have looked at ive options: load
policy much more quickly so that we really start to get shedding, rationing by sector or through block tar-
cogeneration happening? ifs, higher prices, encouraging technological change,
We will also need to reduce demand. he decision and encouraging changed behaviour.
to make that 10 per cent cut in January was neces- Load shedding is a very unattractive option.
sary to avoid unscheduled blackouts and to preserve Mines have to close down if there are unscheduled
the stability of the whole system. But because the blackouts. Process industries – chemicals and food
cut was so sudden, it imposed a very big cost on the processing – lose even if blackouts are scheduled.
economy, particularly in mining and heavy manufac- he cold chain is seriously disrupted. Farmers can
turing. his was because they were parties to the 2005 lose whole crops. Small manufacturing, retail and
Electricity Eiciency Agreement, which means that restaurants – which are important for employment –
they had already implemented most of the obvious are seriously damaged by load shedding. It also has
ways to save electricity. Commerce, retail, and house- a huge impact on construction, which is critical for
holds made very little efort to save electricity before employment. If ever we have to go back to load shed-
the crisis because the price has been low and they ding – which I really hope we can avoid – we should
weren’t part of that agreement. ind ways to say if industries and commerce can dem-
How can we reduce demand with the least eco- onstrate that they’re using less electricity, they should
12
be put on a separate sub-station and exempted from body was that it didn’t matter how much you save,
load shedding. It’s cheaper to put them on a separate you’re going to be cut anyway. Communication also
sub-station than for them to bring in diesel generators needs to improve. People resist punitive messages. We
– which is what they would probably do otherwise. need to say that you will be rewarded for saving, not
According to the models we’ve seen, rationing by punished for mistakes that households didn’t make.
sector or through block pricing – which is when elec- Bottom line: although we probably need a mix of
tricity gets much more expensive once you have used approaches, a rise in prices is essential. We just don’t
your ration – both have worse economic impacts than think we should do it overnight.
an across-the-board price increase. We should also
remember that we don’t have the kinds of electricity
meters that will let us do this anyway. Discussants
Price increases are the least bad way to reduce
demand, and they have a great advantage in that they Jean-Francois Mercier, chief economist,
will help to start cogeneration. But we still have to CitiGroup South Africa
understand the implications of a price increase and
try to minimise negative impacts. Our modelling sug- When we were irst hit by the unplanned load shed-
gests that Eskom’s proposal for a once-of increase ding and the closure of the mines during that week in
of 60 per cent would mean a big jump in inlation. January, we all had anxious customers on the phones,
Therefore it would be better to phase in the price banks from London, from the States. However – and
increases over ive years or so. If we increased prices with the important exception of the mines – I think
more slowly, we would need to manage a slower that the near-term impact may be less than what
reduction in demand, and think about the implica- we initially feared. We should also be careful not to
tions for cogeneration and Eskom’s build programme. attribute the entire economic slowdown to the power
But very casual engagement with the inancial sector crisis alone.
suggests that if we had a price path that really set the
increases in stone, there would be no trouble in get-
ting inancing for new generation plants. Price increases are the least bad way to reduce
With price increases, we don’t escape completely demand, and they have a great advantage in that
from the metering problem: if we want people to save
quickly and eiciently, we will need to ensure that they will help to start cogeneration
they are able to monitor their consumption. And we
also really need to think about the impact on poor
households, who don’t use a lot of electricity. Should But there are likely to be serious medium- to
they be forced to pay more for what little they use? long-term impacts. The most obvious are on con-
In the medium term, technological and behav- sumer and business confidence. I’m particularly
ioural changes will be essential to achieving greater worried about the impact on investment. We’ve had
energy efficiency. Current Eskom programmes to strong consumer-led growth and not enough exports.
subsidise the use of more eicient technologies pay Capital inlows are required to inance the current
out only slowly. We need to shift to using tax subsi- account deficit. Investment in physical plant and
dies and building regulations to incentivise people to infrastructure is desperately needed to de-bottleneck
move to energy-eicient technologies. And we need the economy. Some major foreign manufacturers
to ensure that these technologies – things like com- and mining companies may have been thinking of
pact luorescent light bulbs – are available and meet investing in South Africa because of its potential for
the necessary standards. his is also an opportunity fast growth. Well, that might not happen now if possi-
to stimulate local production, by the way. ble investors fear that inadequate or expensive power
We must ensure that incentives are clear and will really slow growth down.
consistent. From that standpoint, load shedding was I agree that the right response to this crisis must
totally perverse. What load shedding said to every- be a mix of different approaches. A brutal price
13
increase of 60 per cent would worry me. This is a General discussion

delicate situation and we should not make it worse
by giving consumers a big shock.
Getting the prices right
Jac Laubsher, group economist, • I think we may be tempted to raise prices too
Sanlam Investment Management slowly. hat’s a big risk. Of course there are other
implications in terms of interest rate efects and
he immediate impact on economic activity seems inlation efects, but if we do not send the right
to be lingering. his year’s growth rate will be around price signals, we are not going to stimulate either
3,25 per cent, and next year’s will probably also be the eiciency savings or the new investment. hen
below 4 per cent. But I don’t think we have to assume we will have cut of our noses to spite our faces.
that this crisis makes slower growth inevitable in the • If prices do go up too slowly, Eskom’s balance
longer run. If Eskom is able to expand capacity as sheet will collapse, the cost of debt will increase,
planned over the next ive or six years, it gives you and consumers will not save enough electricity.
on average about 3,7 per cent per year expansion. Also, if prices remain below levels required to
Of course, it won’t be a smooth expansion, so there fund new investment, government subsidies and
will be periods of acute shortage. But if we achieve injections will be required in future years, with
the 10 per cent saving in demand – and I agree with signiicant iscal consequences.
Neva that we shouldn’t be too glib in our assump- • Prices vary tremendously between consumers.
tions about how easily this can be achieved – but if The biggest consumers face the lowest prices
we do manage it, then South Africa should be able – between a quarter and a third of the price for
to support a growth rate of 5 per cent plus. he real everybody else. Many of these big consumers
question is how eiciently Eskom will be able to exe- are mineral exporters getting fantastic prices on
cute its plans. world markets. Why can’t they face a price closer
to the scarcity cost, especially if that means we can
keep prices from rising so much for smaller users?
People resist punitive messages. We need to say
Impact on investment
that you will be rewarded for saving, not punished
• What’s the impact of the crisis on new greenield
for mistakes that households didn’t make investment? From what I hear, one government
department has been negotiating for new invest-
ment and new projects while Eskom has been
How should the Reserve Bank respond to the saying that no new industrial projects are possible
inlationary impact of the necessary price increases? until they have built more baseload stations.
Some people have been saying that – come what • Getting new connections is a real concern. A lot
may – the Reserve Bank must defend the inlation of municipalities won’t even look at new connec-
target and must keep raising interest rates. But deal- tions. It’s the same with Eskom. I know of one case
ing with energy-related shocks like this can’t be the where a company wants to invest R2 billion and
sole responsibility of the monetary authority. For the they can’t get a yes or a no. In efect what’s been
good of the economy overall, the government needs happening in the last three months is that Eskom
to reduce the pressure on monetary policy. One has ended up making not just pricing policy but
option might be to exclude electricity prices from the industrial policy.
targeted inlation rate.
Other economic impacts
• We’re going to see reduced exports and increased
liquid fuel imports: exactly the opposite of what
we want to see during a global energy crisis and
with our current account deicit.
14
Some initial economic consequences of the electricity crisis
The following list of reported impacts of the electricity crisis on large and small irms gives a sense of the
ways in which it has already damaged the economy. Productivity declines and costs rise. Stock is damaged
or destroyed. Conidence drains away. Jobs are lost.
• Harmony Gold estimated that the production halt prevented them from mining over 25 000 ounces
of gold. The company laid off 5 000 workers in February.20
• DRDGold says it was forced to ire 400 workers as a direct result of the power crisis.21
• Gold Fields’ gold production for the irst quarter of 2008 was forecast to decline by between 20 and
25 per cent against the previous quarter. The total number of employees and contractors potentially
affected at all of Gold Fields’ South African mines is 6 900. Gold Fields spent some R200 million on
securing additional emergency power to safeguard employees in the case of a total blackout.22
• BHP announced that they were closing two potlines at their Bayside aluminium smelter, potentially
causing 500 jobs to be lost. At the current world aluminum price, the closure will result in a revenue
sacriice of over R3 billion per year for BHP.23
• Nestlé spent an estimated R37 million on purchasing generators for their production lines in order to
overcome an erratic electricity supply. Nestlé has 27 factories around the country, and has invested
more than R1 billion in South Africa over the last 3 years. Buying generators has a large negative cost
impact on the company, and so has the loss of production that happens during power outages.24
• Nearly 40 tourists were trapped in a cable car on Table Mountain, Cape Town, in high winds for more
than two hours. Hundreds more were left stranded until after midnight on the top of the mountain.25
As a Cape Town city councillor put it, ‘The knock-on effect on Cape Town is immeasurable… A head-
line today is lost business tomorrow.’26
• A company making plastic milk bottles reported that it lost R4 million per week during the worst crisis
period because of power luctuations.27
• Bakeries reported major losses as a result of power outages because blackouts meant that oven-loads
of bread and other baked goods would go stale.The owner of one bakery estimated that each power
cut cost his shop between R5 000 and R15 000. ‘What can we do?’ said the owner. ‘I let the employees
have a one-hour break. Then they come back and stand around and do nothing.’28
• The manager of a camera and binocular store said that his sales were down 40 per cent. ‘People leave
the shopping centre when the lights go out’, he said. ‘Who wants to be here? We were all optimistic
about this country’s growth, but this will destroy it. I have sales reps coming into the store because
they want me to carry their product. What can I tell them? I’m already cutting inventory.’29
In the months and years to come, further economic costs are almost unavoidable. Among the more
important negative effects will be from lost foreign and local investment, lost mineral and manufacturing
exports, lost tourism earnings, further pressure on the balance of payments from increased liquid fuel
imports, and sharply increased production costs if commerce and light industry have to rely heavily on
their own diesel-fuelled generators.
CDE 2008
• People will invest in massive diesel generators. diesel generators, this is hugely costly in duplicate
his will worsen the already serious liquid fuel investment and higher operating costs.
supply problem. And for factories using their own • It is important to remember that the economic
15
cost of not providing electricity – the value of give some real urgency to the eforts to get the
lost load – is always very much higher than the independent power producer and cogeneration
marginal cost of new generation. his fact should programmes happening.
Assessing Eskom’s progress in restoring electricity supply security
Presentation do have much harder – and that leads to plant avail-

ability falling. here’s a strong correlation between
Jacob Maroga, CEO, Eskom how much strain you are putting on your plants and
the rate of unplanned outages.
The heart of the problem is the reserve margins – And then there’s the coal story. his has contrib-
the gap between maximum output and maximum uted both to the funding crisis and to the problems
demand. here are three variables that determine the with plant availability. BEE is not the problem – the
size of the margin. One: how much plant you have. real problems come from our exposure to short-term
Two: plant availability. hree: the level of demand. contracts. Our base case is that each coal power sta-
We don’t have adequate reserve margins because tion we build should have a dedicated coal mine, but
we didn’t start our new build programme in time and we’ve been forced to increase our usage of short-
because our plant is performing worse than it did in term contracts for coal. We now have two big base
the past. load power stations with no dedicated mines. And we
are running all our stations so hard that those with
dedicated mines are no longer able to meet all their
‘We are making investment decisions without a requirements from their tied mines, meaning that we
long-term plan. The quicker we deal with this, the need yet more short-term coal. So we are increasingly
exposed to the world price of coal and to the costs of
better’ transportation.
And it’s not just a price issue. If we don’t deal
with the way the roads in Mpumalanga are deterio-
he sequence of things was like this: we started rating, it becomes a supply-security issue. We’re very
with a planning crisis. Eskom saw the problem com- exposed here. A third problem with coal is that the
ing but, for reasons that have already been discussed, quality of coal we’ve been getting has deteriorated
it was not possible for Eskom – or anybody else – to as world demand for coal has risen. Mines can now
build new plant. From there, we moved to a capac- proitably export grades of coal that previously only
ity crisis. Over the past few years we’ve been short at Eskom was interested in taking. In January, a com-
peak and we’ve had to use our peaking plant much bination of low coal stocks, wet weather, and poor
harder. Then we started load shedding, mostly at quality coal conspired to create the dramatic prob-
peak. hat was the start of an energy crisis, and from lems we experienced.
there we have moved into a funding crisis. One of Now I’ll give you my sense of our progress in
the reasons for going into a funding crisis is that the recovering from this crisis. We have to accept that this
diesel generators we use at peak are about 30 times is a ive-to-eight year emergency. I don’t want to give
more expensive to run than coal base load stations. anybody a false sense of comfort.
We built the diesel peaker stations to use about 6 per We have a plan now to buy 40 million tons over
cent of the time. In the months we had problems, the next two years to recover the coal stocks. hese
we were using them close to 50 per cent of the time. have not recovered as quickly as we wanted them to.
hat’s one outcome of having too little plant. We’d wanted 20 days going into winter, and we are
Another result of having too little generation currently at about 15 – but we started at below 10 in
capacity is that you start having to run the plant you January. We’ve got the contracts, we know where the
16
coal is, but getting it to the stations to recover the to develop one clear message to mobilise and align
stocks remains a very serious challenge. South African society.
Plant availability: there’s a vicious circle here. To his is a very big problem and it’s going to take
improve plant performance you need spare capac- time to resolve. Reducing demand will be essential
ity. However, the commitment is that we want to because building power stations is slow. Cogenera-
limit our unplanned outages to 2 500 megawatts. It’s tion can help a lot. We need to resolve the funding
something we’re absolutely focused on. We don’t challenge, both for Eskom’s own build and to get
want load shedding. It’s not sustainable. We have cogeneration. And we need rapid and successful
not designed our networks or our customer interface execution of our plans. In my view, we may well have
technology to do load shedding. to change key institutions to be able to manage this
We plan to spend around R343 billion on new properly. We cannot assume that the current institu-
power plants over the next ive years. We have already tions, in their current form, will be able to get the job
seen signiicant progress on returning mothballed done.
plants to service. We have built a 1 000 MW open
cycle gas turbine (OCGT) plant in record time, and
we will have megawatts coming out of a second new The impression is that the board is on sabbatical
OCGT plant by the irst quarter of next year. But we leave and that the company is being run by the
are not going to get any new base load coal stations
completed before 2012. We had anticipated 2010, Department of Minerals and Energy
but we underestimated the complexity of the envi-
ronmental impact assessment, procurement, and
tendering processes. We haven’t built a plant of this
size for many, many years. Discussants
Independent power producers (IPPs) are proving
very elusive. his has to do with risk allocation, with Frans Baleni, general secretary,
how project inancing happens, and with all sorts of National Union of Mineworkers
guarantees that are required. I think there are better
opportunities with cogeneration. he issue here is Eskom has lost the conidence of stakeholders and
pricing. here’s lots of interest. I think we can get mega- investors, and staff morale is low. The impression
watts running before 2012, once we have dealt with the out there is that the board is on sabbatical leave and
power purchase agreements (PPAs) and the pricing. that the company is being run by the Department of
Probably my biggest concern is funding for our Minerals and Energy. When a shareholder runs the
build programme. here’s been lots of talk, but the company, it means that management and the board
long-term funding model is still not sorted out. How have become irrelevant. Eskom’s leadership needs to
do we mix what government must do and what tarifs take urgent steps to correct these impressions.
must do? As it is, we are making investment decisions It’s time to rally the troops – and also to recruit
without a long-term plan. he quicker we deal with some more skilled troops. Are we satisied that Eskom
this, the better. has suicient skills to take us through this crisis as
On the demand side, we intended to come up quickly and efficiently as possible? There’s a lot at
with a power conservation programme and there stake and fundamental questions will get asked if the
was going to be a rigorous process to get there. hen timing continues to slip. People are already asking,
January happened and we had to fast track a lot of ‘should we continue to invest in mining, especially
things. So we had this agreement about a 10 per cent gold mining?’
reduction from our biggest customers. The long- My last point is about communication. he Jan-
term programme will have targets and incentives to uary thing – we call it Black Friday in the mining
reduce demand by using price and quotas. here’s industry – came as a complete shock.
still a lot of work to be done on power conservation
and energy eiciency. In particular, I think we need
17
Roger Baxter, chief economist, accelerated contracting of cogeneration, IPP and

Chamber of Mines demand side management, can you tell us what
progress has been made in simplifying the con-
Organised labour and organised business have been tracting arrangements and creating more certainty
exceptionally frustrated by the fact that we’ve been for would-be suppliers. For example, why doesn’t
pulled from pillar to post. I’ve counted ive diferent Eskom make a standard ofer for Cogen and IPP?
forums dealing with the electricity crisis in South In other words, just disclose avoided costs and
Africa. We have to integrate all these processes. We state the prices at which you would contract.
need to make sure there’s a strongly focused efort in • I’m from a small IPP. Our biggest problems are
getting out of this crisis. I’m pleased to say that gov- regulations and the price Eskom is ofering us. I
ernment seems to be recognising this. think some attention needs to be paid to assisting
I think Eskom has been taking a lot of lak, maybe companies like ourselves, encouraging us to bring
more than it should have taken. Maybe the poli- projects on as soon as possible. At the moment
cymakers should have taken more of the flak and Eskom is abusing its market dominance and tying
should be taking more of the responsibility for the us up in red tape.
challenges that we face. • Eskom doesn’t seem to have any form of customer
Government, labour, and business all have to play orientation or customer focus. I don’t see any
a much more strategic role in leading this recovery statement about commitment to customers on
process. If we don’t all collectively work on it, and if your website. here’s a great silence in this area.
we don’t have the leadership to take us forward, we’re Surely Eskom should want to become a customer-
simply not going to solve the problem. focused enterprise?
• Can you say what’s diferent between now and
Black Friday? Has anyone been ired at Eskom?
Questions to Jacob Maroga And I understand you’ve brought in some interna-
tional expertise. Can you tell us more about this?
• If companies like ours are going to spend hun- • Could you give us an indication of how you think
dreds of millions on cogeneration, is there going to the funding problem is to be resolved? What would
be some lexibility from Eskom and the regulator be the right balance between increased tariffs,
about how we are going to feed back into the sys- grant money from the taxpayers, and loan inance?
tem? We have no option but to build the facilities • Why not sell one or two of Eskom’s power
stations? here’s massive potential to unlock eco-
nomic value. You could price the power purchase
‘There was a dead body which we were hiding, agreements in a way that would make them an
pretending there was no problem. Now we’ve attractive investment, while the proceeds of the
sales would strengthen Eskom’s balance sheet.
found the body’
Jacob Maroga’s responses

to make sure that we are protected against out-
ages. But there’s got to be some quid pro quo. We • he board may not be visible and making press
need to be able to claw back that investment. We statements, but they were meeting almost every
also think it would be appropriate for the Treas- week at the height of the load shedding. Maybe
ury to consider giving investment in cogeneration they need to be more visible, more public, but
favourable tax treatment, perhaps by way of an they are hard at work, giving us direction.
accelerated depreciation schedule for these assets. • Our biggest skills gap is in building new stations.
• Since Eskom’s new base load capacity only arrives he last time we did this was 20 years ago. We’re
in 2012 – at the earliest – and given that the short- recruiting overseas, using consultants, asking
to medium-term supply gap has to be plugged by former employees to come back on contract.
18
The National Electricity Summit: are the

necessary hard decisions being made?
On 16 May 2008, NEDLAC (South Africa’s apex negotiation forum on economic and labour market
policy) convened a summit on the electricity crisis.This was attended by more than 300 people represent-
ing government, labour, business, political parties, some NGOs, and Eskom. The summit resolved to:
• Work together to ensure that the AsgiSA targets for growth, employment and poverty reduction are
met despite the electricity shortfall
• See to it that poorer people still have access to affordable electricity
• Call on all South Africans to save electricity, and particularly households, government and commerce,
which ‘can still cut their usage substantially with relatively low social and economic costs’
• Ensure that existing generation and distribution capacity is ‘operated and maintained as eficiently as
possible’
• Expect ‘greater transparency and sharing of information’
• Ensure that the necessary price increases take place gradually over ive years, with no ‘excessive
increases’ in any one year
• Support the development of new generation, ‘led by the public sector but supplemented where pos-
sible by co-generation’
The summit declared that ‘key decisions in response to the crisis must be led by government but
tested with stakeholders in terms of their socioeconomic impact. No single agency should make unilateral
decisions that affect the future of us all.’
Most South Africans would ind much to agree with in this broad consensus position. In CDE’s view,
this is not a good sign. To get out of this crisis, we have to accept that past mistakes mean that there will
unavoidably be some losers now; that rapid and unilateral actions will sometimes have to taken; and that
we will need to ind genuinely new approaches to creating more generation capacity. Without this kind
of ‘hard’ realism, it is possible that South Africa will drift from summit to summit while the crisis drags on
and worsens. As the minister of minerals and energy put it in her annual budget speech to Parliament, ‘It is
quite clear that unless drastic interventions and sacriices are made we are going to be in this emergency
situation for years to come.’30
CDE 2008
• Communications: we try our best, but there are on. So we are in a process and we’ll have to con-
still lots of gaps. his is something we absolutely clude that before we actually have the standard
need to improve. PPA and the price.
• We are doing as people are suggesting on con- • Customer focus: over the years we’ve built very
tracting. We want to have a standard PPA with a strong relationships with our key industrial cus-
clear price. If you meet that, we contract with you tomers. If we didn’t have that relationship, this
immediately. For that to happen, we have to have crisis would have been far worse.
an agreement with the regulator. We can’t con- • What has changed? I think the national sense of
tract at a price which the regulator says we cannot urgency around this issue. For me, the issue was
agree to. he regulator must also agree that the that for some time there was a dead body which
cost of buying in electricity is part of the regula- we were hiding, pretending there was no prob-
tory base on which they calculate our costs. hird, lem. Now we’ve found the body. he issue now is:
the regulator has to accept that the consumer will how do we bury this body? Also what’s changed
bear the risk created by the IPP. We can’t take it is that the key industrial customers agreed to
19
reduce load. his allowed us to move out of the • What are the funding options? It’s not for Eskom
immediate crisis of January. And, yes, people to say we’d prefer tarifs or loans or a shareholder
have left, but I’m not going to hold them up and injection. hat’s a national issue, for government
say this is the sacriicial lamb of load shedding. to decide. What I prefer is that the funding ques-
If there has to be such a thing, I must take that tion must be resolved.
accountability.
Reforming South Africa’s electricity

industry, an international perspective
Presentation Eskom has actually performed very well over the

past 20 years. Its productivity has risen steadily, while
David Newbery, professor, Electricity Policy the price it has been getting for its electricity has been
Research Group, University of Cambridge falling just as steadily. he reason is that Eskom has
been operating under a system of regulation in which
I will concentrate on pricing, and then talk a little the owner thought it was deeply immoral to allow this
about next steps I would recommend. An important large company to generate revenue. his attitude was
cause of the problems South Africa is now facing is a mistake.
that policymakers here have paid far too little atten- If you are going to liberalise your electricity
tion to pricing. industry efectively, you need prices that accurately
Over the past 15 years, the South African govern- relect the true cost of production. Why? Because if
ment put a lot of efort into trying to restructure the you want competition in generation you need to be
electricity industry. By 2000, a consensus seemed to able to encourage new generating stations to enter
have emerged that the industry should be liberalised, the industry. And to get these new generating sta-
tions, investors need to be assured of the proitable
price for the output of their new stations.
The result is that Eskom’s a hungry dog when it In the long run, the price needed to attract inves-
tors has to be at least as high on average as the
should be a cash cow long-run marginal cost of production. In the shorter
run, investors will want prices that relect the cur-
rent scarcity of electricity, as there will likely be
that Eskom should be unbundled, and that new Inde- future periods when prices are lower than long-run
pendent Power Producers should be encouraged. he marginal cost. By the standard of what South Africa
international experience seemed to suggest that this has been used to, these will be very high prices. he
was the right choice. England secured a permanent question becomes – what are you going to do about
6 per cent reduction in the cost of electricity, prima- adjusting to these new prices? How are you actually
rily enjoyed by the shareholders in the new private going to translate the economic value of additional
electricity companies. Among developing countries, electricity into a price structure?
Chile was the irst country to restructure and reform In my view, you should look irst at energy-inten-
its electricity sector. And it is also one of the most suc- sive users. You should ask any new energy-intensive
cessful countries in penetrating electriication into user whether they are willing to pay the price that a
rural areas in a cost-efective way. But although the power purchase agreement signed with a new IPP
correct policy choice appeared to have been made would require. If not, then these new users shouldn’t
in South Africa by 2000, there was not nearly enough be in business. Your existing mineral exports are
thinking about what the price of electricity should be enjoying a marvellous boom – frankly, they can aford
in the liberalised market. a huge increase in electricity prices. his means that
20
the vast majority of the population could be very Discussant

efectively insulated from dramatic price increases.
So the first main reason why you need to raise Bobby Godsell, chairman, Business Unity South
prices is to attract new investors in generation, and Africa
to reduce demand, especially from consumers – like
your aluminium smelters – that only made sense in We need to place what has happened in South Africa
a very diferent time, when you had a lot of surplus in context. With oil at $120 or more a barrel, the world
generation capacity. of 2008 is completely diferent from the world of 2006.
The second reason why prices should go up is We can’t try to live in a little cocoon. he issue here
to relect the value of Eskom to the economy and to concerns not only Eskom or the Department of Min-
the state as owner. When you look at the value of the erals and Energy. I say this not to exempt anybody
asset, it is clear that there’s been serious under-pric- from responsibility. But we should recognise that
ing. he owner has been content with getting around South Africa is feeling the efects of powerful global
a 2 per cent return on its asset. The result is that forces. Electricity prices will have to rise in response
Eskom’s a hungry dog when it should be a cash cow. to these forces whatever we decide to do about
It should not be begging for handouts to inance new Eskom.
investment, let alone to cover its running costs. As In order to understand this crisis, and to start
Eskom’s owner, the government should be insisting inding a way out of it, we need to move away from
on a dividend low from this asset. his would then an over-simple debate about state-owned enterprises
be available for reinvestment in Eskom and so help versus liberalisation. Instead, we need to be talking
to reduce pressure on the government to subsidise about what a good owner – whether private or pub-
Eskom from tax revenue. lic – actually does with their assets. An owner who
What should South Africa do now? Because the doesn’t have a funding model to fund growth or the
price has been wrong and because Eskom’s assets routine replacement of his assets is an incompetent
have been undervalued, the conditions are simply
not in place for rapid liberalisation of the electricity
market. We need to be talking about what a good owner
South Africa should focus now on timely, eicient – whether private or public – actually does with
procurement of new generation capacity. his will
require – it’s worth saying again – remunerative pric- their assets
ing to attract investors and pay for investment. You
also urgently need an eicient mechanism for plan-
ning the rapid growth in generation capacity that is owner. Frankly, he’s the worst kind of speculator, who
required, and for contracting new generation quickly is not looking to the long-term survival of that indus-
and fairly. One obvious longer-run option, I would try. And if that industry is a supplier of public as well
suggest, is to make efective the Cabinet decision on as private goods and has a public agenda to roll-out
a single buyer, separate from Eskom. When creating electriication to millions of people who’ve never had
the single buyer, I would also suggest you take the electricity, this failure of ownership becomes a seri-
opportunity to sort out which body is responsible ous national issue.
for planning for the industry – at the moment you he next thing I want to emphasise is there are
have three, which has clearly led to confusion, if not a few things we need to do immediately. We need
paralysis. to get the coal supply right, and to get cogeneration
In the short run, I think Eskom should set up its going quickly. On coal, it’s important that we know
own internal single buyer oice. his oice should how Eskom is going to transport its 45 million tons of
be empowered to make timely decisions to contract additional coal. here are urgent road and rail issues
cogeneration and independent power producers at here.
prices that make economic sense. On the demand side, there is an incredibly urgent
need to develop a simple set of messages for consum-
21
ers. I want to know the best way to save electricity in exactly what governments should be doing?
my home. I want to know whether I should switch of • Who should bear the burden of the necessary
my geyser, yes or no. So far, nobody seems to have price increases? here are a lot of poor families in
made up their mind about this very basic issue. he this country who are really struggling to get by – it
tone has been wrong too. We need a simple, positive, would be incredibly unfair for the poor to pay for
friendly message to mobilise South Africans. South mistakes they didn’t have anything to do with.
Africans are patriotic and could be easily mobilised • Aren’t advocates of restructuring and liberali-
by the right kind of message. sation just ideologues, people who are blindly
here are a few other quick wins on the demand convinced that the invisible hand of the market will
side. Let’s get an adequate supply of energy-saving somehow solve all our economic and social ills?
light bulbs. Let’s get an adequate supply of reasonably • Have you taken into account that South Africa is
priced solar water heaters. Let’s make the necessary a developing country? When Britain made the
quick decisions about stimulating local industries to choice to liberalise, it was a very diferent stage of
produce these things. development for us. Aren’t we risking disaster if
We need to build a national consensus on price. we slavishly follow inappropriate models?
This shouldn’t be impossible. After all, there’s no
point in having the cheapest electricity in the world
if you don’t have any electricity. David Newbery’s responses
We need to invoke the spirit of 1994. We’re a
nation that embraces Armageddon. We’ve got to go • I would be more convinced that there was a real
to the edge – we’ve got to see the dead bodies. And development role for state-owned electricity gen-
then, at the very last moment, we say ‘We don’t want erators if I looked around diferent countries and
to go there.’ hat’s where we are today. In an odd way, saw that they are each clearly articulating their
that’s very positive. objectives and doing different things to reach
them. But what I see everywhere is that state-
owned enterprises are just making sure that they
There’s no point in having the cheapest electricity break even, looking only at the immediate costs
in front of them. And that is not the behaviour of
in the world if you don’t have any electricity an owner who has a real sense of what the devel-
opmental purpose of their asset is. he purpose
can’t just be to provide subsidies until either the
he challenge now is whether our leadership can money or the electricity runs out.
be both cohesive and decisive in the way it was in • Who’s going to pay? I think the answer to this
1994. We’ve had too many summits about this cri- question is remarkably simple. Marginal pricing
sis. It’s time to get on with it. I don’t think there’s one is what it says. You want to make sure that if peo-
individual who we can make the energy champion; ple take more than some amount of electricity,
no one person could win the loyalty of all the criti- they are confronted with the true scarcity value
cal stakeholders. But perhaps a small group could, of that electricity. You could do this with block
along the lines of the Gold Crisis Committee in the tariffs, where you say that 80 per cent of 2006
late 1990s. consumption you get at the old price and any-
thing above that you get at the new price. Or you
could say to an export industry selling gold and
Questions to David Newbery platinum in an incredibly strong market that they
can quickly aford to pay the full scarcity price of
• I am worried about the idea that Eskom should electricity. Of course, prices for domestic users
be a cash cow. If so, we might as well just privatise have to move slowly. he good news is that they
it. Government owns things so that they can have can, because households are a very small part of
a strategic impact on development. Surely that’s overall demand.
22
• Certainly, liberalisation and restructuring can • Yes, South Africa is a developing country, radi-
be blindly ideological and destructive. hey can cally diferent from the UK. But, as I said, Chile
also create signiicant social beneits. You have to is also a developing country, and it liberalised
go about it in the right way at the right time. he very successfully. Note that Chile spent ten years
British model is simply not appropriate here – the getting the price and the organisation of the state-
circumstances are totally diferent. For one thing, owned enterprise correct before they began – very
we had lots of surplus capacity when we started gently – to sell things of. So I would suggest that
to liberalise. What you need to do here is start to Chile is actually a very useful model if you want to
move towards a single independent electricity look at long-term, gradual, carefully planned, and
buyer that can stimulate production of a lot more carefully-thought-through reforms.
megawatts than you’ve got at the moment.
Panel discussion on governance and accountability
Jack Koolen, global partner, Monitor Group he crisis teaches a fundamental lesson: mana-
gerial accountability is like electricity – most notable
We’ve been discussing the problems in electric- when it’s absent.
ity supply essentially as a problem of price. But the
repercussions go well beyond that. We’ve seen sev- Dave Brink, deputy chairman, ABSA,
eral investment proposals from both local and foreign and co-chair, Business Trust
investors evaporate just in the past few months. hat’s
a lot of potential jobs that have been lost. I have great appreciation for Jacob Maroga and his
Behind the price problem there appears to be a openness and energy in dealing with the problems
profound lack of managerial accountability. In the that we’ve been talking about today. I feel sad, though,
press, and even today, we heard of a lot of people when I think about what his diary must look like. He
taking ‘collective accountability’ for the crisis. hat seems to be running around putting out ires instead
clearly doesn’t work. If you want to have the remu- of doing what he really should be doing, which is
neration structures and levels of the private sector, leading one of our most important enterprises.
I suggest you import all the other measures from
the private sector that accompany it – including
real managerial accountability. hat means that you I ind it quite astonishing we that haven’t seen any
measure performance. If you get it wrong, you get to high proile departures at Eskom, at the regulator,
leave, either because the board exercises its rights, or
because the market punishes your performance. or in government
Real managerial accountability doesn’t apply at
an entity that delivers a public good as an enforced
monopoly and appears to have de facto pricing and The question arises: what’s happened with the
regulatory powers. his entity is not a business – and Eskom board? Eskom should be an enterprise which
benchmarking salaries and bonuses against private is set free to operate as a world-class company, gov-
sector businesses seems inappropriate. erned and led by a world-class board that delegates
Despite some internally managed Eskom exec- operational management within approved plans and
utive changes, I find it quite astonishing we that budgets to a world-class management team who are
haven’t seen any high proile departures at Eskom, committed to deliver on its value proposition to its
at the regulator, or in government. he behaviour of customers.
the Eskom board has been even stranger. he govern- If that’s what Eskom really needs to be, the govern-
ment appears to exercising direct control without the ment as shareholder must change the way the board
board seeming to feature. works. At the moment, we have an enterprise where
23
How the international media reported the January blackouts
The following selection from the international coverage of the January blackouts gives a sense of how the
crisis was reported outside South Africa.
‘Power failures outrage South Africa’

New York Times
This is a mortifying turn for a country that considers itself the powerhouse of Africa and resists compari-
sons to its underdeveloped, famine-plagued neighbours. But electricity shortages … are more than an
embarrassment. They threaten continued strong growth. … many experts consider the power shortage
a lamentable foul-up likely to undo some of Mr. Mbeki’s economic accomplishments.31
‘The Dark Ages: South Africa’s power crisis is having wider repercussions’
The Economist
The government says with a straight face that the economy, which grew by 5 per cent last year, will not
be affected. But that is hard to believe.32
‘Mining: electricity crisis hits response to higher prices’

Financial Times
In the last week of January, R9bn ($1.2bn) in equity investments led South Africa, not because of any
catastrophic political event, but because at 10.30 on the night of January 24, the state electricity provider,
Eskom, declared force majeure on electricity supplies. … Some businesspeople believe this did more harm
not just to mining, but to the entire economy, than any other single development since 1994. This was in
part because it dented the country’s image as a well-managed economy, but also because it signalled –
something many people knew anyway – that infrastructure and skills shortages would constrain economic
performance over the next ive years.33
CDE 2008
the shareholder dictates strategy, appoints every We also have to ensure that government takes
member of the board, including the chairman, and more responsibility. The funding shouldn’t be an
limits the board’s responsibility to operational man- issue. If government is going to be the shareholder,
agement. his structure is so outdated as to be weird. they’ve got to take responsibility as a shareholder.
I think the chairman of the board is a wonderful And instead of offering a loan of R60 billion, they
person. Valli Moosa is an outstanding politician – he’s must put equity in. Government also needs to ix the
made great contributions to our country. But he has regulatory system. NERSA is doing its best with a set
no experience of running an industrial enterprise. of rules that were designed for some foreign land.
And he’s got no understanding or expertise about Let’s ix that now.
how capital markets work, which an enterprise like I sympathise with Jacob Maroga. I think it’s wrong
Eskom absolutely must have. Eskom needs a chair- that he has to spend so much time managing upwards
man who understands these things. And Eskom needs and downwards and sideways. He needs the time to
a chairman who is willing and able to defend his get on with supervising the recovery programme
management, and not leave Jacob Maroga with sole he’s told us about today. And this brings me to my
responsibility for putting out ires and attending sum- inal point about accountability: this is South Africa’s
mits. If Valli Moosa asked me for advice, I’d tell him to problem. We’re ruining our reputation and we’ve all
resign. And I’d advise most of the board to do the same. really got to help wherever we can to ix it.
24
Bobby Godsell Anton Eberhard
We should be suggesting to the government, write out Our irst priority must be to get out of the immediate
your mandate for Eskom. Tell us and the people of crisis, and I think today’s discussion has generated
South Africa what you want Eskom to do. I’m talking a clear picture of what needs to be done. But I also
about a relatively short document that says we want think that we need a Commission of Enquiry on how
security of supply, number one. We’d like competitively we got into the mess. We need to look hard at the his-
priced electricity; we’d like the poor to be able to have tory of this crisis, and relect seriously and in depth
access to electricity. Set out your objectives. Address on the governance and management of the electric-
the question of pricing and funding in that mandate. ity industry over the past 15 years. To extend what
Government should set out a speciication for the Jacob Maroga said, we really need to discover where
board and then allow it to do its own thing, including all the bodies are buried and who was responsible
generating candidates through a nomination com- for putting them there. his would be the best way to
mittee, which is just common good practice. learn from our mistakes and to reduce the probability
that we’ll make them all over again in other areas.
CDE’s assessment: What have we learned?
Over the past few months, the reputation of one of some popular myths about the causes of the crisis
South Africa’s proudest institutions has been dramat- and provided a clear view of its real causes. It also
ically undermined. South Africans used to be able to identiied several fundamental questions that remain
boast that ours was the only African country in which to be answered.
the lights always stayed on. We used to be able to say Building on this analysis, participants identiied
that we had extended afordable and reliable elec- some of the steps that need to taken immediately and
tricity to far more homes than any other country on over the next few years to resolve the electricity short-
the continent and that Eskom was one of the world’s age with a minimum of permanent damage.
most eicient electricity utilities. Cheap and reliable
electricity was one of South Africa’s most important
comparative advantages. None of this is true any Myths about the crisis
more, and the damage to South Africa’s international
reputation and to our national self-conidence has It is important to dismiss the following myths and
been incalculable. misunderstandings about the causes of the crisis:
The damage to our economy has been equally • he crisis was not caused by bad luck with unsea-
grave. It is worth relecting on the fact that the January sonably cold and wet weather. The acute coal
blackouts halted mining production for the longest shortage and plant breakdowns in January 2008
period in decades. In efect, the heart of our econ- were just the final burdens that destroyed the
omy had been stilled. he ‘heart attack’ metaphor is illusion that South Africa had enough electricity
apt. Unless the underlying causes are addressed, the generation capacity. In reality, the crisis had been
long-run economic damage could well be even worse building for a decade.
than the immediate crisis. South Africa is a country • he crisis was not caused by the electricity regu-
starved of jobs and in desperate need of rapid and lator refusing to allow Eskom to raise electricity
shared growth. We will not attract the new invest- prices earlier. Eskom made huge profits in the
ment we need unless both conidence and reliable early 2000s, which could have been spent on new
electricity are quickly restored. generation capacity.
he round table discussion enabled us to dismiss • he crisis was not caused by faster-than-expected
25
economic growth. Eskom’s forecasts of electricity to fund burgeoning new demands for electricity
demand were remarkably accurate. he company created by economic expansion and the success-
fully expected we would run out of power in 2007. ful drive to increase access to electricity for poorer
he government’s own energy policy White Paper communities – a problem that would have been
made the same prediction in 1998. simple to solve if more attention had been paid
• The crisis was not caused by the private sector to proper pricing and to reinvesting the resulting
refusing to invest in electricity generation. The proits.
private sector does not lack interest in supply- • Eskom’s poor response to the undeniably diicult
ing South Africa’s electricity needs – there are situation in which it was placed by its shareholder
40 independent power producers across Africa. – government. As Eskom’s CEO pointed out at
he government proved to be incapable of con- the workshop, the utility entered a crisis with
tracting with private companies to build and run several elements. First, there was a crisis of plan-
power stations. ning: Eskom knew it should start to build more
power stations, but was forbidden from doing so.
his led to a crisis of capacity. Eskom’s reserve
Real causes of the crisis margin began to fall to dangerous levels, making
breakdowns and blackouts far more likely. he
Poor decisions and miscalculations are among the capacity crisis led to the current emergency, in
most important causes of the crisis. he most signii- which Eskom inds itself short of primary energy –
cant were: coal – and has to rebuild its stocks of coal at great
• The government’s decision in 2001 to prevent expense, causing a funding crisis. Eskom was not
Eskom from building any new power stations. a passive victim of government’s poor decisions.
This meant that Eskom had to run its existing Its own choices exacerbated the crisis. It worsened
plant too hard, and that the rate of plant break- the planning crisis by its inability to persuade
downs would rise. government to let it build new power stations. It
• he government’s failure to accept and act on the worsened the capacity crisis by placing a higher
responsibilities of ownership. In common with value on racial transformation and affirmative
many governments across the world, the South action than on inding and keeping the skills it
needed to manage and maintain its operations.
In addition to the rising world price of energy, a
The government proved to be incapable of major cause of the energy and funding crises was
contracting with private companies to build and gross negligence in coal contracting. Not nearly
enough was done to extend the favourable long-
run power stations term contracts with the major coal suppliers that
had provided Eskom with some of the cheapest
coal in the world. Far too much emphasis was put
African government has been an incompetent on procuring a growing proportion of coal from
owner of a state-owned enterprise. It did not take small, inexperienced and expensive suppliers in
account of the plain fact that its assets would the name of BEE. his choice beneited relatively
inevitably start to wear out and would need to be few people, and helped to cause a great deal of
replaced. It did not respond efectively to the sim- harm to many others – the vast majority of whom
ple reality that an expanding market for electricity are poor and black. It has also created a logistics
meant that it should invest in more generating crisis as the roads around Eskom’s plants have
plant. It was reluctant to demand a dividend that been eroded by the hundreds of trucks used by
properly relected the value of its asset – when do small operators to deliver the enormous quantities
to so would have allowed the Government either of coal required in ineiciently small shipments.
to reduce taxes or increase development spend- • A lack of capacity, both in government and in
ing elsewhere. It did not think clearly about how Eskom, to contract successfully with the private
26
sector for new generation capacity. Experience • Even more serious leadership failures in gov-
on the African continent and broader interna- ernment. The root cause of the crisis has been
tional experience shows that private operators are government’s indecision and paralysis. It could
perfectly willing and able to contract with govern- have chosen to create more generation capacity
ments to build and operate power stations. he by liberalising the industry and attracting pri-
South African government spent ive years fail- vate generation. Alternatively, the government
ing to contract with an international company to could have chosen to take its responsibilities as
build a single plant. Until very recently, Eskom owner of Eskom and as a ‘developmental state’
also made it prohibitively diicult and unproit- seriously, and instructed Eskom to start building
able for private contractors to sell electricity to it. new plant in time to avoid the crisis. his would
• Grave and persistent failures of leadership by the have required making decisions about how to
board of Eskom. In the view of several very senior inance this necessary expansion – with or with-
and experienced executives, the utility’s board out bringing in private resources. Although it
failed to provide skilled and independent lead- can be argued that expansion through liberali-
ership to Eskom’s management; failed in its core sation would have been preferable to expanding
duty to defend the shareholder’s interest in the Eskom’s own generation capacity, either would
efective running of the company and failed for have been acceptable. But making either choice
at least a decade to communicate efectively with would have required government to take a irm
government or with the public about the urgent decision and to stick to it for several years without
need to build more power stations. Since the seeing immediate results. Either option would
start of the public phase of the crisis in January, have alienated some allies and encountered
it has also failed to accept responsibility for the vocal opposition, and therefore both would have
situation. he board’s many failures are partly the required government to actively ‘sell’ its choice
result of Eskom’s antiquated governance structure clearly and honestly to electricity industry stake-
and partly because most board members lack the holders and the wider public. his would in turn
necessary skills and experience to run a world have required government to confront uncom-
class company. fortable realities about the cost of producing
Suggestions from workshop participants
The senior industry and trade union leaders and industry experts gathered at the CDE workshop made
a number of suggestions about how to handle the crisis. These included:
• A dedicated Electricity Ministry.
• A small group of senior business, trade union and government leaders to function as electricity
champions.
• Selling one or more of Eskom’s existing base load stations to private investors in order to fund Eskom’s
expansion and to provide Eskom with the stimulus of competition.
• An independent and expert Commission of Enquiry to thoroughly investigate the causes of the crisis
and to make recommendations for long-term changes to the structure of the electricity industry.
• Government to develop and publish a clear and simple mandate for Eskom.
• Government to make a major new injection of equity into Eskom.
• A irm and well-publicised policy to shield the poorest South Africans from the necessary price
increases. Given how little electricity poor households use, they should not and need not carry this
burden.
CDE 2008
27
more electricity. he government failed to make new power stations? Has every feasible option
up its mind, choose a plan, and then see that it been explored? Possibilities here might include
was implemented. All South Africans are paying using Indian or Chinese firms and technology
dearly for this indecision. not previously considered because the plants
As yet it is hard to see who is paying for all these fail- they offer are relatively small or produce less-
ures in government or Eskom. than-ideal quantities of pollution. In the current
emergency, is it not worth reconsidering the costs
and beneits of contracting for one or two of these
Fundamental questions kinds of plants in addition to the larger, more
remain unanswered eicient and cleaner technology provided by the
leading manufacturers?
he workshop made it clear that a number of vitally • How much of an impact will the crisis end up
important questions about the crisis have still to be having on new local and international invest-
answered. Among these are: ment and, therefore, on job creation and shared
• How is Eskom’s new build programme to be growth? In order to plan efectively to minimise
financed? How will this burden be shared the impact of the crisis, we need to develop much
between consumers and taxpayers? And what better estimates of the size of the damage and of
is the appropriate balance between funding the how it will be distributed among sectors. his kind
expansion from current fees and taxes or by way of cost accounting will also help to keep policy
of debt, which will have to be paid of by future makers and the public aware of the importance
generations? As the CEO of Eskom pointed out, he of energy eiciency and the urgency of restoring
did not know how this was to be resolved. Much an adequate supply of electricity.
greater clarity on these questions is urgently • What kinds of institutional changes will be
required. required in the electricity industry and in govern-
ment? It is clear that many of existing institutions
have failed and will need significant reforms.
The root cause of the crisis has been What kind of regulator is appropriate for an indus-
try that will continue to be dominated by a single
government’s indecision and paralysis large state-owned enterprise but that must also
attract a great deal of private investment? What
kinds of government oversight does the industry
• What is the policy on new connections? here are require? And what should be the composition and
reports that municipalities are refusing to connect powers of the Eskom board? All these questions
new commercial and light industrial irms and need careful answers, but there is already one
residential developments, and that Eskom has clear lesson of this crisis that needs to be applied
delayed or refused applications for heavy indus- here. ‘Collective accountability’ often means no
trial use. In efect, municipalities and Eskom are accountability. herefore, each of these structures
making national industrial policy. If South Africa must be designed to ensure that the people who
has to endure a period during which some new work within them have clear lines of personal
connections will have to be delayed or refused, responsibility. Everyone needs to know what their
these choices should be made by a competent job requires; must have the authority to do that
authority after careful consideration of the eco- job; and must be held personally responsible for
nomic costs and beneits of connecting some new their errors.
customers while refusing others. Which govern- • he simplest and most urgent of all unanswered
ment departments should be doing this? And questions about this crisis is: Who is in charge
have any steps been taken to set up the necessary now? Which person or authority is taking respon-
structures and lines of authority? sibility for seeing that these kinds of questions are
• Is there any way of speeding up the building of answered? Who is personally responsible for see-
28
ing that South Africa moves out of this crisis as must rise steadily over the next few years.
quickly and eiciently as possible?
The way forward

Immediate priorities
Taking the three steps listed above will relieve the
he day’s discussions made it clear that we need to immediate crisis. However, if we want to stop ‘mud-
take three steps without delay if South Africa is to dling through,’ to avoid repeats of this kind of crisis
avoid extremely destructive and prolonged large- and to set the electricity industry on a permanently
scale blackouts in years to come. hese are: better path, we need to address the following issues:
Secure the coal supply: he coal stock at Eskom’s Government leadership of the electricity indus-
power stations has recovered since January. It now try as a whole: he government needs to decide the
needs to stay at acceptable levels. his will require route that it wants the electricity industry to follow
urgent action to ensure that Eskom is able to trans- and then to ensure that individual government lead-
port the coal it is buying. The deterioration of the ers take direct personal responsibility for seeing that
road and rail infrastructure leading to Eskom’s major this path is followed. Responsibility for the industry
power stations in Mpumalanga must be reversed should fall under a single Ministry or Oice, with one
without delay. senior politician at its head. his individual will be
Contract private sector cogeneration and Inde- judged solely by his or her performance in restoring
pendent Power Producers: If we can get private sector the health of the South African electricity industry.
cogeneration and Independent Power Producers
contracted within the next few months, the emer-
gency will recede over the next two years. If we fail, Without private sector generation, the lights will
the blackouts of January 2008 and the ‘load shedding’
that followed will be just a mild foretaste of what is to
be going out for hours every day by 2010
come. Without private sector generation, the lights
will be going out for hours every day by 2010, and
South Africa can abandon any hope of reaching its he irst task of this new authority should be to make
growth targets and development goals. the electricity industry an attractive sector for private
Increase the price of electricity: In order to secure sector investment. his will require government to set
private sector cogeneration and Independent Power up a single buyer for electricity that is independent
Production and to fund Eskom’s own build pro- of Eskom and that will ensure that contracts ofered
gramme, the price of electricity will have to continue to private suppliers are water-tight, transparent, and
to rise – sharply for those able to pay in the minerals provide for a reasonable and commercially accept-
export sector and for those requiring large quantities able sharing of risks and rewards between Eskom and
of additional power, less sharply but steadily for other new producers. Over the next few years, the respon-
consumers. Over the next few years, the average price sible minister should undertake a comprehensive
of electricity must start to converge with its long run overhaul of the industry’s governance. his overhaul
marginal cost of production, fully taking into account should include a redesign of the industry regulator to
the cost of new generation plant. Price increases are suit South African conditions, creating a new man-
also essential to induce more eicient use of electric- date for Eskom and modernisation of the relationship
ity and therefore to reduce pressure on the reserve between Eskom’s board and its shareholder.
margin while it is being rebuilt. The good news is Governance and management of Eskom: Sev-
that there is a strong consensus that the price has eral participants argued that failures of leadership
been too low, but a great deal of hard bargaining will and management, especially on the scale that had
still be required over exactly how the burden is to be been experienced, should result in the responsible
distributed. his must happen quickly. What South decision-makers, both in Eskom and in government,
Africa cannot aford is to deny the price of electricity being called to account; this in turn should lead to
29
resignations and dismissals. he evidence is that the the government and the utility have failed to commu-
board of Eskom needs a radical shake-up in order to nicate efectively with possible future investors and
secure the appropriately skilled, experienced and current industrial and mining users. hey have sent
independent leadership required. he senior man- mixed signals that have gravely undermined coni-
agement of Eskom needs the same treatment. dence and – in all likelihood – have already lost the
But the issues go beyond those of individual country billions in new investment and thousands
responsibility and accountability. Where there is a of jobs. Eskom and government have failed to com-
single shareholder, the role of a board which includes municate efectively about the crisis with the South
supposedly independent members is problematic African people. Instead, they have tended to hector
(what inluence can the independent members really consumers about their obligation to save electricity
exercise?); where the shareholder is government, as if the crisis were the customers’ fault. Employing
with an overtly political agenda, the matter is further more competent professional communications staf
complicated. he debate implicitly identiied not only would help to address the failure of communication
these problems in general but also the particular fea- with the public. Improved communication between
tures surrounding Eskom – the imprecisely deined Eskom and the government will result from creating
simpler institutional structures and clearer lines of
responsibility. But a change in attitude will also be
Eskom and government have failed to required. South Africans have now learned the cost
communicate effectively about the crisis with the of unnecessary secretiveness and excessive defer-
ence to ill-informed or indecisive political authority.
South African people Government, Eskom and, indeed, all South Africans
must all aim to do better in future.
roles and authorities, along with the associated

accountabilities, of the Department of Minerals and Concluding remarks
Energy, Department of Public Enterprises, National
Treasury, NERSA and the Eskom board. Addressing The South African electricity industry needs new
these systemic issues will be a pre-condition for ind- leaders and managers to restore Eskom’s status as
ing and implementing sustainable solutions to the a world class utility; to attract private investment in
electricity crisis. new power stations; and to restore public and inves-
A focus on skills and competent delivery at Eskom: tor conidence.
Eskom itself reports that it is short of several hun- There are no substitutes for personal leader-
dred qualiied engineers and technical staf. Eskom ship accountability and for individual management
now needs to focus on hiring the skills and services responsibility. Political and business leaders have to
it needs, wherever they come from. It should place be held – and hold themselves - personally account-
far less emphasis on transformation and BEE goals able for what happens on their watch. If they fail to
– especially since it has already done a great deal meet agreed targets, they should be able to give a
in these areas. The company and its shareholder precise and satisfactory explanation of why this was
should concentrate on building its capacity to pro- beyond their control. If they cannot, they should be
vide strategic direction to the electricity industry and ired.
on learning how to contract with the private sector hese may seem harsh rules. But, as South Africa
quickly and competently. has just discovered, the consequences of ignoring
Improved communication: he crisis has shown them cause far more damage to many more people.
up serious weaknesses in the government and
Eskom’s capacity to communicate. Eskom could not
persuade government that it needed to start build-
ing new power stations. Government ignored expert
advice on the looming crisis for at least a decade. Both
30
Endnotes
1 A Swersky, Lights out on South African boom?, BBC ing_news/breaking_news__national/ [accessed 17 June
News [online], 19 May 2008, http://news.bbc.co.uk/2/ 2008].
hi/business/7339213.stm [Accessed 25 May 2008]; P 20 J Barry, Lights out in South Africa, 14 March 2008,
Biles, South Africa fumbles on through power chaos, Financial Sense [online], http://www.inancialsense.
BBC News [online], 25 January 2008, http://news.bbc. com/fsu/editorials/barry/2008/0314.html [Accessed 6
co.uk/2/hi/africa/7208628.stm [Accessed 25 May, 2008]. June 2008].
2 Global Insight [online], Electricity crisis in South Africa 21 M Hill, Feature on Eskom and the power crisis, Mining
intensiies, Same-day analysis, http://www.globalin- Weekly, 16–22 May 2008
sight.com/SDA/SDADetail11434.htm [Accessed 27 May 22 Gold Fields Limited, Electricity crisis puts 6 900 Gold
2008]. Fields jobs at risk and further efect on production,
3 E Hazelhurst, Quarter of discontent yields 2,1% rise in 25 February 2008, he Earth Times, http://www.
GDP, Business Report, he Star, 28 May 2008; M Hill, earthtimes.org/articles/show/electricity-crisis-puts-
Feature on Eskom and the power crisis, Mining Weekly, 6900-gold-ields-jobs-at-risk-and,289644.shtml
16–22 May 2008. [Accessed 17 June 2008].
4 Department of Minerals and Energy, White Paper on 23 Bloomberg News [online]. http://www.bloomberg.com/
the Energy Policy of the Republic of South Africa, Gov- apps/news?pid=20601116&sid=aKKSY_9idFZA&refer=a
ernment of South Africa, December 1998, http://www. frica [Accessed 18 June 2008].
dme.gov.za/pdfs/energy/planning/wp_energy_pol- 24 Reuters, Nestle spent R37m during SA power crisis, 6
icy_1998.pdf [Accessed 9 June 2008] June 2008, Engineering News [online], http://www.engi-
5 N Smith, Road to a blackout, Eskom: he inside story, neeringnews.co.za/article.php?a_id=135176 [Accessed
Financial Mail, 2 May 2008. 20 June 2008].
6 Smith, Financial Mail. 25 C McGreal, Gold mines shut as South Africa forced to
7 A Eberhard, South Africa’s Power Crisis: understanding ration power supply, he Guardian [online] 26 January
its root causes. 2008, http://www.guardian.co.uk/world/2008/jan/26/
8 B Webb & L Flanagan, Government owns up, 10 June southafrica.international [Accessed 8 June 2008].
2008, he Sunday Tribune [online], http://www.sun- 26 Breaking News [online], South Africa’s electricity crisis
daytribune.co.za/index.php?fSectionId=&fArticleId=vn shuts gold mines, 25 January 2008, http://www.break-
20080610054959546C772859 [Accessed 18 June 2008]. ingnews.ie/archives/?c=BUSINESS&jp=mheygbaumha
9 SAPA, ‘Electricity Maintenance backlog tops R26 mil- u&d=2008-01-25 [Accessed 17 June 2008].
lion,’ Business Report, 10 June 2008 27 Barry, Lights out in South Africa [online].
10 B Webb & L Flanagan, Energy role-players in critical 28 Swersky, Lights out on South African boom?
mood, he Star [online], 10 June 2008, http://www. 29 B Bearak & C Dugger, Power failures outrage South
thestar.co.za/index.php?fArticleId=4446396 [Accessed Africa, 31 January 2008, New York Times [online],
17 June 2008]. http://www.nytimes.com/2008/01/31/world/
11 S Lunsche, Skills Crisis: seeking bright sparks, 2 May africa/31safrica.html?scp=3&sq=South+Africa%2C+elec
2008, Financial Mail. tricity%2C+crisis&st=nyt [Accessed 17 June 2008].
12 Eskom Corporate Directive ESKADAAT6, December 30 B Sonjica, Speech introducing the miner-
2002, http://www.eskom.co.za/procurement/comm/ als and energy budget vote debate, National
logistic/docs/ESKADAAT6_REV4b.doc [Accessed 9 June Assembly, 6 June 2008, http://www.info.gov.za/
2008]. speeches/2008/08060610151002.htm [Accessed 17 June
13 Business Map Foundation, Preferential Procurement 2008].
at Eskom, 20 September 2006, http://www.business- 31 Bearak & Dugger, New York Times [online].
map.org.za/Documents/1456/BEE016%202006%20 32 he Economist [online], he Dark Ages, 31 January
Eskom%20Seminar.pdf [Accessed 9 June 2008] 2008, http://www.economist.com/business/display-
14 Carte Blanche, ‘Eskom’s Darkest Hour,’ 27 January 2008, story.cfm?story_id=10609230 [Accessed 17 June 2008]
http://www.mnet.co.za/Mnet/Shows/carteblanche/ 33 T Hawkins, Mining: Electricity crisis hits response to
story.asp? Id=3444 [Accessed 13 June 2008] higher prices, 17 June 2008, Financial Times [online],
15 Lunsche, Skills Crisis: seeking bright sparks. http://www.ft.com/cms/s/0/862feeec-39c9-11dd-90d7-
16 ibid. 0000779fd2ac.html [Accessed 17 June 2008].
17 A Lawless, Numbers and needs: addressing imbalances
in the civil engineering profession, South African Institu-
tion of Civil Engineering, 2005, Table 10.3, p 225.
18 Carte Blanche, ‘Eskom’s Darkest Hour’.
19 M le Roux, Mbeki: here is no electricity crisis, 30 March
2006, Mail & Guardian [online], http://www.mg.co.
za/articlePage.aspx?articleid=268158&area=/break-
31
Series Editor: Ann Bernstein
This edition of CDE Round Table was written by Dr Simon Dagut and Ann
Bernstein, with assistance from Megan MacGarry. The workshop on which this
publication is based was conceived and managed by Professor Nick Segal, with
input from Professor Anton Eberhard.
This CDE Round Table was funded by the Friedrich Naumann Foundation for Liberty.
CE NTRE FOR DEVE LOPM E NT AND E NTE RPRI S E

Informing South African Policy
Transmedit Place, 5 Eton Road, Parktown, Johannesburg 2193, South Africa

P O Box 1936, Johannesburg 2000, South Africa
Tel 2711 482 5140 • Fax 2711 482 5089 • info@cde.org.za • www.cde.org.za
BOARD
L Dippenaar (chairman), A Bernstein (executive director), F Bam, E Bradley, C Coovadia,
B De Klerk, B Figaji, S Jonah, I Mkhabela, S Ndukwana, W Nkuhlu, S Ridley, M Spicer,
E van As, T van Kralingen.
INTERNATIONAL ASSOCIATE
Peter L Berger
© The Centre for Development and Enterprise. All rights reserved. This publication may not be
reproduced, stored, or transmitted without the express permission of the copyright holder. It may be
quoted and short extracts may be used, provided the source is fully acknowledged.
ISBN: 978-0-9802628-8-9
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CDE An occasional publication by the

TABLE held on key national issues

Acronyms and abbreviations

AsgiSA Accelerated and shared growth initiative for South Africa

The real causes of the crisis, and what

Presentation ity generation. It’s very important that we unpick this

Jacob Maroga, chief executive oficer, Eskom Holdings:

Frans Baleni, general secretary, National Union of Mineworkers:

Prof David Newbery, Electricity Policy Research Group, University of Cambridge:

Bobby Godsell, chairman, Business Unity South Africa:

Dave Brink, deputy chairman, ABSA Group:

Eskom’s capacity and reserve margin

• Eskom’s total installed capacity is 39 955 megawatts.

25% Michael Spicer, chief executive oicer,

Electricity distribution: Shooting ourselves in the foot again?

The economic impact of the power crisis

Presentation ity response team has been focusing on inding the

Is this the right way to empower black South Africans?

increase of 60 per cent would worry me. This is a General discussion

Some initial economic consequences of the electricity crisis

Assessing Eskom’s progress in restoring electricity supply security

Presentation do have much harder – and that leads to plant avail-

Roger Baxter, chief economist, accelerated contracting of cogeneration, IPP and

Jacob Maroga’s responses

The National Electricity Summit: are the

Reforming South Africa’s electricity

Presentation Eskom has actually performed very well over the

the vast majority of the population could be very Discussant

Panel discussion on governance and accountability

How the international media reported the January blackouts

‘Power failures outrage South Africa’

‘Mining: electricity crisis hits response to higher prices’

Bobby Godsell Anton Eberhard

CDE’s assessment: What have we learned?

Suggestions from workshop participants

The way forward

roles and authorities, along with the associated

CE NTRE FOR DEVE LOPM E NT AND E NTE RPRI S E

Transmedit Place, 5 Eton Road, Parktown, Johannesburg 2193, South Africa

Produced by Acumen Publishing Solutions, Johannesburg

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