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Eskom's business model

The International Integrated Reporting Council’s framework describes a company’s business model as “its system of transforming inputs, through its business activities, into outputs and outcomes with the aim to fulfilling the organisation’s strategic purposes and create value over the short, medium and long term”. This system is affected by internal and external factors, which together make up the company’s operating environment.

Electricity supply industry (ESI) in South Africa

The ESI consists of generation, transmission and distribution as well as the importing and exporting of electricity. Eskom sells electricity to a variety of customers, including to redistributors (municipalities). Redistributors distribute power to end-users directly, under licence.

Eskom is a key player in the industry in the generation space, particularly with most of the baseload and peaking capacity being operated by Eskom.

Independent power producers (IPPs) have been invited to participate through a renewable energy programme run by the Department of Energy (DoE). Potential players were shortlisted and successful bidders have been contracted to supply energy into the national grid owned by Eskom. All grid planning is done by Eskom, lines are constructed under specific licensing criteria and conform to a national grid code which is overseen and regulated by NERSA.

Regulation of electricity market: The electricity business is regulated by NERSA in terms of the National Energy Regulatory Act. NERSA issues licences, regulates all tariff increases, provides national grid codes, etc.

Integrated Resource Plan 2010 (IRP 2010): The IRP 2010 sets out South Africa’s long-term energy needs and discusses the generating capacity, technologies, timing and costs associated with meeting that need.

National Nuclear Regulator (NNR): The NNR ensures that individuals, society and the environment are adequately protected against radiological hazards associated with the use of nuclear technology, and in Eskom’s case, regulates its Koeberg nuclear power station.

Independent system market operator bill (ISMO): This is a proposal to restructure the existing market structure (one dominant player within a regulated market which manages the overall value chain of electricity generation, transmission and the bulk sale of electric power). A proposed independent system operator with or without transmission assets being incorporated into the structure was considered in terms of legislation. Eskom has in its comments to the parliamentary sub-committee indicated that it was important not to embark on any restructuring while the power system was constrained and recommended a phased approach towards the creation of an ISMO.

Southern African Power Pool (SAPP): Eskom imports electricity from Namibia, Lesotho, and Mozambique and sells electricity to Lesotho, Namibia, Botswana, Zimbabwe, Mozambique, Swaziland and Zambia on either firm or unfirm contracts.

External factors that influence Eskom

Eskom is affected by four key external factors, which form the framework within which the company operates. These factors are the shareholder mandate; the economic, social and environmental climate; the Integrated Resource Plan for Electricity 2010-2030 (IRP 2010); and relevant legislation, regulations and policies (other than the IRP 2010).

Shareholder mandate

Eskom’s mandate, as outlined by the government, is to sustainably provide electricity to grow the economy and improve the quality of life of people in South Africa and the region. In practice, this requires keeping the lights on under conditions of tight supply – requiring a concerted effort to balance competing priorities in an appropriate manner – the need to do maintenance, manage the financial constraints, and ensure sustainability in the longer term. Eskom cannot do this on its own and relies on partnerships with all stakeholders and various demand-side management interventions.

Eskom uses integrated demand-management programmes to reduce energy demand while it builds additional generating, transmitting and distributing capacity.

Eskom is also tasked with supporting the government’s developmental objectives, as outlined in the New Growth Path, the National Development Plan and other development documents.

Eskom’s annual corporate plan gives effect to Eskom’s medium-term strategic objectives and the annual shareholder’s compact sets out annual key performance indicators in support of Eskom’s mandate and strategic objectives. This plan and compact are sent to the Minister of Public Enterprises for approval before the start of each financial year.

The economic, social and environmental climate

The electricity that Eskom produces is a major driver of the economy and about 3% of the country’s gross domestic product can be attributed to Eskom.

The pace at which the economy grows is linked to the pace at which the country’s energy needs grow, and therefore the pace at which Eskom needs to expand to meet demand. Infrastructure capital investment has historically not kept up with economic growth, resulting in a constrained electricity-supply situation in the short term.

Elements of the social landscape affecting operations include an increase in labour action against Eskom’s customers, which ultimately reduces their electricity usage, and against its contractors and suppliers, which has the potential to further delay the capacity expansion programme and raises concerns about contractor and employee safety.

The current economic climate also has the potential to increase customer non-payment, electricity and equipment theft, and illegal connections, all of which have a technical and financial impact on Eskom’s ability to ensure security of supply.

Just as electricity generation inevitably affects the environment, the environment also has an effect on Eskom. Eskom’s operating licence depends on various legislative requirements, including keeping its water usage and atmospheric emissions within legislative requirements.

The Integrated Resource Plan for Electricity 2010-2030

The IRP 2010 sets out South Africa’s long-term energy needs and discusses the generating capacity, technologies, timing and costs associated with meeting that need. In November 2013, the Department of Energy (DoE) issued a draft update of the IRP for public comment. This reflects the effect of slowing economic growth on projected electricity demand as well as changes in the committed build programme. Public comment on the update has been gathered. The DoE is now consulting with other government departments and is expected to issue the approved updated plan in the second half of 2014.

The government is in the process of allocating generating capacity to power producers, based on the IRP 2010 requirements. The number of MWs required and technology allocated to Eskom will substantially influence its expansion plans after the completion of Kusile, especially if that allocation includes nuclear power. No South African cabinet decision has yet been made regarding new nuclear power stations. The government’s nuclear energy working groups and sub-working groups are developing strategies for the envisaged new nuclear build programme, including the supply of nuclear fuel. Eskom is participating in the sub-working groups.

Legislation, regulation and policies

Eskom is subject to numerous laws and regulations regarding its operations, including conditions relating to tariffs, expansion activities, environmental compliance and regulatory and licence conditions. Eskom has to operate within the terms of the various regulations and water usage and atmospheric emissions licences that govern its operations. Current licensing conditions place stringent limits on plant emissions to reduce the country’s current and future environmental footprint.

Important legislation that influences Eskom’s governance include the Companies Act (2008), the Public Finance Management Act (1999), the Preferential Procurement Policy Framework Act (2000), the Promotion of Access to Information Act and the Promotion of Administrative Justice Act (2000). King III, the Protocol on Corporate Governance in the Public Sector, and various international guidelines guide Eskom regarding best practice in governance and reporting. Eskom has applied most of the King III principles although, since it is a state-owned company, some of them do not apply. In some instances, Eskom has adopted alternative practices to those recommended by King III. Where a principle has not been applied, an explanation is provided. For more information on King III practices refer to www.eskom.co.za/IR2014/03.html

Eskom periodically has to apply to NERSA for the revenue it requires to sustainably operate its business. The application for revenue is in the form of a multi-year price determination (MYPD) and currently the third pricing application, MYPD 3, is in effect and covers the five-year period 2013/14 to 2017/18.

Eskom’s internal operating environment

The four internal cornerstones of Eskom’s business are: leadership and governance; the Eskom values; policies, procedures and systems; and technology.

Leadership and governance

Eskom’s board is responsible for governing the company. The executive management committee and a broader management committee, which includes line and functional leaders, implement the decisions made at governance level on a day-to-day basis. There is a clear distinction of roles and responsibilities between the board, the executive management committee (Exco) and the management committee (Manco). The Exco provides overall guidance while Manco focuses on monitoring performance and operations at a more detailed level.

Eskom’s leadership and governance is underpinned by Eskom’s values.

Eskom’s values

Eskom works within a culture that strives to embody the following values:

Zero harm: Eskom strives to ensure that zero harm befalls its employees, contractors, the public and the natural environment
Integrity: Eskom strives to achieve honesty of purpose, conduct and actions, and respect for people
Innovation: Eskom strives to encourage value-adding creativity and to be results orientated. It aims to lead through excellence in innovation
Sinobuntu: Eskom is caring
Customer satisfaction: Eskom is committed to meeting or even exceeding the needs of the recipients of its products and services
Excellence: Eskom aims to be recognised for its exceptional standards, performance and professionalism

 
Live-line maintenance on the high-voltage lines reduces the need to shut lines down for maintenance   The Apollo HVDC converter station in Johannesburg converts the direct current power into alternating current power from Mozambique and then feeds it into the South African national grid

Policies, procedures and systems

Systems play an important role in Eskom, affecting every aspect of operations from safety to the experience of its customers to the efficiency of its power stations. Standardised processes, policies and procedures have been developed for all aspects of the business and are regularly updated to ensure good governance and implement efficiency improvements.

Eskom has key performance indicators to measure business performance. These measures are documented and approved in terms of the enterprise performance management process.

Eskom achieved ISO 9001 certification on 31 March 2013. During the surveillance audits, the certification bodies (e.g. SABS) did not identify any significant findings or risks that could lead to Eskom losing its ISO 9001 certificate. Work is underway with the SABS to identify specialist ISO standards which need to be implemented in specific divisions or business units in Eskom.

Technology

Technology is a key enabler for Eskom and includes telecommunications, information technology, research and innovation. Eskom is constantly scanning the technology environment for new ways to improve its operations.

Eskom runs focused research programmes to improve its processes and technologies as well as reduce its impact on the environment. If research indicates that a technology is promising, Eskom invests in a pilot project to investigate the feasibility of larger-scale rollout. These technologies include new methods for generating electricity (such as the concentrated solar power plant in Upington) and smart grid technology.

Eskom’s value chain

Eskom is committed to providing and maintaining a safe, healthy working environment for all employees and contractors and has made safety a key focus area within the company.

Core operations

As stated in the “Nature of the business and client base”, on page 31 of this report, Eskom’s core operations are the generation, transmission and distribution of electricity. The primary energy resources (coal, liquid fuel and uranium), water and limestone that Eskom’s power stations need to operate, must be sufficient, delivered on time and at optimal cost, and be of the required quality.

Coal is procured in term of cost-plus contracts, fixed-cost contracts, medium- and short-term contracts. Cost-plus contracts are long-term agreements whereby a mine’s coal reserves are dedicated to Eskom and bought at a cost that covers the mine’s full capital investment plus a return on investment. Fixed-cost contracts are with mines that produce both export-quality coal for sale on international markets and Eskom-quality coal, which is sold to the company at a fixed price, subject to annual inflationary adjustments. Kusile will be the first Eskom power station to use limestone when it comes into operation.

Generating electricity requires a significant amount of water and also results in atmospheric emissions, ash and nuclear waste.

Eskom aims to minimise its impact on the environment by reducing atmospheric emissions and fresh-water usage by transitioning to a cleaner energy mix, considering different technologies and continuing with research and development to develop improved energy technologies.

Eskom’s primary partners are the people and companies it sells electricity to, both locally and beyond its borders. The quality of these relationships is very important to the company and is constantly being monitored and enhanced. Eskom’s customers are important partners in assisting the company to ensure security of supply by reducing their electricity demand. This is done through demand-management and energy-efficiency strategies such as the televised Power Alerts, the integrated demand-management campaign and the 49M energy-efficiency campaign.

Strong partnerships with government, suppliers and contractors are vital to Eskom meeting current and future electricity needs. This group includes various government departments, coal mines and water authorities, IPPs, fellow members of the Southern African Power Pool, original equipment manufacturers and contractors working on the capacity expansion programme. Eskom has also established partnerships with other state-owned entities such as Transnet and Broadband Infraco to capitalise on any complementary strengths that may exist between itself and these organisations and enhance the economic contribution of state-owned entities.

Eskom’s regional development strategy involved creating the Southern African Energy unit, through which it imported electricity in the past year from Namibia, Lesotho, and Mozambique. As a member of the Southern African Power Pool, Eskom also sells electricity to Lesotho, Namibia, Botswana, Zimbabwe, Mozambique, Swaziland and Zambia on firm or unfirm contracts.

Capacity expansion programme

Eskom is in the process of a capacity expansion programme to expand its generation and transmission capacity. This programme will increase Eskom’s generating capacity by 17 384MW. This includes building two coal-fired and one pumped-storage power stations, one wind farm as well as a concentrated solar thermal station. It also involves strengthening and substantially extending the transmission grid.

Finance

Eskom’s funding model consists of equity, revenue and debt funding, with strong support from the government. Eskom’s revenue requirement and resultant tariff is determined by its regulator, NERSA, through multi-year-price-determinations. Eskom’s credit rating is affected by its own financial position as well as the sovereign credit rating. Eskom has embarked on the business productivity programme to address the revenue shortfall it is faced with by introducing cost reductions, increasing productivity as well as improving operational efficiencies.

Workforce

Eskom’s operations are supported by a highly skilled workforce that executes Eskom’s core operations and provides supporting business services such as human resources management, information technology services, procurement, research, etc.

Eskom has a rigorous transformation programme in place to ensure equity in the workplace, and has put in place skills-development programmes to train engineers, technicians and artisans to meet its need for skilled workers in future. Eskom’s employees receive training on an ongoing basis.

Procurement

Eskom has a centre-led procurement and supply chain process. Eskom uses its procurement partnerships to stimulate black economic empowerment, in line with its supplier localisation and development aspirations.

Corporate social investment and development services

Eskom has a dedicated subsidiary, the Eskom Development Foundation NPC, to run corporate social investment activities. Eskom is also leveraging the capacity expansion programme to reduce unemployment, improve the country’s skills pool, stimulate the local economy and increase economic equity by supporting B-BBEE.

Eskom has been implementing the Department of Energy’s integrated national electrification programme in its licensed areas of supply since April 2001. Since it started electrifying homes in 1991, more than 4.5 million households have been electrified within Eskom’s supply areas.

The following diagram outlines Eskom’s business model and how it creates value:

Business Model

View enlarged

The Eskom energy wheel

The energy wheel shows the volume of electricity that flowed from local and international power stations and independent power producers (IPP) to Eskom’s distribution and export points during the past two years, including the losses incurred in reaching those customers. All figures are in GWh unless otherwise stated.

Eskom energy flows during 2013/14 and 2012/13

Eskom energy flows during 2013/14 and 2012/13

1. Wheeling is the buying and selling of electricity between Eskom and foreign parties without the power entering into South Africa.