Eskom cannot shine a light on way forward
Mired in financial crisis, utility battles to keep going when it should be fully focused on fresh technologies
In the early 2000s the telecommunications sector underwent a veritable revolution. For Africa in particular mobile phone penetration connected consumers far and wide at low cost, and bypassed the need for costly fixed-line infrastructure. It marked the end of public phone networks. Change was inevitable and SA’s own Telkom was pushed to adapt or die. A similar revolution is now taking place in the energy sector, and electric power utilities around the world are being forced to dig deep. Known globally as the utility death spiral, large monopolistic power utilities are struggling to contain rising costs as sales drop and revenue streams erode. Competition from independent power production — green energy, in particular — has propelled the spiral. Utilities worldwide are slowly embracing the inevitability of change.
But Eskom, once a world-class power utility, is so occupied with tackling a financial crisis it is failing to change with the times. At its annual results presentation on Monday Eskom CEO Phakamani Hadebe emphasised the need to plan for Eskom’s future. “Globally all the utilities are evolving [yet] somehow we remain a bit behind as Eskom,” he said, noting that Eskom had not put together a long-term strategy since 2010.
If the state-owned enterprise cannot overcome urgent financial challenges and meet its R72bn funding requirement (and rising) for 2018, it runs the risk of defaulting on loans and triggering the calling in of up to R271bn in governmentguaranteed debt. On the revenue side, Eskom is stuck. Electricity tariff hikes cannot exceed inflation by much as that would just depress demand. As it is, sales were down 0.9% for the 2017-2018 financial year.
As such, Eskom has little option but to cut costs, but that area does not look promising either. Wage negotiations for the next three years are ongoing and, after an original offer of 0%, Eskom has presented two proposals of wage increases of 7% to 7.5%, which the unions are yet to accept.
The utility is also gearing up to truck up to 1-million tonnes of coal from its Medupi stockpile to its Mpumalanga coal stations at what is independently estimated to be a budgetbreaking cost.
Its two new mega coal-fired power stations, Medupi and Kusile, are running massively over time and over budget, and the head of the management programme in infrastructure reform and regulation at the University of Cape Town’s Graduate School of Business, Anton Eberhard, says Eskom should at least have a business unit to explore new technologies.
“While Eskom has some renewable energy projects it has not really developed expertise in these areas such that it could compete with IPPs [independent power producers],” he says. “IPPs are not going away. Change is inexorable, it is inevitable.” New solar and wind projects are now the cheapest new source of grid-connected power, he says.
Eskom, the largest power utility in Africa and one of the biggest in the world, could look to the likes of Enel, the Italian utility turned multinational power developer, Eberhard says.
RENEWABLE ENERGY AUCTIONS
Enel bids for renewable projects in reverse auctions all over the world. Most recently it won a bid for a project in Mexico. In a reverse auction sellers compete to offer the lowest price, which helps drive down costs.
Renewable energy auctions are being held in a number of African countries, but Eberhard points out that instead of being at the forefront, Eskom is nowhere to be seen.
However, more than that will be needed. The old-fashioned vertically integrated model, where a single large company controls virtually the entire supply chain, is outdated. Globally the trend is to unbundle large national electric utilities.
Ronald Chauke, energy portfolio manager at the Organisation Undoing Tax Abuse (Outa), says the unbundling of Eskom was proposed 20 years ago in an energy policy white paper, but this has gone nowhere. Meanwhile, most countries have gone this route, leading to competition in the energy generation space.
Eberhard says almost all of the Organisation for Economic Co-operation and Development’s 36 member countries have done so, “and even in Africa a number of countries such as Kenya and Uganda have separated their power generation and transmission utilities, with positive outcomes in terms of investment and performance”.
In SA the grid and system operator should be unbundled from Eskom generation to protect the heart of the system, he says. Each business would have its own independent board focused on its unique challenges and opportunities.
“For generation, this is about dealing with its expensive legacy coal assets, cutting costs and restructuring its balance sheet. For transmission, this will be about stabilising the system and returning to investment grade as soon as possible.”
The call to unbundle is receiving support from a range of stakeholders, including Outa, which maintains the separation of control of Eskom’s electricity generation and transmission arms will break its stranglehold over the grid and open it up to competition. Chauke says the Department of Energy would have to assist the utility by changing its mandate.
Outa is compiling a new submission to the Competition Commission to initiate a market inquiry that would unpack competitiveness in the energy sector and identify possible abuses of Eskom’s dominant position.
Next the organisation will push for IPPs to be able to sell not just to Eskom but also to customers of their choice, in effect liberalising electricity supply.
Eberhard says unbundling Eskom does not mean privatisation, and he would not recommend privatising the national grid in particular. However, Chauke says for Eskom to continue operating under the current business model is economic suicide. “Restructuring Eskom is a key imperative to unlocking economic development of the country.”
Eskom doesn’t disagree with this thinking. In fact, it is acutely aware of the need for change, and the new board and executive committee are putting together a new long-term strategy, which it aims to complete by September.
“Ultimately we have to decide about the future of Eskom,” Hadebe says, “We need to agree with the shareholder on key business policies and review the business model and see if it remains relevant … we need new growth markets and products if we are to drive revenue going forward.”
Eskom spokesman Khulu Phasiwe says Eskom sees clear scope for it to participate in some other markets on the African continent. Should an unbundling happen, Eskom has to find a way it can offset that business. One way would be to get more involved in renewables.
“Management and the board feel we must play a bigger role in this space. We want to be one of the companies that builds and operates wind and solar plants,” Phasiwe says.
He points to Eskom’s research and innovation centre in Germiston, which has been running for 40 years and is quietly working on innovations. These projects include battery storage testing, a solar photovoltaics plant, next-generation water treatment, coal quality testing, smart-grid technologies and lighting technology.
Phasiwe adds that Eskom teamed up with the Council for Scientific and Industrial Research and Stellenbosch University and invested more than R30m in renewable energy technologies, including solar storage related research.
If things were “normal”, Eskom would be focusing exclusively on these projects and fasttracking them, Phasiwe says. But research and innovation require a lot of money, and that poses a challenge for Eskom at the moment. Steyn is mining and energy writer