Business

Will a three-way split save Eskom?

2019-02-06 00:49

Unbundling the utility could be the only way to solve its financial and operational woes, writes Neeraj Sanjay Mense

The unbundling of South Africa’s only power utility could soon be a reality, following President Cyril Ramaphosa’s announcement at the World Economic Forum in Davos, Switzerland, last month that a turnaround strategy for Eskom would soon be unveiled.

Public Enterprises Minister Pravin Gordhan said this past week that there was a debate about whether the power utility should be split into three state-owned enterprises responsible for generation, distribution and transmission.

Were the split to happen it would be a catalyst, together with privatisation, that was needed to get Eskom’s house in order.

When looking at the issue of Eskom’s financial and operational crisis, one must understand why there is a need to split the utility and privatise.

Eskom is a state company that is involved in power generation, transmission and distribution.

Owning the transmission infrastructure, it will buy electricity from its own generators, which could be viewed as a conflict of interest, as it will always prefer to buy from itself.

This is a serious barrier to entry for any private generation solutions that could possibly feed into the grid.

With all the different sources of power that are coming into play, such as wind and solar, and the cost of energy generation reduced below that of coal, buying from private players such as the independent power producers within the renewable energy independent power producer procurement programme could potentially result in a shutdown of some of Eskom’s existing plants.

This is as a result of Eskom not gearing up to the change that is happening in the electricity industry.

The current system at Eskom is not something that is transparent and does not encourage competition, causing the end consumer to suffer higher tariffs for electricity.

Should Eskom be privatised, South Africa would have a completely independent system operator, the generation would be separate and there would be a transmission entity that manages only purchasing of electricity from different generators and then selling it to the end users.

Privatisation through the unbundling of Eskom would mean a utility completely independent from government functioning and Eskom staff.

The new utility would focus on factors that are needed to make sure the consumer gets the best price for electricity, benefiting the economy and the consumer.

The independent operator would decide where to buy electricity, as well as the structure of the independent transmission body that is associated with procuring and purchasing electricity from different sources.

The first mandate for such a body would be to purchase electricity from the cheapest source, which may be a hydro plant, a coal plant, or a wind or solar plant, provided that all the requirements are met.

An independent entity that purchases electricity based on price would force Eskom to improve its internal performance and make sure that it also provides electricity at competitive prices.

Because Eskom is almost a monopoly, with only minor rivals to compete, the utility can hike electricity tariffs and cover up inefficiencies, but if there was an independent entity purchasing from different sources, there would be a huge level of competition that would force Eskom to improve its internal function and get its house in order.

Because of what the utility has gone through in the past four years, regarding blackouts and high electricity tariffs, industrial and mining operations have had to move out of South Africa. If we are to see economic growth, industry needs to prevent the economy from further suffering.

Eskom has the financial capability to set up wind and solar farms, and should re-evaluate its investment in coal, a fuel that other countries are moving away from in the hopes of seeking cheaper sources of power, while also anticipating future electricity demand on a regular basis.

An independent operator whose main focus would be procuring and selling electricity at a competitive price, compared with global benchmarks, would result in various industries moving to South Africa.

Electricity is key to industry growth and companies tend to move their production to countries that have cheaper operating resources and provide them with the necessary facility to reduce their operating expenditure.

Although we cannot change the lack of foresight that ultimately put Eskom in the dire situation it is in now, we can certainly hope that it focuses on various other sources of power that could be sustainable in the long term.

Privatising a once sole government utility into separate entities would directly benefit the end user and the economy, and, as a result, increase economic growth owing to electricity prices that would be brought under control.

It will also encourage competition and innovation within the South African electricity industry.

Opening the market through power being procured from various power sources would invite companies to South Africa to look at distributed generation and electric mobility, which is being explored in European countries.

South Africa could also see an influx of companies that manufacture batteries, as the country has the natural resources and energy storage is an essential element in the wind and solar grid.

The disadvantage for Eskom would mean a smaller market share, but that would not necessarily mean the end of the power utility.

South Africa would never be able to solely rely on wind and solar energy, and Eskom would have to be a part of the energy mix if the economy was to sustain itself.

One needs to be clear that although the privatisation of Eskom will not solve its financial and operations crisis, it is a step in the right direction and could potentially reduce its operational inefficiencies and revenue losses.

One needs to also be mindful that the road to recovery and getting Eskom back on its feet will not materialise overnight.

This is going to be a long process and it will only succeed when Eskom is sufficiently restructured internally, through reduced operational expenditure and streamlined processes.

Mense is a senior industry analyst at Frost & Sullivan

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February 17 2019