Eskom

All the eggs are in Eskom’s basket: It is time to diversify the energy sector

OP-ED

All the eggs are in Eskom’s basket: It is time to diversify the energy sector

By Jasandra Nyker 6 February 2019

 

An independent state-owned grid is not a solution to all Eskom’s woes, but will aid the recovery of part of the enterprise and decrease the costs of borrowing by returning the well-regulated transmission segment to investment grade, says Jasandra Nyker. (Photo: EPA/Kim Ludbrook)
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An independent state-owned grid is the necessary first step towards energy sector reform.

Jasandra Nyker

A threat to development

As South Africa reels with daily revelations of the extent and depth of State Capture in our critical institutions, we must confront another serious and related threat to our society. Eskom is failing. The state-owned company that once promised to power our democracy and economic development now cannot promise to keep the lights on.

Our view of this crisis comes into ever-sharpening view, through the Parliamentary Portfolio Committee on Public Enterprises’ inquiry into Eskom, Nersa hearings on tariffs, and representations of the board. Eskom is insolvent, and may soon run out of funds to cover its operational costs. In the shadow of this revelation, the very best we can hope for is a projected loss of R20-billion. Caught in a debt spiral, it is borrowing to pay for borrowing, without a way out. How can the company fund new power plants if it can’t even pay the debt on Kusile and Medupi?

South Africa is again confronted with the reality of load-shedding even as electricity tariffs increase at a rate above inflation. Supply is neither secure nor affordable. For our most vulnerable households, electricity has become a luxury that they can only sometimes afford, only covering a few days in a month. Increasingly expensive and unreliable electricity undermines basic service delivery and economic transformation, limiting opportunity, and pushing up the price of just about everything.

For South Africans, another Eskom crisis has become an all too familiar story.

How convenient it would be to say that this is Eskom’s problem. But Eskom is our problem. It is too big, too important, too far-reaching in its impact on every aspect of life and economy to be left without a remedy. Eskom is every South African’s problem because if it fails, the whole electricity system will fail. This would have dire implications for fiscal consolidation, setting in motion a catastrophic decline, further credit downgrades, economic recession, unprecedented job losses, and untold hardship. We have all our eggs in Eskom’s basket. If it drops, our economy breaks.

We haven’t sufficiently diversified our energy generation. Because it still generates about 95% of electricity, Eskom is, for now, too big to fail. One does not need to be an engineer or financial analyst to know that this is the very antithesis of good risk management. South Africans know that our is strength in diversity. It is time we take that lesson to the electricity sector.

In the short term, the state-owned entity’s ailing balance sheet with likely require yet another bailout, either by transferring part of its ballooning debt to the sovereign or through a series of equity injections. But let this be the last crisis, the last bailout. Let us move beyond treating symptoms, and get to the root of the problem. We must confront the structural causes of recurring crises if we have any hope of pursuing our developmental goals, for a stable, just and transformed South Africa.

Failing by design; redesigning for success

A vertically integrated power company with monopoly power is uncommon in the world today. With its archaic, slow-moving and unaccountable structures, Eskom is an anachronism. It is in its aged bones, forged under conditions of isolation and suspicion within apartheid’s security state, that we find the cause of its ongoing degeneration. The size and complexity of this single entity have made it almost impossible to govern well and prevented it from keeping step with international developments. The Eskom monopoly has led to (1) devastating inefficiencies and cost inflation, (2) foregone investment, and (3) a lack of transparency and accountability, which has placed Eskom at the centre of the State Capture saga. It has actively blocked the entrance of new players into the sector, leaving South Africa behind as other African countries experiment with new technologies to improve access and develop new energy sources.

As the causes of Eskom’s problems are structural, so too must the remedies be. We need an electricity sector that is structured to enable diversification, rather than impeding this transformation. Any restructuring must remove barriers to entry, allowing new players to access the grid and share their power. We need an independent, state-owned grid that will set South Africa on a path toward a more accountable, competitive and efficient power sector.

Unlike the current monopolistic system, an independent state-owned grid would be a prudent solution to the wicked web of risks that characterise the sector now. The national transmission grid brings electricity from power plants to our cities and towns, and as such, we cannot imagine a modern developing economy without it. Unlike Eskom’s generation business, which is the source of most of its financial perils, the transmission and system operator are well-run. In addition to increasing efficiency, separating the grid would also protect this critical infrastructure. If protected in this way, an independent state-owned grid company could provide a stable platform for the transparent contracting of power to provide energy at the lowest possible cost, saving money for Eskom and its customers.

Start by starting

The path to our bright new dawn will not be easy. Solving our electricity crisis, properly and in an enduring way will take time, effort and investment. But there are steps that we can and must take in the short term. We must prioritise our need to attract investment, ensure sufficient generation and secure supply, and to incentivise least-cost procurement. If we don’t, we may be unable to avert a national fiscal crisis and subsequent appeals to the IMF for assistance that could compromise our sovereignty in setting our policy agenda. We must act now to bring Eskom out of the shadows and into the 21st Century.

How we proceed today will determine what can be achieved in the future. And as any journey begins with the first step, what we do now will set us on a course with serious economic and political consequence. Our first step should signal a credible commitment to transformation in the sector, while major legislation solidifying our long-term vision is developed through appropriate processes.

Lessons from our own and other developing country experiences call for the path of least regret, a strategy that reduces the risks and costs of structural change. In South Africa, this would be to use the existing Eskom Holdings structure to establish a subsidiary that will come to house transmission and system operations, a company with an expert board, appointed not only for their knowledge and experience but for their leadership, demonstrated strength of character and evidenced commitment to good governance. This board will steward the state-owned grid company, and drive the migration of relevant people, systems, assets and debt into the new entity. Only once this is done, will this subsidiary be separated to become independent of Eskom, accountable to government and the people.

Without being encumbered by ailing generation or the current conflict of interest inherent to vertically integrated power companies, this company will be able to secure least-cost generation in a transparent manner and with the required urgency. The Renewable Energy Independent Power Producer Programme (REIPPPP) is a tried and tested model that could be used to procure new power. An expedited REIPPP round already has the potential to offer prices lower than 50c/kWh and, due to the shorter lead times associated with renewable technologies, deliver power to the grid within two-years. At a time when supply is constrained, this would be a boon. But procurement need not be limited to IPPs. New players should include municipalities, community-owned projects and small, medium and large companies investing in energy generation. In this way, the energy system could be democratised, over time.

A signal to the world

An independent state-owned grid is not a panacea, but it is pragmatic and should be considered a necessary next step. While not a solution to all Eskom’s woes, it will aid the recovery of part of the enterprise and decrease the costs of borrowing by returning the well-regulated transmission segment to investment grade. It will also increase competition and transparency in the sector while protecting the core of the system from the contagion of crises in generation and distribution. This is the surest way to set South Africa’s electricity system back onto a sustainable path.

Taking this first step in restructuring Eskom will send a clear signal to investors, rating agencies, lenders, economic partners, and other stakeholders that the causes underlying this crisis are being addressed, bolstering their faith in the future of the sector and our economy. As the world watches, we must demonstrate bold leadership and credible commitment by taking action. We need to transform, across so many spheres of the South African economy, and nowhere more urgently than in energy.

We must act now, and together. DM

Jasandra Nyker is Chief Executive Officer of BioTherm Energy, a leading African based renewable energy investment and independent project development platform. She is a long-serving proponent of a just energy transition. Nyker has a Bachelor’s degree in Business Science from the University of Cape Town and an MBA from the London Business School. In 2012 she was named a Young Global Leader of the World Economic Forum. The views expressed are in her personal capacity and not that of the company.

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