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Cape Town – If acting Eskom CEO Brian Molefe only operates in this position for a year, he will struggle to achieve his stated goals of dealing with load shedding and shifting generation capacity away from coal, according emerging markets economist Peter Attard Montalto of Nomura on Monday.
“Eskom needs a permanent high calibre CEO now,” he said.
Public Enterprises Minister Lynne Brown said Molefe would remain in the position for a year when she “seconded” him from Transnet last week, but said she wanted to find a different role for suspended CEO Tshediso Matona, which might indicate that Molefe’s role could become permanent in time.
“Brown stated she had wanted him in the role for only a year. However, Eskom’s problems are so huge that it is unclear what Molefe can really achieve with another management shift and more uncertainty and lack of leadership after.”
Strong leadership
Attard Montalto said Molefe “brings a strong leadership and management style from Transnet, which will be crucial in dealing with what we have previously identified as ineffective middle and junior management below the core head office level”.
“With his strong management style and hefty experience we think the possibility of a brownout is likely a little lower now, but the amount he can achieve is probably limited in the medium run, with him only set to be in place for around a year. Eskom is a very different political beast from Transnet.”
A brownout is one level better than a blackout, when the country is plunged into a total power disaster.
However, He said that the leveraging of non-core state assets was no nearer with this appointment. “Eskom debt should be somewhat more supported in the coming weeks, though more load shedding could erode that.”
Warnings for Molefe
Attard Montalto said Nomura praised Matona when he was appointed and so would now highlight the political pitfalls for Molefe in this regard.
“He is unlikely to be able to unpick highly (over-)complex labour contracts at the new-build plants (what we call ‘nested labour contracts’), nor long-term supply contracts for the new-build programme.
“Like Matona, he will likely struggle to unpick the deep-seated rent extraction that occurs within Eskom’s supply chain and pushes up the cost of base load generation markedly.
“BEE coal supply contracts are of particular note here. This is the area we believe has the most political interference within Eskom.
“In this regard his relationship with the board will be key, but still uncertain since the post of chairman remains vacant.”
Manage the process better
“We see little that can be done to avoid load shedding in the short to medium run given such an old fleet of generation capacity. However, he could manage the process better, including diesel inventory-keeping and improving relations with heavy industrial users.”
Attard Montalto said Eskom’s major problem has been connecting existing renewable energy independent power producer projects in the private sector to the grid.
“If [Molefe] can make that a real priority alongside coal plant maintenance then he could leave a positive legacy. However, renewables cannot be an effective supply option against coal for the next 5+ years, especially considering its challenges in supporting supply against the evening demand peak.
“Major turnarounds in policy to allow gas generation are now the preserve of the energy ministry and unlikely to see much progress we believe in the coming year in terms of actual projects that can be committed to with the exception of converting OCGT (open cycle gas turbine) generation capacity from diesel to gas.
“However, if in such a short time Molefe can encourage better corporate governance and avoid a brownout, as well as developing a stronger relationship with finance markets and maintaining access for issuance, he will have done a good job in our view.
“However, his appointment does not mean the stalled process of privatisation of non-core assets by government will be any quicker, not institutional changes to Eskom and the energy market.”
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