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Ring-fence Eskom’s ‘bad bank’ generation assets, says energy expert

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Ring-fence Eskom’s ‘bad bank’ generation assets, says energy expert

University of Cape Town Graduate School of Business’ Professor Anton Eberhard outlines a ‘pragmatic’ restructuring plan for Eskom. Camera Work: Nicholas Boyd. Editing: Christo Greyling. Recorded: 28.8.2018
Photo by Dylan Slater
Professor Anton Eberhard

29th August 2018

By: Terence Creamer
Creamer Media Editor

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A leading electricity expert is warning that there is little or no prospect that Eskom can trade itself out of its current financial difficulties and that restructuring – including a vertical separation of its cash-guzzling generation assets from its transmission, system operator and distribution units – is now both urgent and practically implementable.

Likening the generation business to a ‘bad bank’, University of Cape Town Graduate School of Business’ Professor Anton Eberhard argued this week that the power stations should be “ring-fenced” to prevent ongoing financial contamination of the “heart of the system”; the grid and the system operator.

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Addressing a packed Eskom auditorium at an event hosted in Johannesburg by EE Publishers and the South African Institute of Electrical Engineers, Eberhard said the vertically integrated utility model was no longer fit for purpose, particularly in light of the “unprecedented” rate of change currently under way across the global electricity industry.

Eberhard spoke against the backdrop of an Eskom strategy review, dubbed Strategy 2035, which Public Enterprises Minister Pravin Gordhan has mandated the utility to undertake. The review, together with a new corporate plan, should be finalised by the end of September.

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He agreed that corruption and maladministration had seriously damaged the business and applauded unfolding effort to address the problems. However, Eskom’s long-term sustainability was increasingly threatened by an industry structure and business model that was more “relevant to the previous century” than the current context.

“Around the world, electricity generation is no longer regarded as a natural monopoly. In fact, it hasn’t been since the 1980s, when we saw the first wave of reforms.”

The failure of South Africa to keep pace with those market changes had resulted in an electricity supply industry with serious operational and capital investment inefficiencies, primarily at Medupi and Kusile.

The view that a State-owned utility was best placed to raise low-cost capital and build and operate large-scale power stations for captive customers had been all but disproven through poor project choices and the abysmal execution of the build programmes at the two coal-fired power stations.

Amid falling costs for wind and solar, as well as the flexible generation sources needed to support variable renewable energy plants, Eberhard argued that the cost overruns posed a risk that Medupi and Kusile would become  “stranded assets”. With price tags of R145-billion and R161-billion respectively, the projects are two-and-a-half times more expensive than what was initially budgeted and are well behind schedule, with the last Medupi unit only expected in 2020 and the last Kusile unit in 2022.

As a consequence of the overruns, Eskom’s debt has risen to beyond R380-billion and is expected to peak at R600-billion. Funding this debt burden is also likely to become increasingly difficult in light of the constraints on the national fiscus, as well as growing societal resistance to further large tariff hikes, which could also further dampen demand for power.

Eberhard said that no policy change would be required before unbundling could be pursued, as the separation of generation from transmission was already embedded in the 1998 Energy Policy White Paper.

There was also no need for new legislation, as privatisation was not the objective, but rather a corporate restructuring of Eskom Holdings so as to facilitate the creation of a distinct transmission and system operator, with its own board. In time, that entity could be separated to become a distinct State-owned entity.

Nevertheless, such a restructuring would probably require a renegotiation of debt covenants to enable the debt to be split between generation and transmission.

Eberhard said the proposed restructuring would create greater transparency of the problems within Eskom and could also help protect the grid and system operator, which he described as the key main enablers of both greater competition in generation and a transition from coal to a system led by renewables and complemented by flexible generation.

Energy Intensive User Group past chairperson Piet van Staden supported the argument that Eskom, together with its rising debt burden, posed a risk to business and the economy and that restructuring was required.

However, he said that, given South Africa’s poor restructuring track record, as well the current lack of social cohesion, it would be critical for any restructuring plan to have broad-based support.

Van Staden even suggested that there might be a need for another De Villiers Commission, or even an ‘Energy Codesa’ to create a common vision of the pathway and to ensure full support from all stakeholders, including business and labour, for implementation.

“The idea would be for the social partners to unite behind a common vision . . . even if you have to lock everyone up in room for a month.”

Energy consultant Dr Andrew Eriksson, who is based in Switzerland, but is South African educated, stressed that Eskom’s sustainability problem was not unique.

Utilities globally were grappling with ways to remain relevant and sustainable in the context of dramatic changes in the electricity sector. “There are no guarantees of success, the death spiral is there and it’s real.”

Nevertheless, Eriksson described the changes as an opportunity to create new businesses and jobs within the electricity ecosystem, ranging from energy trading and management through to the aggregation of assets.

“There is a fear that renewables could force all kinds of painful changes, but I believe it’s quite the opposite. If you take the concept of the prosumer [the producing consumer] . . . it is, in fact, one of the most democratising processes around.”

Already renewables were enabling low prices for consumers and being able to participate in the electricity industry directly through, for instance, the installation of rooftop solar is allowing for a democratization of the sector.

Eriksson, who is already a prosumer by virtue of having installed solar panels on his house in Switzerland, said he “enjoys selling surplus power back to my local utility”.

“It’s a lot of fun being a prosumer.”

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