South Africa

South Africa

Eskom imperils our energy security – It is long past time to Liberate the Grid

It is a paradox of sorts but Eskom’s increasingly hostile attitude towards the country’s once successful renewable energy programme (REIPPPP) and indeed, the government’s own energy policy, should be welcomed. By DIRK DE VOS.

Recently, we have seen Eskom’s current head generation, Matshela Koko, saying that National Treasury itself should pick up the liability created by existing renewable energy projects even though the costs of these are passed through via the regulated tariff mechanism (so no cost is borne by Eskom).

Eskom’s defiance of national policy and legislation by its refusal to connect additional renewable energy projects is now the subject of an official complaint by the Wind Energy Association (SAWEA). At the same time, Eskom wants to be at the centre of a future nuclear energy procurement programme despite the lack of an Integrated Resource Plan (IRP) to support any such thing.

This should not be seen as a bad thing. Why? In the Finance Minister’s Medium Term Budget Policy Statement, we see Treasury support REIPPPP and other energy initiatives but these are little more than encouraging words. It is Eskom that, perhaps inadvertently, is framing exactly the kind of debate that South Africa should have finalised more than 18 years ago. In 1998, Cabinet adopted the White Paper on Energy. It contemplated a substantial restructuring of our electricity sector separating generation, transmission and distribution, the extensive use of markets to regulate price, promoting energy efficiency and environmental sustainability.

Almost none of the policies was carried out. One initiative that did emerge was an Independent System and Market Operator (ISMO) Bill which would have made a modest start on separating the management of the grid from Eskom’s generation and distribution activities. It went nowhere.

In the interim, a revolution driven by increasingly cheap renewable energy has got under way. In 2014, more additions to global electricity generating capacity were accounted for by renewables than any other form of energy and growth of this sector is charging on requiring constant upward revisions to the future growth of renewables.

In South Africa however, despite claims to the contrary, the promising renewables programme is grinding to a halt. Eskom’s willingness to connect ever cheaper renewable projects has moved from what can be described as passive-aggressive to one of open defiance. Soon, investors in renewables will have to abandon the country and relocate their efforts to countries that are moving with the times.

We seem to be caught in endless debates about the merits of renewables. While Eskom, a publicly owned company, refuses to disclose information about the costs of its generation, new renewables are proving to be cheaper than any other source of electricity generation. Eskom, for its part, has sought to dismiss renewables with a series of misrepresentations about renewable energy and does so even in its own financial statements. Eskom’s false claims on renewable energy are then trafficked to the general public in such bad faith that there is little purpose in the tedious efforts to refute them.

Let’s get to the more useful debate then: Mr Koko is reported to have said that the financial strain caused by the REIPPPP (renewables) was indefensible. In doing so, he makes a telling point, “I am an executive of Eskom. I will not preside over Eskom sinking,” and to underline what he means, he goes on to say, “You cannot be a cardinal and not believe in the pope.” So, there it is. Eskom and its viability stands in the way of sensible electricity sector decisions.

One of the more recent changes to the electricity sector is that planning future generation is now not done by Eskom itself but through an independent IRP process. The IRP is now the means by which South Africa plans its future electricity path. The outcome of the IRP permits the Minister of Energy to make a determination in terms of the Electricity Regulation Act on what type of capacity is to be built, when and by whom. Previous such ministerial determinations have resulted in the REIPPPP, the coal IPP and the gas IPP.

The IRP processes are fairly rigorous but it looks at the South African electricity supply sector as a holistic system. That is essential for planning processes but it does not take into account that for all practical purposes system is Eskom and Eskom has its own plans for itself. If, theoretically, Eskom’s interests were the same as those of the rest of the country, that would not be much of a concern. But they are not and Mr Koko and his management now have made it quite clear whose interests are to be pursued. They are not our interests.

To understand the growing problem South Africans confront, take a look at the table below, a snapshot of Eskom in 2007 and 2016:

Despite revenues shooting up by a factor of 4 (about 3 in inflation adjusted terms), total debt is up by a factor of eight and to that debt pile, another R327-billion is to be borrowed on current plans. The explosion in debt is largely a function of the disastrous new coal-fired mega generator builds, Medupi and Kusile. That is partly a function of Eskom’s very poor project management capability but also that megaprojects everywhere follow an Iron Law – Over Budget, Over Time, Over and Over Again.

Eskom’s extraordinary ability to dissipate large amounts of physical capital on a more or less continuous basis is matched only by its ability to maintain and preserve political capital. This is not a new problem. The current Eskom management simply follows an established tradition extending back to well before our democratic dispensation. As Dr Grové Steyn, of Meridian Economics, writing about Eskom a decade ago, points out: “It should not escape the attention that technological paradigms, construction choices and (lack) of demand-side strategies serve the pecuniary and reputational interests of engineers, managers and politicians… Unfortunately, the interests of these groups are often not adequately aligned with the social interest”. None of this should be surprising – all government sanctioned monopolies do the same thing.

Seen in this way, Eskom’s enthusiastic support for the completely ludicrous nuclear programme makes perfect sense. Very few sensible independent observers think it can proceed and Eskom has no chance of financing or, as we have seen, successfully project managing any such programme. It is more than likely that most senior managers within Eskom know this too – as their own 2008 study showed. But there is a lot of political capital to be won by getting behind it. Again, dissipating physical capital and building political capital.

For the rest of us, the problem with our electricity system just gets bigger as Eskom loads up on more debt to support its capital programme firmly based on a perpetuation of a coal-based, centralised and vertically integrated monopoly. The nature of the existing debt pile is worth examining. Over half of Eskom’s debt is explicitly guaranteed by the state and a good portion of that is made up of bonds held by the Government Employees Pension Fund (GEPF) through the Public Investment Corp (PIC). We should know that Treasury explicitly or implicitly stands behind all of Eskom’s debt. It does not help that the one crucial metric against which Eskom ought to be measured, its credit status, is “junk”. Raising capital for a coal-based utility is just going to get harder and more expensive as investors everywhere withdraw from anything to do with coal. A coal-based electricity system looks increasingly like a stranded asset.

Utilities elsewhere that remain wedded to coal have suffered enormous write-downs and continue to do so. There is a term for what happens where demand for electricity falls as the costs of producing it increases: A utility death spiral.

South Africa does not have to be stuck with a heavily indebted dinosaur dependant on depleting reserves of coal and an ageing fleet of power stations becoming ever less reliable generating electricity at a price that South Africans cannot afford. It requires just one thing:

Liberating the transmission grid from Eskom.

Once we do that, energy policy and IRP processes can actually mean something. Managed separately, the grid can make the kind of investments that would allow South Africa to remain with the family of nations that are deploying renewable energy at a furious pace. Not only will this allow South Africa to meet its greenhouse gas emissions commitments but also will attract investors who see smarter grids with more decentralised and locally located renewable generators as sound investments.

South Africans need to be clear about one thing. Carbon taxes are coming, whether we like it or not. The Paris Agreement on climate change will come into force on November 4, 2016 and carbon taxes will be the major tool to combat CO2 emissions. Claiming that South Africa represents just a small fraction of total CO2 emissions won’t wash when our economy, based on coal, is one of the most carbon intense economies in the world. If we don’t impose carbon taxes, our trading partners (including China) will happily impose them on our exports at their ports of entry.

Of course, Eskom will resist any changes to the way it operates – as much as necessary changes are in the interests of the rest of us, none of them are not in its interests. Eskom is bound to use whatever political capital it has to resist any change and increasingly, it can use the consequence of defaulting on its debt as an additional threat. As mentioned, that is to be expected. That is what monopolies do.

We should know this. In the long term, Eskom in its present form as a vertically integrated monopoly does not have a future anyway. The only real question is the amount of damage that it will cause on the way down. It is the task of all responsible South Africans to minimise the damage.

The first step before anything else of consequence can happen and it can’t happen quickly enough – liberate The Grid. DM

Photo: Eskom power lines run through an open field as the sun rises on a cold winter’s day in Johannesburg, South Africa, 08 June 2015. EPA/KIM LUDBROOK

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