Eskom: How a World-Class Utility Failed

Eskom’s failure is the most consequential business story in modern South Africa. This story covers the surplus era, the capacity decision, Medupi and Kusile, state capture, the debt problem, the reform programme and the private generation response — part of the South Africa Company Stories hub.

How did Eskom get here?

Through a sequence of decisions each rational in isolation. In the 1990s Eskom had substantial surplus capacity and among the world’s cheapest electricity, and government declined to authorize new build while considering restructuring and private participation.

The restructuring did not happen, demand grew as electrification extended access to millions of households, and by the mid-2000s the reserve margin had disappeared. The first load-shedding occurred in 2007-08.

By then new capacity took a decade to build. The decision not to build in the 1990s determined the outcome in the 2010s, and no subsequent decision could shorten the construction time for baseload plant.

What went wrong with Medupi and Kusile?

Almost everything. Two enormous coal stations, each among the largest in the world, were budgeted at a fraction of their eventual cost, delivered many years late, and commissioned with design and construction defects requiring extensive remediation.

The problems included boiler and mill design faults, welding defects, contractor disputes, project management failures and, later, evidence of corruption in procurement. Units that were commissioned frequently could not run at rated output.

The financial consequence was debt exceeding four hundred billion rand, incurred to build assets that did not deliver the capacity they were meant to provide, at a utility whose revenue could not service it.

What was state capture at Eskom?

Systematic looting through procurement. Judicial inquiry findings documented contracts awarded improperly, coal supply arrangements benefiting politically connected suppliers at inflated prices, consultancy and equipment contracts diverted, and senior appointments made to enable it.

The operational consequence went beyond the money stolen. Maintenance was deferred, competent engineers left, coal quality deteriorated as compliant suppliers were replaced, and the plants degraded faster than they would have under normal management.

Recovery required leadership replacement, forensic investigation, contract cancellations and criminal referrals, and the institutional damage — lost skills, broken processes, destroyed morale — has taken far longer to repair than the financial losses.

What does load-shedding cost the economy?

Enormously, in ways that compound. Direct costs include lost production, spoiled goods, generator fuel and equipment damage. Indirect costs include deferred investment, business closures, reduced employment and the general deterrent effect on economic activity.

Estimates of the annual cost run to several percentage points of GDP in the worst years, and the cumulative effect over more than a decade is a substantially smaller economy than would otherwise exist.

The distributional effect is regressive. Businesses and households that can afford generators, inverters and solar continue functioning; those that cannot lose income, food and study time, which widens inequality directly.

What is the debt problem?

A utility owing hundreds of billions of rand, unable to service it from operations, with government having provided repeated bailouts and eventually taking a substantial portion of the debt onto the national balance sheet.

The debt constrained everything: maintenance was deferred to conserve cash, tariff increases were sought to service borrowing rather than to fund operations, and investment in transmission — increasingly the binding constraint on connecting new renewable capacity — was underfunded.

Municipal non-payment compounded it. Many municipalities collect electricity revenue from residents and fail to pay Eskom, accumulating arrears that the utility cannot enforce without cutting supply to entire towns.

What is the reform programme?

Unbundling into generation, transmission and distribution entities, opening generation to private producers, establishing an independent transmission system operator and creating a competitive electricity market over time.

The transmission separation is the critical element, because an independent grid operator can connect private generators without the conflict of a monopoly utility that competes with them.

Implementation has been slow, contested by unions concerned about employment and complicated by the debt allocation between entities, but the direction is settled and licensing thresholds for private generation have been effectively removed.

What has private generation delivered?

A very substantial response. Removing licensing limits triggered thousands of megawatts of announced private projects, corporate solar installations, wheeling arrangements and utility-scale renewable developments funded by banks and independent producers.

Mines, retailers, manufacturers and data centres have built their own capacity, converting an operating problem into a capital investment that permanently reduces their exposure — and reduces Eskom’s future revenue base.

Rooftop solar on homes and businesses has grown enormously, driven by load-shedding and falling equipment costs, adding capacity that is invisible in official statistics and that permanently changes demand patterns.

What does the coal transition mean?

An enormously difficult adjustment. Eskom’s fleet is predominantly coal, located in Mpumalanga where mining and power employ a large workforce, and closing stations affects communities with no alternative economy.

International climate finance through the Just Energy Transition Partnership offers funding conditional on decommissioning coal capacity, which creates tension between climate commitments, energy security and regional employment.

The practical sequencing question is whether replacement capacity arrives before coal plants close, since South Africa cannot afford to lose generation it still needs — which is why closure timelines have repeatedly been extended.

What is the lesson?

That infrastructure decisions have twenty-year consequences and that deferring them is a decision. The choice not to build capacity in the 1990s produced blackouts in the 2010s, and no amount of subsequent effort could compress the physics of construction.

The second lesson concerns institutional capacity. Eskom was once a genuinely world-class utility with deep engineering capability, and that capability was destroyed within a decade by appointment decisions, corruption and the departure of skilled staff.

The third is that failure creates its own alternatives. South Africa is now building a decentralized, substantially renewable, partly private electricity system faster than any policy process would have produced — an outcome nobody chose, driven entirely by the failure of the system it replaces.

How does load-shedding actually work?

The system operator rotates planned outages across defined blocks so that total demand falls to match available generation. Without it, demand exceeding supply would collapse frequency across the entire grid and cause an uncontrolled national blackout that could take weeks to restore.

Stages correspond to the amount of load that must be removed, and published schedules tell each area when it will be cut. The predictability is deliberate: it lets businesses and households plan around outages rather than being surprised by them.

The economic damage is nonetheless severe and asymmetric. Large industrial users can sometimes negotiate exemptions or shift production; small businesses without generators simply stop trading, and the cumulative loss to output has been estimated in percentage points of national growth.

Why did the new power stations cost so much?

Because they were designed and procured by an organization that had not built a major station in roughly two decades, using boiler and control technology new to its engineers, on sites where construction labour relations were difficult.

Design changes during construction compounded the problem. Modifications to boilers and to the flue gas systems after work had started produced rework, delay and contractual claims, and each delay carried interest costs on capital already spent.

The result was units that arrived years late at multiples of their original budgets and that then required further remediation to reach design availability — which is the specific reason the utility’s debt reached a level the balance sheet could not service from tariff revenue.

What is the role of independent power producers?

Private generators — wind, solar, gas and storage — that build capacity and sell electricity under long-term agreements, either to the utility or increasingly directly to private buyers through wheeling arrangements over the national grid.

The renewable procurement programme demonstrated that South Africa can attract private capital at competitive tariffs when the contractual framework is credible, and successive bid rounds delivered falling prices for wind and solar generation.

The constraint has shifted from generation to transmission. Building lines to the windy and sunny provinces where the resource is best requires capital and land access on a scale that has become the binding limit on how quickly new private capacity can connect.

How did the debt reach an unsustainable level?

Through a build programme funded largely by borrowing against future tariff income that the regulator did not subsequently allow, combined with declining sales volumes as customers reduced consumption or installed their own generation.

The arithmetic then works against the utility. Debt service is fixed, revenue depends on units sold, and every tariff increase intended to cover costs accelerates the customer defection that shrinks the volume base — the classic utility death spiral.

Municipal arrears compounded it, with substantial amounts owed by distributors who collect from end users but do not remit, leaving the generator financing a collection failure several steps removed from its own operations.

What does the restructuring into separate entities achieve?

It splits generation, transmission and distribution into distinct businesses with their own accounts, so that the transmission network can be operated as a neutral system operator rather than as a division of the dominant generator.

That neutrality is the precondition for a competitive market. Private generators will only invest at scale if they trust that grid access, dispatch and connection queues are administered without favouring the incumbent’s own plants.

It also makes the finances legible. Separate accounts reveal which part of the chain loses money and why, which is the necessary starting point for tariff reform, targeted subsidy and any credible plan to stabilize the debt.

What is the outlook for electricity supply?

Improving on the generation side and constrained on the network side. Private solar and wind capacity has been added faster than the state could have built it, and improved maintenance at the existing fleet has raised availability from its worst levels.

The remaining problems are transmission capacity to connect new generation, distribution infrastructure in municipalities that have under-invested for years, and the debt burden that still shapes what tariffs must recover.

The realistic expectation is a system that becomes more reliable but more expensive, with large users increasingly self-supplying and the utility serving a smaller, more residential customer base — a structural change with significant social and fiscal consequences.

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