ANALYSIS

Eskom Roadmap: Floated ideas with flexible milestones, for an uncertain future

By Marianne Merten 29 October 2019
Caption
Pravin Gordhan, South Africa's minister for public enterprises, arrives for a news conference to announce the Eskom Holdings SOC Ltd. rescue plan in Pretoria, South Africa, on Tuesday, Oct. 29, 2019. Photographer: Waldo Swiegers/Bloomberg via Getty Images Background: Eskom power lines run through an open field in Johannesburg, South Africa, 08 June 2015. PHOTO: EPA/KIM LUDBROOK

The Eskom Special Paper is long on vision, if short on detail and urgency. But that’s not its point. The paper’s release on Tuesday, the eve of a crucial Medium-Term Budget Policy Statement (MTBPS) is meant to support the narrative that while the outlook is far from rosy, the government is acting.

Public Enterprises Minister Pravin Gordhan on Tuesday delivered a narrative that kept coming back to the main point made repeatedly in different ways — sustainable energy at a lower cost, and Eskom simply could not stay as it is.

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That’s the ultimate aim of the restructuring over the next three to five years, or by 2024, of the power utility that with its R440-billion debt, much of it government-guaranteed, is the biggest risk to South Africa’s economy.

The much-anticipated Eskom special paper, now redubbed “Roadmap for Eskom in a reformed electricity supply industry”, doesn’t really hold anything fundamentally new that had not been anticipated since February 2019 when President Cyril Ramaphosa first announced the power utility’s unbundling.

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That the Eskom special paper has been repeatedly delayed over the past eight months — and shuffled from Public Enterprises to the Presidency — is one of the signifiers of the political contestation within the governing ANC.

The president instructed me to release the paper today (Tuesday) and as a loyal Cabinet minister I do so,” said Gordhan, who also swatted off questions on the rands and cents to his Cabinet colleague, Finance Minister Tito Mboweni who delivers the Medium-Term Budget Policy Statement (MTBPS) on Wednesday.

On Tuesday, the Eskom roadmap announces the functional separation of a transmission entity with its own board by 31 March 2020. However, the path to a separate legal entity could well be longer, given the possible need for legislative amendments to the Eskom governance law or the need for completely new legislation.

The roadmap gives 2021 as the outer timeline for the establishment of the legal entities for transmission, generation and distribution under the auspices of Eskom Holdings. It’s about as firm as it gets in the roadmap with regards to deadlines; according to the minister much was happening and it all depended on sequencing.

On Tuesday, Gordhan maintained that legal advice indicated it was possible to do what government wanted without any legislative changes.

If legislation is needed, you’ll hear. It won’t happen until the first quarter 2020.”

A new transmission entity, which would still remain part of the Eskom Holdings mother body, would involve up to 6,000 workers and tens of thousands of kilometres of “wires”, the transmission lines that ensure electricity gets from the power station to where it is distributed from. The entity would charge for this, while paying the generation entities for the power, although they could also buy power from elsewhere.

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On generation, the Eskom roadmap proposes dividing South Africa’s 16 coal-fired power stations into three clusters, each of which should drive their own efficiencies to produce the lowest-cost electricity possible. The first steps towards that would be taken in a few months’ time.

It’s a model that had worked in China, said Gordhan, adding Vietnam to the list later.

We are floating this idea. It has worked elsewhere in the world.”

It’s a more palatable approach to the unbundling than had initially been proposed as far back as the February 2019 Budget when Mboweni had picked up the ball from Ramaphosa.

Coincidentally, Mboweni didn’t alter the Eskom unbundling proposals of Annexure W3 in the wake of the immediate and sharp political comeback on the Eskom restructuring. Ramaphosa used his reply to the State of the Nation address parliamentary debate to reassure the country that Eskom’s restructuring did not mean retrenchment.

The 2019 Budget Review Annexure W3 addresses the details of the unbundling of Eskom’s so-called “institutional separation”, but is also intended to “crowd private investment into the electricity sector”, provide “open access to the grid” while providing a stable platform for secure lowest-cost electricity.

It’s that which has Mboweni, National Treasury and those who support such measures labelled as “neo-liberal” and worse amid the political contestation in the governing ANC.

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And so Tuesday’s Eskom roadmap went the Chinese way of internally competing clusters of power stations. It’s an indication of the political contestation that the proposals of Budget Review Annexure W3 have been dropped in the Eskom roadmap.

Don’t kill it off yet,” quipped Gordhan to Tuesday’s questions on whether such internal competition would be effective, particularly as the generation entity would remain, like the transmission entity, as part of the Eskom holdings mother body.

As the governing ANC and its ministers met trade unions, particularly Cosatu and its affiliates, over the Eskom unbundling, the terminology of “just transition” emerged. Focused largely on reskilling and retraining workers as the energy sector increasingly moves from coal, it’s an approach which threads not only through the recently released Independent Resource Plan (IRP), but also the Eskom roadmap. Public Enterprises is spearheading a pilot project on a just transition in a mining community. The meetings with labour are continuing.

There was a misconception, said Gordhan, that “fixing Eskom is like replacing a tyre in a car or a bolt in a boiler… As were are learning, this is a long protracted process…” It was a case of managing the crisis, including ageing infrastructure and breakdowns, while recrafting the business model.

But challenges surround the separation of the third entity, distribution, which on Tuesday seemed on the back-burner. Eskom and the South African Local Government Association have stalemated over legal and constitutional issues around electricity reticulation, or who should supply whom, particularly as municipalities generate considerable revenues from selling on electricity with a surcharge on Eskom prices, and even collecting monthly electricity levies.

An inter-ministerial task team established in August 2017 remains seized with breaking this deadlock.

The distribution model of the future will take into account the reliance of municipalities on electricity as a significant source of revenue. However, many municipalities do not have the technical capacity to effectively reticulate electricity function, which is a constitutional mandate,” states the Eskom roadmap in what appears to be an acknowledgement of further work to be done on this front.

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And later the documents adds:

Further consideration will be given to the structure of the distribution sector as a whole, given the:

a) Dependence of many municipalities on revenue from electricity tariffs; and

b) The development of rooftop solar and similar local embedded generation.

This is a rapidly evolving area. A set of policy parameters appropriate to the current and mediumterm should be formulated urgently.”

This is one of the many unresolved specifics in the Eskom roadmap and, given the stalemate at the inter-ministerial task team level, may signal complications down the road — regardless of the upbeat talk.

Opposition reaction to the Eskom roadmap has been short, sharp and brutal. The EFF, in a debate on the Public Enterprises Budget review and recommendation report (BRRR) described the unbundling of Eskom as “privatisation” amid sharp criticism of both Gordhan and Eskom board chairperson Jabu Mabuza, who has been doubling up as CEO for the past three months.

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It’s precisely what the government had wanted to avoid, both in the repeated reassurances that restructuring would not cause retrenchments and in dropping references to “crowding in” the private sector. That’s already a soft-spot for criticism in the independent power producers (IPPs) sector.

The EFF, like the DA later, called for the disestablishment of Public Enterprises as a department.

DA MP Natasha Mazzone pushed for the opposition’s Private Member’s Bill — the Cheaper Electricity Bill — as a better alternative to the Eskom roadmap.

This uncertainty and lack of clarity in energy policy is what has led South Africa to the energy crisis we currently face,” said Mazzone of the Eskom proposals.

Intellidex analyst Peter Attard Montalto said the Eskom roadmap was “strong on vision” across several areas, including the just transition, although concerns arose over where capacity would come from for implementation.

Overall, it is ‘fine’. The market is marginally disappointed that the (transmissions entity) isn’t fully spun out and there was no more detail on the debt… The key will be in the implementation and the contestation to come in that implementation.”

Gordhan was upbeat. “I am optimistic it’s all possible,” he said — with a crucial qualifier: “All of us have to make a contribution.”

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But it’s more complicated than government calling for an end to the culture of non-payment, particularly as municipal debt stands at R25.1-billion and many national and provincial government departments are also in the red with Eskom.

It’s more complicated than publicly acknowledging electricity sales have dropped by one percentage point over the past 10 years, admit the tariff has exploded by 500% in that period — and then still take the regulator to court to, simply put, get higher tariff increases.

It’s more complicated than claiming the books are being cleaned up after State Capture as Eskom tops the National Treasury Top 20 list of deviations, or exceptions to the usual procurement practices, in the first three months of 2019. That’s according to Tuesday’s briefing to the watchdog on public spending, the Standing Committee on Public Accounts (Scopa), which also showed Eskom ranked second, after Transnet, for exceptions that also need National Treasury approval.

It’s much more complicated. No pretty narrative can obscure that. DM

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