Unbundling Eskom is the key to securing SA’s energy needs
The government’s long-awaited Integrated Resource Plan (IRP), finally released last week, maps an energygeneration future for SA that appears to leave little room for embattled utility Eskom post2030, at least as it exists in its current form.
The plan, which guides the way for power generation until 2030 and beyond, recognises that electricity demand is at the same level as a decade ago, and so has revised power demand forecasts down significantly. For this reason the need to even discuss the politically charged question of building nuclear power has, for now, been avoided.
A nuclear build, aggressively lobbied for under the Zuma administration, would have made Eskom the designated owner and operator, despite the utility’s appalling track record in building mega-projects such as the Medupi and Kusile coal-fired power stations, which have faced years of chronic delays and billions in cost overruns.
Instead, the draft IRP proposes a least-cost scenario comprising solar photovoltaics (PVs) and wind power, paired with gas to provide constant base-load power. With technology costs of renewable technologies dropping dramatically, the price of power from solar PV and wind is now significantly lower than Eskom’s average cost of supply.
However, the plan allows for some policy interventions to include various projects already in the pipeline, notably the inclusion of power from Medupi and Kusile, which means coal power will remain a significant chunk of the energy mix up to 2030.
Still, “the plan hints at a much-reduced role for Eskom”, says Ronald Chauke, energy portfolio manager for the Organisation Undoing Tax Abuse. Eskom provides 92% of SA’s power, Chauke notes. According to the IRP, by 2030 coal power will account for 40% of the mix, but as old coal-fired power stations are decommissioned this is expected to drop to less than 30% by 2040 and below 20% by 2050. The draft suggests the department of energy is slowly dimming the lights on Eskom and making way for other supply sources, he says.
The IRP shows that a transition to a low-carbon economy is inevitable. And for Eskom to survive it, the utility will have to embark on its own dramatic transformation. At a panel discussion on the utility of the future hosted by EE Publishers and the SA Institute of Electrical Engineers this week, speakers noted that utilities worldwide were facing disruption.
Monolithic, vertically integrated utilities “will mostly go the way of the dinosaurs”, said speaker and independent consultant Andrew Eriksson. As UCT’s Graduate School of Business professor Anton Eberhard explained, Eskom’s trouble is related to its structure and business model, which means it cannot trade itself out of its crisis.
Electricity sale volumes are lower than they were a decade ago and growth is uncertain. Going forward, the National Energy Regulator will be reluctant to significantly hike electricity tariffs, which have already increased fourfold in 10 years. Even if tariffs do increase, experience shows this will only further depress demand and encourage defection from the grid, Eberhard said.
Meanwhile, Eskom’s coal costs are rising and wages have increased beyond inflation. “Something has to give,” he said. To secure its place in future power generation Eskom must be able to compete to provide solar, wind and gas power. Utilities elsewhere have gone this way. Italy’s Enel, for example, is now one of the largest renewable operators in the world.
THE MOST PROBLEMATIC OF ITS BUSINESSES — GENERATION — SHOULD BE RINGFENCED AND CONTAIN THE STRANDED ASSETS
Eskom has said it will exercise its right to provide comments on the draft IRP within the 60-day comment period. Meanwhile, it is busy with its strategic review which, once complete, will highlight Eskom’s strategy going forward. But its prospect of competing in new-generation technologies looks unlikely in light of its crippling debt of R388bn, which is expected to balloon to R600bn in four years.
The debt is mainly due to the cost overruns of the mega-builds, Eberhard said. This is ironic considering that economies of scale used to dictate that mega coal and nuclear plants would be competitive. Instead they are now losing out to new technologies that are modular and more cost effective.
Eberhard proposes an unbundling of Eskom, but stresses that privatisation is not imperative at this stage. In unbundling, the most problematic of the businesses — generation — should be ringfenced and contain the stranded assets as well as a debt-restructuring deal “without infecting the entire system”. Eskom’s conflict of interest as both dominant generator and single-buyer of power from independent power producers would also be removed. But mainly, it is key that the heart of the system, the national power grid, is protected and placed in a separate entity.