Eskom has role to play in energy transition
• Unbundling and apportioning a fair share of its debt per asset is the first step in managing its legacy assets
Some South Africans believe Eskom should fall and the country will stride into the new energy world, but this is not desirable. Being a state-owned enterprise, Eskom belongs to all South Africans. It carries huge debt. Abandoning Eskom would be like leaving an existing (mortgaged) house and moving into a new one without thinking about what to do with the old one.
As Eskom and its assets have a critical role to play in SA’s energy future, it should be sustained through the transition. It contains a fount of knowledge, technology and expertise.
The energy model of the future is so different that it is questionable whether the large legacy companies can make the huge adjustment necessary to be viable operators in the future — without acting as a barrier to progress. Eskom’s practices relating to the renewables programme and new capacity is a pertinent case study. Consequently, while it must play a key role in the energy sector of the future, Eskom as it is currently structured does not have a part to play.
Some insist that it is possible, over a very short period, to move to a new system of 100% renewables. Technically, they are correct, but the gap between theory and practice is very difficult to close and comes at a high cost and risk. The solution is to manage the transition period and process of change. A key element of this is how to manage Eskom’s legacy assets.
The first step should be to unbundle Eskom and apportion a fair share of its debt per asset. Given the way it is structured and the readily available accounting data on asset valuations and debt structures, this should not be an onerous task.
Its transmission lines and the management of the system are key components of a future smart grid to deliver and receive power and provide essential security, reliability and transactional services. They account for about 15%-20% of the price of electricity and this is likely to remain constant. In a power sector that has been reformed, these wires and the system operator should be a separate, fully regulated monopoly with a focus on efficiency and meeting performance standards that are well benchmarked.
Other than establishing the efficiency and performance standards, regulatory regime and network development plan, little legacy management is required for the grid. The challenge is to ensure that it remains relevant in the transition period and does not get “stranded” as part of the utility death spiral.
To avoid this, there should be ready access to, and use of, the grid by all players.
The distribution lines, billing and retail services account for about 25%-30% of the cost of electricity. Currently, these costs are spread across Eskom and municipalities countrywide.
In a reformed power sector, the current configuration could be retained, with the Eskom distribution wires and retail unbundled into separate and independent provincially delimited businesses.
The regulatory and policy environment should be reformed to allow for the voluntary restructuring of the energy sector through mergers or unbundling.
SA has low-cost generation plant (Eskom legacy coal, Eskom legacy nuclear) as well as premium-priced capacity (Medupi, Kusile and new renewables) and capacity to manage peaks and assure system security and reliability (hydro and peaking plant). Some older coal plants will reach the end of their lifetimes in 2020, but others have capacity to operate for another 50 years. New technologies will produce electricity at costs lower than all but the legacy coal plants — and that will be challenged soon.
Any legacy management plan must phase out CO²-emitting plants and replace them with low and non-emitting options, with emissions peaking by 2025 and declining thereafter. The solution lies in creating an electricity market anchored on several generation companies, all competing for their share and none with the power of the market.
Careful design of these companies would ensure an equivalent sharing of Eskom’s current debt burden, as well as a diverse mix of old and new capacity to ensure all can compete on an equal footing.
These companies would need to be unbundled from Eskom into standalone and independent entities. Careful consideration must be given to the valuation of assets in this process to ensure that a lowcost base can offset the burden of the high-cost generators such as Medupi and Kusile.
The early renewable projects also come at premium pricing — a necessary step in getting to the very low-cost base being bid. These costs, committed under power purchase agreements, would need to be factored into the base tariff along with transmission and distribution costs.
A multimarket power model allows for a variety of instruments to be applied to manage legacy issues such as the debt burden, emissions, system security and nuclear plants.
New capacity to replace decommissioned capacity can be incentivised via market mechanisms to ensure efficient and timeous investment, which will result in lower costs and lower environmental footprints.
The policy makers should set objectives such as emission targets and socioeconomic parameters, and the regulators should set efficiency, reliability and quality standards. The rest can be left to the market.
The unbundling of Eskom presents huge opportunities for broad-based black economic empowerment. Initial public offerings of the unbundled generation companies present opportunities for black South Africans to own a part of their energy legacy, while getting a foot in the door to an exciting energy future. This is probably the biggest broad-based empowerment opportunity yet and there is a limited window of opportunity to ensure that it is effective and adds value for all South Africans. Key to the success of power sector reform is the empowerment of customers with transparency in pricing, markets and decision making. Mechanisms must be put in place to ensure that social-good elements of the system — such as electrification and free basic electricity — are sustained so that electricity continues to improve the quality of life of all, while growing the economy and improving the environment.
These benefits in managing the legacy are the start of the economy into one that powers into the Fourth Industrial Revolution as an energy, technology and innovation leader.
A key driver for it is the availability of plentiful, reliable, clean and competitively priced energy. The integrated grid of the future will power the Fourth Industrial Revolution.
The speed of technological change means that models of innovation and the commercialisation of products and services need to change and accelerate drastically. In the power sector, there has historically been substantial cost decreases in niche technologies such as solar photovoltaic — it dropped by almost 60%, from 2010 to 2015 and is anticipated to drop 59% more by 2025. Since 2009, battery costs have fallen by a factor of four and battery energy density has increased sixfold.
Distributed energy sources such as solar photovoltaic are turning electricity consumers into “prosumers” (producer consumers) while rapidly becoming the lowest-cost source of electricity.
As a result, the subsidy driver that is supporting the growth of renewables is being replaced by a business case driver that is causing renewables to overtake fossil fuels and nuclear in investment decisions.
In SA, this means the country is perfectly poised to move from the “big coal, big nuclear, big grid, big monopoly” structure through one that is diverse in ownership and technology and driven by market forces, to one tailored to meet the needs of the Fourth Industrial Revolution.
The skills and technology base for the new power sector should be locked in. This means building on the excellent skills in Eskom, science councils and the private sector in areas such as variable energy integration, smart metering, digital communications, grid-based storage, synchronous condensers, synthetic inertia, power conversion systems, demand response as well as interconnections.
The sector should prepare for an electricity market that starts off as a traditional market and evolves into a large trading platform that involves millions or even billions of transactions.
The services offered to this industry will change. New energy businesses will offer unique investment opportunities in a diversified portfolio of clean energy technologies. This will include the supply, trading, storage and efficient end-use of electricity. New and efficient technologies in transport, lighting, heating, cooling, evaporation, drives, materials and catalysts, when coupled with better management of energy, means that the business opportunities will continue to grow.
ITS TRANSMISSION LINES AND THE MANAGEMENT OF THE SYSTEM ARE KEY COMPONENTS OF A FUTURE SMART GRID
NEW TECHNOLOGIES WILL MAKE THE ELECTRIFICATION OF REMOTE AREAS AFFORDABLE, CREATING CHANCES
New technologies will make the electrification of remote areas affordable, creating chances for rural communities to thrive beyond subsistence.
Mini grids coupled with distributed generation and storage will enable communities to cooperate in new ways.
Standalone technologies such as solar pumping and lighting open new doors to agriculture, learning and security.
The Sustainable Energy for All programme is showing how universal access can be achieved. Innovation must be supported and channelled into the opportunities opening up in the Fourth Industrial Revolution.
Institutions such as the Technology Innovation Agency should be supported in their aim of turning ideas into viable businesses. Venture capital needs to become more courageous and responsive in turning innovative ideas into economic reality.