Eskom forced to pay exorbitant prices for diesel

By Mariam Isa and Chris Yelland, EE Business Intelligence

Eskom has been forced to pay exorbitant prices for diesel it buys in bulk from PetroSA, the financially distressed state-owned entity which is its main diesel supplier, even as the utility battles in vain to stave off worsening stages of load shedding.

The diesel is needed to power Eskom’s two open-cycle gas turbine (OCGT) power plants, Gourikwa and Ankerlig, which are effectively its emergency backup generators that can mitigate against two stages of load shedding if running at full output of 2067 MW.

However, the OCGTs are very expensive to run and were intended for use only in peak demand periods, but are now being heavily relied on to meet daily demand as breakdowns and unplanned outages spiral within Eskom’s ageing fleet of coal-fired power stations.

Eskom’s management first warned they had run out of money for diesel in November 2022, after spending double the R6-billion budget allocated for the fuel in the financial year ending 31 March 2023, with four months still to go.

Because of these financial constraints, Eskom initially indicated it would stop using the OCGTs to meet daily electricity demand.

However, rolling power cuts immediately significantly intensified to 6000 MW (stage 6), resulting in massive political pressure to ramp them up again.

Capitulation

The admission that Eskom had no money for diesel drew fierce criticism from National Treasury and other government departments.

Finance minister Enoch Godongwana accused Eskom of profligate spending and mismanagement.

With no funds forthcoming from government, Eskom capitulated and somehow managed to scrape together funds from savings in capital and operational expenditure for a first emergency procurement of diesel in late November 2022 from stock held by PetroSA.

Eskom paid R1.3-billion for this first tranche of 50 million litres of diesel, which translates to an extortionate R26.00 per litre – about R1.00 per litre above the retail pump price at which members of the public in Cape Town could fill up their car with just 50 litres of diesel.

At the time, the public was led to understand that given the deepening power crisis, PetroSA had supplied the diesel as some form of “donation”, while agreeing to resolve the issue of payment later after further negotiations between itself, Eskom, and the government departments involved.

But, in fact, Eskom had to pay upfront for the first emergency tranche.

Further diesel procurements

Then, on 6 January 2023, Eskom made a second procurement of 56 million litres of diesel from PetroSA for some R1.265-billion, which translates to a price of about R22.59 per litre — a more realistic 10% bulk discount off the retail diesel pump price in Cape Town.

According to sources within the organisation, this second tranche would enable Eskom to continue burning diesel at a relatively high rate until close to the end of January 2023.

Then on 23 January 2023, the purchase of a third tranche of R1.5-billion worth of diesel was approved by the Eskom board, which Eskom has since begun burning.

This was expected to last until the middle of February 2023, but it will run out much sooner at the current high burn rate.

Eskom’s data portal shows that the load factor for its two OCGTs was nearly 50% on 31 January 2023, compared with an average of about 16% for the financial year before that date.

Sources within Eskom have indicated that another R5- to R6-billion will be required to buy more diesel before the financial year ends, bringing the diesel spend to about R22 billion for the financial year — close to four times the budgeted value.

Contract prices and unsolicited proposals

PetroSA is currently the biggest supplier of diesel to Eskom, but the utility also procures smaller quantities from other commercial diesel suppliers, namely Astron, Engen, and Shell.

Eskom’s current normal contact prices for diesel, confirmed by two reliable sources, are R23.51 per litre with PetroSA, R20.36 per litre with Engen, R20.28 per litre with Astron, and R20.22 per litre with Shell.

EE Business Intelligence has further been advised that since Eskom first announced in November 2022 that it had run out of money for diesel, it has received several unsolicited suggestions by the DMRE, the Department of Public Enterprises (DPE), and members of the Eskom board proposing the names of other uncontracted sources of diesel supply.

However, Eskom has resisted these suggestions, as these opportunistic diesel suppliers were all offering prices just slightly below those from PetroSA, indicating possible collusion and anti-competitive behaviour.

“If you cooperate and engage with irregular suppliers for ad hoc procurements suggested by politicians and board members, this will just continue and increase”, one of the sources said.

Response from PetroSA and DPE

In response to questions on pricing sent to PetroSA by EE Business Intelligence, the company replied that it operated as a commercial entity which aimed to be “profitable, convenient and efficient within the current market and industry dynamics.”

PetroSA further said that it was committed to supplying and meeting Eskom demand, and in line with best business practices, reserved the right not to disclose the prices and terms of its commercial agreements with the utility.

The same set of questions was sent to the DPE, and spokesman Richard Mantu replied that Eskom was best positioned to respond. This despite Eskom executives having been advised by the DPE that they were not permitted to engage with the media on the subject of diesel as “this would embarrass the shareholder”.

However, Mantu did indicate in the DPE response received on 20 January 2023 that “DPE is actively prospecting and engaging diesel suppliers to expand Eskom sources of diesel and ensure that Eskom gets diesel at competitive prices in order to realise cost saving for Eskom”.

Later, on 26 January, Jacky Molisane, the acting DG for the DPE, conceded that the department had made unsolicited suggestions to Eskom as to possible unconventional sources of supply for diesel, but said that DPE was only trying to be helpful.

She agreed that the apparent overcharging by PetroSA above the diesel pump price needed to be thoroughly investigated in the interests of Eskom and South Africa, but denied that there had been any deliberate miscommunication on upfront payment terms for the three emergency procurements for December, January and February.

No support yet from the government

Eskom acknowledges that it is discussing other funding mechanisms with commercial banks, but is reluctant to borrow money ahead of the national budget speech in the latter half of February 2023.

Finance minister Enoch Godongwana is expected to announce a major relief package for Eskom’s R400-billion debt burden during the budget speech.

Eskom has also received no support from government in clawing back some of a substantial diesel rebate claim to which the utility says it is entitled from the South African Revenue Service (SARS).

In terms of an amendment to Section 75 of the Customs and Excise Act, from 3 August 2022, Eskom is allowed Fuel Levy and Road Accident Fund rebates amounting to R4.03 per litre of diesel burned at its power generation plants.

According to Eskom, its current diesel rebate claims on SARS amount to about R5.9-billion. Sources within the organisation say if the utility were paid just the R3 billion of the rebate due in respect of the year ending 31 March 2022, the money would go a long way to paying for the diesel it needs now.

Eskom also faces a major challenge regarding arrear debt owed by several defaulting municipalities and municipal electricity distributors, which currently stands at about R56 billion, and is rising at about R1 billion a month.

An intergovernmental political task team chaired by the deputy president has been looking at the recovery of municipal arrear debt to Eskom for years, but there appears to be no progress, and the arrear debt continues to rise alarmingly.

Recovery of just a fraction of this R56 billion would resolve Eskom’s current diesel procurement issues.

The role of PetroSA

In all these procurements, PetroSA has insisted on full payment upfront, which is said to be a result of its own cash flow challenges and weak financial position.

The company, a subsidiary of the Central Energy Fund (CEF) and reporting to the Department of Mineral Resources & Energy (DMRE), posted a R1 billion loss for the financial year ended 31 March 2022.

Eskom has also been trying to obtain a wholesale diesel license from the DMRE, enabling it to procure and import diesel fuel directly, saving an estimated R4 billion annually. But the department has declined Eskom’s application.

There is speculation that the real motive for the DMRE’s refusal is to force Eskom to continue with its large diesel procurements through PetroSA at above-market prices, so as to mitigate the embattled liquid fuel trader’s deep financial and cash flow challenges.

The suggestions are that if Eskom were to obtain its own diesel trading or wholesale licence, PetroSA would face an unsustainable future and may fold.


Now read: Eskom a total disaster — and the ANC is rearranging deck chairs on the Titanic

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Eskom forced to pay exorbitant prices for diesel