Breaking up Eskom can benefit economy and the taxpayers
The owners of Eskom (all South Africans) should be aware of the grave risks their managers and directors have taken on their behalf. The risks, that is, to the value of the many billions of rand that have been deployed on their behalf to add to Eskom’s capacity.
The new Medupi power station was originally estimated to cost R69.1bn in April 2007. The latest estimate puts the figure at more than R135bn and still rising. Kusile was estimated to cost R80bn. The revised estimate in July 2016 was R160bn – and will be revised still higher.
The danger is that all this additional capacity may be worth much less than it cost, and that Eskom will not be capable of servicing and repaying the additional R300bn-plus debt that has been incurred to fund these developments, much of it guaranteed by the taxpayer.
The further danger is that the burden of these overruns and servicing the debt will be passed on to the consumers of electricity in SA through further increases in Eskom’s tariffs.
But Eskom’s monopoly applies only to the electricity delivered over its grid. Thus electricity price increases may prove self-defeating for Eskom as well as damaging to the competitiveness of SA’s economy.
Higher prices lead to lower demand – perhaps the point where sales revenues decline rather than increase as key customers become more energy-conserving and turn to off-grid supplies.
Potential customers can shut down operations or not start new projects when the economic case makes less sense given higher real electricity prices. Investing in solar panels, small wind turbines or increasingly efficient gas turbines installed on-site can make good sense as drawing on the grid becomes ever more expensive.
And who knows what opportunities may arise from innovation and invention in small-scale electricity generation in the near future?
There is no good reason for all South Africans to have to carry these risks to electricity supply and demand. Such risks could be readily absorbed by willing new owners of plants – at the right price — owners capable of raising their own debt and equity capital.
The capital market has a proven taste for the highly predictable income streams electric utilities can deliver.
The Eskom assets could be divided up sensibly and auctioned off to capable independent operators, which would carry the risks of any failure to operate successfully.
Hopefully, the prices realised for the assets would be high enough to cover Eskom’s debts. But even if not, it would be better to realise as much as possible, as soon as possible, for these assets, than to incur still more debt to keep Eskom on its current destructive path.
One advantage of perhaps of prices paid at lower than replacement cost for the Eskom assets is that it might enable the new owners to offer much more competitive electricity — while still providing an adequate return on capital.
This could prove very encouraging to miners and manufacturers made more competitive by lower energy costs. Highly competitive electricity by international standards could stimulate a strong revival of mining and manufacturing and accompanying employment.
IT MIGHT ENABLE THE NEW OWNERS TO OFFER MUCH MORE COMPETITIVE ELECTRICITY — WHILE STILL PROVIDING AN ADEQUATE RETURN
The economy stands to benefit from a much more competitive market for energy from additional generators and distributors of electricity who would compete for customers.
Indeed, it would be a system more like those in the US or UK; a system well designed to spread the risks of failure and rewards for success in energy markets rather than one that concentrates these risks in one team of managers that can prove so highly fallible.