Eskom: The real cause of the crisis

The policies which led to last week’s massive black-outs.

Since 1997 the ANC government has used various methods to fend-off criticism. These have run from attacking motive to bullying, obfuscation, bullshitting, lying, and outright denial. Over time civil society and media became inured to these tactics. So it was something of a welcome surprise when senior government officials - including the president and his deputy - started admitting responsibility for South Africa's energy shortages.

The basic line pushed by President Thabo Mbeki (and others) was that government underestimated the likely rate of economic growth and wrongly ignored Eskom's warnings that it needed to start building new capacity. For this they were very sorry.

These apologies have not silenced criticism, but they have been very effective in drawing attention away from where it should have been focused. This is known, in other fields, as misdirection. A Wikipedia entry notes how "The magician choreographs his actions so that even the critical and observant spectators are likely to look where the magician wants them to. More importantly, they do not look where they should not." One way of doing this is through movement, whereby "A larger action covers a smaller action."

Similarly, it is to the government's advantage to admit to failing to approve the building of new generating capacity on time. At worst they can be accused of ideological prevarication. Meanwhile, our gaze is shifted away from places where the ANC would prefer it not to wander. One of these is the way in which the ANC funding vehicle - Chancellor House - has been cut-in on massive contracts for the building of the Bravo and Madupi power stations. The other relates to the way in which the Eskom's racial obsessions were responsible for last week's massive black outs.

On Wednesday this week there was a heated debate in parliament on these outages. The Minister of Minerals and Energy, Buyelwa Sonjica, spoke first for government; and the DA MP, Hendrik Schmidt, led the response for the opposition. The debate between the two of them centred on the failure to build new generating capacity soon enough. Strikingly, neither side mentioned the word "coal" in their prepared speeches. This is rather surprising because the cause of last week's "national emergency" had relatively little to do with the generalised power squeeze. It had everything to do with Eskom's negligence in securing enough usable coal for its power stations.

The roots of last week's catastrophe lie in two fateful decisions made by Eskom soon after Thulani Gcabashe was appointed CEO in 2000. The first of these was to sell off most of Eskom's coal stockpiles. Eskom's annual report for 2001 states that the decision had been taken to "reduce actively its coal stockpile levels to reduce working capital and related holding costs." In 2000 Eskom had 19,8 million tons (Mt) of coal in stock or 61 days of burn. By the end of 2001 this had been brought down to 14,8Mt or 44 days of burn.

The second decision was to not extend the existing coal procurement regime to meet the expected increase in demand over the following 15 years. Through the course of 2001 Eskom had burnt some 94.1Mt of coal in its power stations. This was provided to the company by the big mining houses on long-term 40 year contracts. In terms of those contracts the coal they were supposed to supply was required to meet certain specifications. One of these was that it had to be useable in the wet.

It was evident then that as Eskom would need to provide more power in the future, it would also have to burn more coal. In February 2002 Gcabashe told a conference that Eskom expected its demand for coal to rise by some 30Mt to 40Mt by 2015. However, he said that Eskom wanted to limit the "the bidding for the bulk of [Eskom's] additional coal requirement contracts to black economic empowerment companies." Eskom was also keen to move away from long-term contracts and create instead an "active coal spot market."

In June 2002 Gcabashe approved a corporate directive on procurement from black suppliers. This established a "Hierarchy of Procurement" which had to be followed in "sourcing products and services." Although existing agreements were to be respected, for any further purchases drawn from outside the company Eskom was required to go first to "Black Women-owned Suppliers," then "Small Black Suppliers," then "Large Black Suppliers," then "Black Empowering Suppliers." Only once these options had been exhausted could "other" South African suppliers be considered.

Eskom's annual report for 2002 stated that the company had now implemented "the first phase of the long-term plan to support BEE and introduce flexibility in purchasing coal requirements (over and above the existing long-term contracts.)" Implementing this directive would be an "important part" of all the performance compacts of senior managers.

Over the next few years Eskom pursued parallel policies of reducing its coal stockpiles and increasing its reliance on BEE companies for the transport and purchase of coal. The 2005 annual report stated that it was supporting tiny, small, medium and large black businesses when it came to "purchasing coal". It also used BEE road transport companies for the transport of coal. In the 2006 annual report Gcabashe noted that each power station now only targeted "a 20-day coal stockpile."

By the following year the problems with the new procurement regimen were becoming apparent, even to the Eskom top brass. The 2007 annual report noted that "coal procurement has continued to be problematic due to under-production at the tied colleries, availability of coal of the correct quality from short-term suppliers and transportation of increased quantities of coal by road." However, there was no suggestion that it was planning to modify its policy. It made clear that "Eskom continues to support BEE coal-mining initiatives when buying coal and uses [only] BEE hauliers for the transport of coal."

In mid-2007 Rob Lines, Eskom's generation general manager, told Justin Brown of Business Report (June 26) that "Eskom was increasingly buying coal on the spot market rather than using its contracts with coal mining firms. The group was buying up to 24m tons of its annual coal need of about 120m tons in the market rather than on fixed contracts. The utility had a total stockpile of more than 6m tons at its power stations [about 18 days of supply]."

Something was going seriously wrong with Eskom's coal procurement for in December last year - Reuters UK reported this week - it issued a tender "seeking consultants to review and improve its coal buying systems."

The power crisis of last week was caused by the combination of low stockpiles of coal, the long-term power squeeze, and the consequences of Eskom's pathological racial procurement policies.

South Africa currently has 39,200MW of generating capacity. Of this 3,700MW (9,4%) was offline for maintenance in January. This left 35,500MW available to meet the country's power needs. However, over the week before last Eskom was hit by massive unplanned power outages. For instance, on January 16 there was an unplanned outage of 5,600MW - 14,4% of total capacity or 16% of available capacity. According to Carte Blanche on Thursday last week (24 January) the outages had spiralled to 8,500MW - 21,7% of total capacity or 24% of available capacity. Including planned outages 31% off South Africa's power was now offline. The programme stated, "coal problems were given as the reason for breakdowns at more than 20 power stations."

This is what brought South Africa's national electricity supply system to the brink of collapse, and forced the closure of the mines on Friday 25 January. The government's own report [PDF] - published on January 25 - identified the main cause of the crisis as problems with the quantity and quality of coal supply. It states that "some of the reasons for these failures were: Boiler Tube leaks/failure; Various small equipment failure; Generator output reductions (load losses) as a result of coal quality; Problems with coal supply."

As Ann Crotty noted in Business Report this week there are few systems in place to control the quality of coal bought on the spot market and delivered to the power stations by truck. She quoted one expert as saying: "Coal that is being delivered by trucks ... is often of very poor quality and very fine in size." The "rocks in trucked coal" cause boiler tube leaks, and fine coal dust operational problems. A spokesman for Eskom admitted last week that "heavy rain in Mpumalanga, where Eskom had most of its coal-fired power stations, turned [this kind of] coal into mud, which needed to be dried before it could be burnt."

Crotty noted that despite growing problems with securing sufficient coal supplies last year, Eskom was restricted by its BEE procurement requirements from meeting "its increased needs by modifying the existing contracts it had with its three major suppliers."

So far government and Eskom have refused to provide the real reasons for last week's national emergency - even as they rush to undue some of the effects. Although all this information is in the public domain - thanks to some excellent reporting - public attention is far away. There is far more discussion of the 1998 White Paper on Energy Policy than there is on the mismanagement and racial preoccupations which brought South Africa's economy to the brink last week.

Eskom: Coal purchased, coal burnt, BEE purchases
Year   2007 2006 2005 2004 2003 2002 2001 2000
Months   12 mths 12 mths 15 mths 12 mths 12 mths 12 mths 12 mths 12 mths
Coal burnt (Mt) Actual 119.11 112.1 136.4 109.5 104.37 96.46 94.14 92.45
  Target 115.3 113.6 133.8 106.4 NA NA NA NA
Coal bought (Mt) Actual 117.4 111.7 137.8 112.7 104.9 92.8 89.1 NA
  Target 120.1 125.3 135 106.8 NA 89.3 NA NA
BEE bought (Mt)   29.2 26.2 28.6 23.2 23.8 18.1 17.4 NA
Source: Eskom annual reports 2002-2007