Why three parts will be better than one
Why will an Eskom in three parts be better than one big Eskom? That is the question that President Cyril Ramaphosa did not quite answer in Thursday’s state of the nation speech.
Why will an Eskom in three parts be better than one big Eskom? That’s the question that President Cyril Ramaphosa did not quite answer in Thursday’s state of the nation speech. There are some compelling reasons, though. Similar proposals have emerged from the ANC, the DA, the Eskom board, Ramaphosa’s expert task team. Unfortunately, outside of this broad consensus, stands labour and elements of the old Jacob Zuma order. Taking labour along as a partner on Eskom’s new journey will be critical to its success or failure.
Importantly, though, if done well, the unbundling should help the biggest stakeholder — the consumer — of which an important subset is business. How will it work?
The starting point is the current state of Eskom. The company is in what has been described elsewhere in the world as “a utility death spiral” brought about, in part, by rapid changes in technology.
Eskom’s death spiral is more acute than usual because of the enormous debt burden it has taken on in the past eight years to build two new mega coalfired power stations.
The debt stands at R419bn and is projected to rise to R600bn in the next three years. Eskom is unable to service this debt and stagnant demand for electricity means that there is no prospect of it in the future.
The split, expected to take two to three years to implement, will result in a generation company that owns Eskom’s power stations; a transmission company that will own and operate the national electricity grid; and a distribution business, which will take care of infrastructure such as substations.
It will do three things quickly. By giving each entity its own balance sheet and accounts, it will be far easier to see where efficiency can be improved.
Secondly, it will enable the three parts to independently raise funding. Eskom’s huge debt will be apportioned to the three parts. As this is mainly related to new plants Medupi and Kusile, it can be expected that a very large portion of this will be held by the generation division. This will have the effect of ring-fencing Eskom’s good and bad parts, in the same way a troubled bank might be saved by a split into good and bad banks.
Negotiations on the debt with bondholders will be an important part of the process. So will negotiations with the Treasury, which must decide how much of Eskom’s debt it is able to take onto the government’s own balance sheet without too damaging fiscal implications.
Eskom’s guaranteed debt (about R350bn) is reflected as a contingent liability for the government and not included in the the debt to GDP calculation.
As debt service costs are the fastest-growing item in the budget, the government is under pressure to stabilise this ratio, having pencilled in a target of just under 60% in 2024, that will now be pushed out further.
Reading between the lines of Ramaphosa’s speech, the government does not expect the bailout can be big enough to avoid a tariff increase over the next three years. He described it as an “affordable one” which can mean something between CPI and the 17% Eskom request.
Thirdly, the split will open the way to increased competition. Key to opening up the market is the establishment of an independent owner and operator of the transmission grid that would contract with power producers.
It is critical that this arm operates entirely independently from Eskom generation, enabling it to buy power from the cheapest sources. This means it will need its own board.
The last piece of the Eskom unbundling puzzle — distribution — is the most complex. The expert task team tried to sidestep the issue by recommending only two separate entities, leaving distribution out for now because of the risk that it would slow things down.
This is because Eskom owns only part of the network; municipalities the rest. A previous attempt to restructure distribution in 2003 by establishing regional electricity distributors turned out to be enormously complex and politically difficult and was abandoned in 2010.
The ANC and the government insisted that the Eskom distribution business be included in the plan. But it has been badly neglected and consumers face frequent power failures.