Opinionista Mark Swilling 18 February 2020

Eskom is in a death spiral, so it’s time to change the energy ballgame

The time has come to speak truth to power – power generated by renewables. Coal is dead, the nuclear lobby is trolling for all it’s worth and State Capture has gutted Eskom.

The Eskom ballgame has changed. The new CEO, André de Ruyter, is unafraid to tell the truth about the real state of our dilapidated fleet of power stations and the failures of our new ones. Cosatu is stepping up to the plate with some very interesting proposals, which the president and Minister Pravin Gordhan have broadly supported.

As he set out to do, Gordhan is giving De Ruyter the space to fix the country’s power utility. And true to form, Minister Gwede Mantashe did a “Mantashe” by throwing the cat in among the pigeons at the start of the Mining Indaba by coming out in support of self-generation and the idea of an “Eskom 2.0”.

Everyone seems to agree that if Eskom goes down, the South African economy goes down. What most do not seem to realise is that it is no longer a matter of “if” – it is already happening. Just look at our poor economic performance and then connect the dots back to Eskom. The last words of former Eskom CEO Phakamani Hadebe are coming true: Before he resigned, he said Eskom was in a “death spiral”. 

A death spiral has a very specific meaning: To cover the costs of operations and the servicing of R450-billion worth of debt, Eskom has to increase electricity prices. If it wins its court case against Nersa (which decided to prevent Eskom from increasing prices), then the result will be higher electricity prices, reduced demand for electricity and therefore reduced income (not to mention the economic damage caused by business closures). Reduced income will force Eskom to raise prices in order to survive, which will further reduce demand and therefore income, and so down the death spiral we go. And with it, the South African economy.

Can it be reversed? Gordhan and Minister Tito Mboweni are seized with the urgency of the crisis, but this is not necessarily the case for some of the other politicians who are critical to saving us from the brink. Mboweni and Gordhan, for example, say different things in public from Mantashe. President Cyril Ramaphosa dedicated much of his State of the Nation speech to the energy crisis, but South Africans are fatigued with his apparent lack of action and he now needs to whip into line political mischief-makers with sufficient force and authority. How Mantashe gets away with blaming Gordhan for the energy crisis really amazes me.

The state-owned development finance institutions cannot really be expected to take initiative if the government is not united around a single strong, coherent strategy. Parliament has also failed to be proactive.

Eskom faces numerous challenges, but by far the greatest is the level of debt. Its debt is north of R450-billion. R250-billion of this is the result of state capture and the massive budget overruns caused by the mind-boggling inefficiencies during the building of Medupi and Kusile. These mega-plants were funded from World Bank loans whose figures and projections have proven to be totally wrong (despite warnings at the time that they were wrong). 

If Eskom wins its court battle with Nersa, the unintended consequence is that we will be paying the price for state capture, incompetence and the World Bank’s refusal to listen to criticism. But as long as the debt remains on the Eskom balance sheet, Eskom has no option, but to push for higher prices.

Eskom’s fleet of coal-fired power stations is old and decrepit. The Integrated Resource Plan (IRP) that Cabinet approved in 2019 includes an ambitious set of annual targets for decommissioning these power stations over the next 20 years. By 2041, only two will be left – Medupi and Kusile (even though it would be cheaper to simply shut down Kusile now instead of completing it). 

In the meantime, it costs more and more to keep an ever-ageing fleet going, which is why we have load shedding. To make matters worse, as temperatures rise because of climate change, the performance of air-cooled power stations is reduced and water supplies for water-cooled power stations are threatened.

The coal industry is in crisis. Nearly all the biggest investors in the world have announced withdrawal from coal, including Black Rock, the world’s largest asset manager. As Roger Baxter from the Minerals Council often makes clear, to secure investors in coal, three conditions will have to be met: energy costs must go down, there must be energy security and the energy supplied to the coal mines must be low carbon. 

Only renewables can deliver all three conditions in a short space of time. What Mantashe does not realise is that his prized pet sector – coal mining – stands to benefit enormously from what he seems reluctant to accept, namely a fast energy transition led by renewables. A massive renewables programme will also significantly increase demand for steel, cement and various other metals, most of which we have in abundance.

If we have to shut down the bulk of our coal-fired power stations over the next 20 years, what will replace them? More coal-fired power stations? Not an option – no-one will provide the funding (and if they do, it will most likely be a costly Chinese deal with onerous conditions). And in any case, coal-fired power would be north of R1.30/KWh compared to 60c/KWh (or lower) for renewables. 

Given our extraordinary radiation and wind assets, and the deteriorating quality of our coal, the only real financially viable lowest cost option (that can also happen quickly), going forward is renewable energy. It follows that over the next 20 years, a massive renewable energy build programme is the only logical alternative.

The nuclear lobby, of course, denies that renewables are a viable alternative: Its army of paid social media trolls pump out fake news on a daily basis about the “white-owned renewable energy”, sector, even though a big-time renewables player like Patrice Motsepe and the BEE companies who own at least 40% of all IPPs don’t quite fit this profile (and it is hugely puzzling why they don’t speak up). This is clearly part of the Jacob Zuma-linked fightback campaign that reinforces Russia’s strategic agenda to build nuclear plants across the African continent. By giving ex-Royal Navy engineer Dave Nichols the South African Nuclear Energy Corporation megaphone, this campaign has received a substantial boost.

This is where the Cosatu proposals come in. By proposing that R250-billion of the Eskom debt be relocated into a Special Purpose Vehicle (SPV) of some kind, Cosatu has revived an idea that Mboweni dismissed in his Medium-Term Budget Policy Statement at the end of 2019 when he said he would only consider “debt relief” if the Eskom reform plan proposed by Gordhan has proven to be workable. 

For the Eskom reform plan to work, Eskom needs to be relieved somehow of at least R250-billion of the R450-billion debt burden. Eskom cannot access new finance and it has to reverse the death spiral. Furthermore, it also faces the challenge of decommissioning the old power stations according to the IRP timeline. Without decommissioning, the funders interested in a 20-year investment programme in renewables do not have the certainty they need. And without that, mining cannot attract new investors.

The Cosatu proposal – which echoes what came out of the Presidential Task Team with respect to an SPV – breaks this logjam. However, the essential difference between the two sets of proposals is that Cosatu is looking at the DFIs (the PIC, DBSA and IDC) to finance the SPV, while the Presidential Task Team suggested a R160-billion green fund (endorsed by the president) sourced from international climate funds. 

The two proposals, however, are not inherently incompatible. Given that this is a 20-year investment programme, there is plenty of space for many different kinds of funding flows that may or may not need an SPV to intermediate. But the key success criterion would be to ensure there is a stable long-term investment framework that guarantees a high degree of certainty for all investors, and workers in the energy and mining sectors. Hence Cosatu’s reference to a “social compact”.

Without being seen to endorse the Cosatu proposal about the role of the PIC, the vehement critiques of this idea seem to me to flagrantly ignore two vital elements. Firstly, the PIC is already on the hook for nearly R100-billion. If this whole thing goes pear-shaped, everyone loses (especially the PIC), and over R300-billion of state guarantees kick in. When the International Monetary Fund team arrives to manage the fall-out, who will they favour? The PIC or the private banks? 

The PIC might well find it attractive to rescue its R100-billion (and, of course, the “national economy” – the PIC press statement refers to this explicitly), if a credible plan emerges that shows how Eskom can be turned around and made financially viable again. Imagine, for example, a plan that envisages PIC investments in new plants only, i.e real generative assets? We all win if this happens. Why is this such a ridiculous idea? Secondly, Cosatu is not calling for a bailout of Eskom. It insists that funding for Eskom (no matter where it comes from), to manage its debt must be conditional on fundamental restructuring so it can lead a just transition. That is very very far from leaving Eskom intact. 

Why are these two elements of the Cosatu position ignored? Is it because the Cosatu proposal means withdrawing billions from the JSE (and the threat to bonuses and fees as share prices drop)? Or is it because the alternative is preferred, i.e to increase government debt as a percentage of GDP in the next budget? Who gains most from which option? We need to ask these questions.

The bottom line is that there are three sources of funding to address the Eskom debt crisis: government borrows more money from financial institutions to reduce the Eskom debt (this is what increasing the debt:GDP ratio means); PIC/GEPF funding of some sort (whatever the terms or permutations); and climate funding. Some mix of all three may be needed. But will this happen quickly enough? And what is needed to speed things up?

Cosatu’s key demand is that Eskom is not privatised. The worldwide lesson is that privatisation within a context that is already highly corrupt results in rampant asset stripping and looting (think Russia). 

Key rent-seekers in SA have supported privatisation. Coincidence? Significantly, the Cosatu statement accepts that Eskom will have to be restructured and it does not reject what De Ruyter has called “divisionalisation”. Cosatu is deeply suspicious of unbundling because it is regarded as the first step towards privatisation. The unions are still working on a document that will consolidate their vision of Eskom’s future.

Equally significant, Cosatu wants Eskom to be restructured so it can deliver renewable energy and it also envisages a decentralised mass rollout of rooftop solar energy (embedded generation) and electric vehicles. This is a clear recognition that SA’s energy future is not a coal future. Nor is there any mention of nuclear power. 

Cosatu envisages a pro-worker renewable energy future with a restructured and refinanced Eskom as a public utility playing a central role, but with important roles for the private sector and community-based alternatives. As the 22 January 2020 version of the Cosatu document puts it: “Targeted public and private investments must be made to produce renewable energy technology locally … .” Furthermore, “[w]orker and community-owned generation capacity must be increased, in particular targeting coal workers and communities”.

This combination of public, private and community-based delivery of renewable energy is an advanced, sophisticated vision (consistent with practice in a number of countries), that breaks from the simplistic view that renewables can only be efficiently delivered by IPPs in a highly competitive market. We must avoid a pure market solution that incentivises a race to the bottom where prices drop so low that renewables become unprofitable. 

Big market share players like Enel are driving this trend hard to the detriment of smaller players who need better margins. The end result would be a slowing down of investment in renewables at precisely the globally historic moment when the opposite is needed. We must avoid this, and the Cosatu vision enables this.

This also means that Cosatu has rejected the technical nonsense spread by certain pro-coal and pro-nuclear lobbies that a renewables-based energy system will be unstable because there is no so-called “baseload”. The highly sophisticated CSIR models confirm with great certainty that if renewables are geographically distributed across South Africa and there is sufficient storage, baseload is not a problem. Internationally, it is widely accepted that baseload is becoming less of an issue.

Echoing Chapter 5 of the National Development Plan, Cosatu also makes it very explicit that it envisages a Just Transition: “A Just Transition plan be developed and implemented for workers at power stations and coal mines reaching the end of their life spans and their host communities, in particular Mpumalanga, Limpopo and the Eastern Cape.” 

Our research shows that if you correlate the decommissioning rate with natural attrition rates, no retrenchments would be required. This is because the average age of most coal miners is between 45 and 60, which means they are going to retire anyway during the 20-year transition period to a renewable energy system. If decommissioning goes too fast, retrenchments will take place. If it goes too slowly, older workers will retire and newly hired (younger) ones will eventually have to be retrenched. Correlation is the key to finding the most equitable and fair solution. And this is not difficult to plan for and achieve.

This brings us to Mpumalanga: The province with most to lose as the coal-fired power stations and coal mines close. Mpumalanga will have to be re-visioned. Without a Just Transition, up to 80,000 workers face a future as dismal as the 60,000 workers who lost their jobs during the unjust transition that has taken place in the gold mining sector. 

If we accelerate the decommissioning programme described in the IRP, it may be possible to secure international climate funding and local DFI funding to support a just transition. This would make possible many of the proposals in the Cosatu document, including heavy investments in Mpumalanga in renewable energy power plants and the upstream manufacturing industries to make the equipment. 

Mpumalanga could become the world’s largest renewables producing region: radiation levels are nearly as good as in the Northern Cape, there is plenty of wind along the escarpment and grid capacity is substantial because that is where all the power plants are. The bulk of the estimated 200,000 jobs that a large-scale renewables programme will generate can be in Mpumalanga.

For the first time, a just transition may be emerging from the maelstrom as a realistic option for all players. We need to stay focused, stick to the facts and allocate capital responsibly in a world transitioning rapidly to renewables. DM

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