Eskom is dimming amid transition
Future power system should be designed on foundation of white paper
If a future power system were to be designed from scratch, it would look very different to the current system of large central power stations generating huge amounts of energy — and often pollutants — which is transmitted through long lines and transformed down for use in homes and businesses.
It would be a plethora of smaller, low-cost, nonemitting generators, storage and management systems all operating in a huge web of minigrids that is constantly transacting with suppliers, users and storage agents.
Most forecasts indicate that this future power system is already under construction and will be in full operation within the next 20 years.
Replacing a century-old system in two decades is daunting, but the timelines in the transformation of the telecommunications industry provide an indication of what can happen when a great technology is coupled with huge economies of scale and endless opportunities for innovation. The power sector is on that cusp of opportunity.
The winners will be the renewables industry, responsible investors and those who invest in the value chain of the new power sector. They will also be data miners, energy managers, vendors of energyefficient technology and grid smarteners. The losers will be the classic utilities operating in a regulated monopolistic model such as Eskom. Driven largely by deflation across the “new” energy board, the so-called utility death spiral already has the inflationary Eskom on its slippery slopes.
Eskom collects a revenue that covers its costs, plus a return on its assets sufficient for replacement and new assets. Its costs are made up of the cost of assets, largely reflected in capital outlays and debt service costs; people; fuel; overheads and operations and maintenance costs — most of which are quite constant over long periods.
Based on expected sales, an electricity tariff is designed to deliver the revenue allowed. The customer pays the tariff — which includes the cost of generating the electricity, its transport, delivery and metering — and a variety of overhead costs.
Historically, this balanced out well and electricity prices could be expected to reflect inflation, or even be below inflation due to productivity improvements.
This was thrown out of kilter when prices were politically limited and new capacity was required without a tariff adequate to support it.
Competition in the form of distributed-generation options such as rooftop solar is cheaper than Eskom electricity. Demand for these alternatives drives costs down and distributedgeneration options such as solar photovoltaic systems become more attractive. Each selfgeneration unit installed reduces the sales of Eskom, which has a largely fixed cost base.
Its unit cost of production therefore rises, with fewer units being sold, and its costs virtually remain the same. That means electricity prices must increase above inflation to enable Eskom to continue to cover its costs.
As alternatives become cheaper, more systems are installed and the gap between Eskom tariffs and the alternative distributed supply increases annually, motivating even more customers to install their plants.
Eskom argues that it is being unfairly treated as it is subsidis- ing reliability for off-grid customers and is not being compensated for this.
The regulator responds by charging all customers with a grid connection an increased monthly connection fee — which encourages customers to go off the grid entirely.
This will continue until the utility is unable to function effectively, its assets are decommissioned and debt service is potentially compromised. This forces the government to step in to sell off assets at bargain rates to compensate lenders.
Then comes the ignominious end to an industry that has been energising economies from the industrial revolution.
This utility death spiral captures others in its vortex of loss: major industrial customers, unable to go off grid, pay over the odds; and the poorest, who can neither afford the capital of self-generation nor access credit, pay more and more — increasing their poverty trap.
Based on experiences learnt with some pain in other countries, SA can manage the transition to a new energy future that positions it to enter a new era of clean, affordable and reliable zero-emissions electricity.
It requires a very different approach to the power sector to the one currently adopted.
An industry plan has to be developed — and stuck to — and the buy-in of all major interested parties has to be obtained.
There was agreement on the key elements of such a plan in 1998, when the white paper on energy for SA was adopted. It envisaged a gradual transition to a competitive power industry.
The end-state would be separate and competing generation companies, an independent transmission company and separate retail distribution entities.
“Government supports gradual steps towards a competitive electricity market, while investigations into the desired form of competition are completed. Eskom will be restructured into separate generation and transmission companies,” the white paper reads.
“Government will establish a transitional process that will lead up to the establishment of independent regional electricity distributors,” it reads.
Key issues relating to the restructured industry were identified in the white paper as giving customers the right to choose their electricity supplier; introducing competition in the industry, especially the generation sector; permitting open, non-discriminatory access to the transmission system; and encouraging private sector participation in the industry.
Since then, the industry has changed little — with interventions at piecemeal restructuring failing for diverse reasons.
SA’s future power system should be designed on the foundation set in the 1998 energy white paper. This should include a revised industry structure; a grid plan that allows for universal, simple and low-cost access; an integrated smart grid that caters for variable renewable energy; an electricity supply and demand plan that is based on low-cost, low-emitting technologies; and a competitive electricity market.
This design should include provisions for universal access to electricity; opportunities for localisation and the creation of new industries; the protection of the poor and the development of a revived industrial base that can rely on affordable, secure and consistent electricity supply.
A five-year plan should be developed to manage this transition. It needs to factor in the necessary enabling environmental — legislation, regulation or deregulation — standards and behaviour required for a smooth and sustainable transition.
An electricity market is required that enables players to sell, buy, trade, transfer and store electricity in a competitive, transparent and well-managed process. Electricity markets are a common feature around the world and SA can create a power exchange and market operator modelled on successes achieved elsewhere.
A first step can be to relieve Eskom of the burden of being the single buyer of electricity from independent power producers (IPPs). This can easily be achieved by creating a power exchange with the single initial function of acting as a single buyer and funding it with the part of the tariff already ringfenced for IPPs.
New market mechanisms to cater for new technologies, services and the full integration of supply, storage and demand markets should be developed. Eskom should be unbundled into several competing generation companies, a separate independent transmission and system operator and separate distribution and retail entities.
At the core of the power grid of the future will be a smart system that can take in supply from millions of suppliers, store it and release it instantly on demand, while also managing demand.
This requires unparalleled levels of data management, new technologies to ensure security and reliability of supply and new tools that operate right up to the end-use device in the homes and businesses of customers — and producer consumers.
Work undertaken at Eskom creates the foundation for a future smart grid, while local universities are developing the skills and technology base to support it. Organisations such as the Electric Power Research Institute in the US provide a view on global technology, case studies and experience that can be emulated. Players should be enabled to access the grid for off-take, feed-in, transmission and energy management.
A strong research and development programme aimed at identifying opportunities and creating new and innovative products and services must be in place.
Key to a future power sector is the fact that many new players will be able to enter the market. If SA creates an enabling environment for these new entrants to thrive and innovate, it should ensure that there are new levels of transparency and empowerment through knowledge.
Elements of the current system will be around for many decades — in particular large central power stations with substantial debt burdens. These assets can play a major role in smoothing the transition to a new future and should be properly managed to maximum advantage — not prematurely decommissioned.
The current excess capacity, with the potential of even higher margins in the next few years, creates the perfect environment for the creation of an electricity market, the restructuring of the industry and the creation of an enabling environment for a future integrated system.