Restructuring and reform of South Africa’s power sector

August 18th, 2016, Published in Articles: Energize


This article is a precis of a keynote address to the Industrial and Commercial Users of Electricity (ICUE) conference held in Cape Town recently.

Everyone welcomes the fact that South Africa has not had load-shedding for nearly a year. After years of power cuts, which constrained economic growth, electricity consumption is more or less flat, and the national utility, Eskom, has had more space to catch up on maintenance and meet demand.

Anton Eberhard

Anton Eberhard

While the improved performance and availability of Eskom’s power stations is a positive development, all is not well in the electricity sector. There are challenges around delays in bringing new capacity online; rising costs and electricity tariffs; and further improvements need to be made in technical and commercial performance.

Electricity tariffs have increased four-fold (in nominal terms)  over the past decade, which in real terms – taking inflation into account – has resulted in an increase in the real cost of electricity of about 2,5 times since 2007. This has contributed to the closure of some energy intensive industries with associated job losses. Furthermore, although more of the population have access to electricity, many find they struggle to afford this basic service.

Eskom has to raise additional finance to complete its new build programmes at a time when Treasury has no fiscal space for further equity injections into the power utility, which has slipped below investment grade.

There are also problems around municipal distributors which are not investing adequately in maintenance and service delivery with potentially serious consequences for security and reliability of supply in the future.

This period without loadshedding provides an opportune time to think about, and plan for, the medium- and long-term future of the sector.

What do we require from our electricity suppliers?

The electricity sector should meet overall national policy and goals, especially those articulated in the National Development Plan: the sector should contribute to poverty alleviation, and a reduction in inequality, through powering economic growth and more employment. This must be done within the broad scope of environmental sustainability. Individuals and businesses need access to a reliable and affordable supply of electricity. To achieve this, the sector must be both technically and commercially efficient. And it needs to be financially sustainable so that it can attract sufficient investment to meet current and future electricity needs.

Is the current electricity institutional structure fit for purpose? Does it provide a sustainable platform to achieve national goals and objectives? Is the current structure adequate to serve the needs of the economy and its customers? Is it capable of attracting adequate investment to the sector for the future?

Restructuring and reform options

We must ask whether a vertically integrated, public-owned power utility is the best model. Many countries have changed, or are changing, their model to accommodate unbundling, competition and private sector participation.

Although recent years have seen an increase in private investment in independent power producers (IPPs), the country has remained relatively immune to the restructuring developments taking place elsewhere.

Eskom has been unable to provide sufficient capital for our future power needs. It has also deployed that capital inefficiently with cost and time overruns. Government has had to inject R83-billion into Eskom since 2008. In the meantime, we have seen the private sector investing about R193-billion in the renewable energy independent power producers procurement programme (REIPPPP) which has delivered projects on time and with decreasing costs.

While this seems to indicate that it would be sensible to accelerate private investment, we need to consider the industry structure within which this private investment is made.

Some members of the ruling party have punted the so-called “Chinese model” where the state holds majority ownership while offering the private sector an investment stake. But such a model would be disastrous without restructuring Eskom because partly privatising a vertically integrated, dominant state-owned entity will result in monopolistic behaviour and price gouging. An example of this can be seen in the telecommunications industry. Foreign companies were invited to participate, but it encouraged predatory behaviour by Telkom.

The wires business (transmission of electricity) should remain a national entity, along with system operation, but state-owned generation could be spun off from Eskom and should compete on a equal basis with private IPPs.  Greater competition should be encouraged through a simple amendment to the Electricity Regulation Act which would make explicit the possibility of direct agreements that allow generation companies to compete on a “willing-buyer, willing seller” arrangement with large electricity customers.

The current structure where Eskom is both a generator and buyer of electricity from IPPs restricts competition. Eskom can inflate the cost of IPPs connecting to the grid and can also constrain dispatch from IPPS if it believed this would be in the power utility’s favour.

But if state-owned generation was spun-off into a “Genco” company and Eskom (remodelled as a Gridco) was to control only transmission, system operation, planning, procurement and contracting, then the utility would be seen to be providing a transparent and fair basis upon which other generation companies could transact.

The difficulty in restructuring state-owned utilities is when they are in crisis governments are careful not to propose interventions that might further destabilise them but when the crisis recedes so does the political imperative for restructuring. When Eskom was load-shedding, the focus was on immediate measures to keep the lights on and on improving its financial viability.  It was more difficult to agree on far-reaching reforms that might prevent similar crises occurring in the future.

Restructuring of state owned enterprises requires vision, leadership and commitment to remove impediments to investment and for achieving efficiency improvements that facilitate economic growth and development. These are the kinds of structural reforms that are required across the economy.

Instead of Eskom’s leadership defending an old, vertically-integrated, monopolistic electricity industry model – which international experience shows is moribund – would they not want their legacy to be distinguished by a reforming zeal that sets our country on a different path; one that’s a model for attracting new investment, securing power supply, while containing costs and prices, and promoting environmental sustainability?

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