Eskom’s financial death spiral

HOW TO AVOID IT: RENEWABLES MUST BE EMBRACED

Cleaning up Eskom, improving efficiencies and restoring it as an efficient operator may not be enough to ensure its survival.

Eskom’s current financial situation makes it difficult to see a way ahead towards sustainability, short of drastic cost-cutting, restructuring and bringing private equity into the business.

Cleaning up Eskom, improving efficiencies and restoring it as an efficient operator may not be enough to ensure survival in a new energy world, where the rules continue to change and the market no longer rewards traditional models.

Eskom faces a perfect storm, with the electricity industry’s supply- and demand-sides changing, making 20th century answers to today’s challenges irrelevant.

On the supply side, renewable costs are falling rapidly and will carve a ‘saddle’ out of the daily demand profile, with a rapid rampup of generation required from Eskom to meet demand at sunset. Wind is a variable resource, and Eskom, as the supplier of last resort, must balance the variability.

It may not be fair to expect Eskom to rapidly re-invent itself from “electricity supplier” to “residual load supplier after IPPs have dispatched their last MWh”, but SA is blessed with such ample renewable resources that it can’t be ignored.

Being sunny and windy presents us with a sustainable competitive advantage in the new energy paradigm, provided we don’t continue to develop energy plans out of sync with modern-day reality, by building inflexible baseload generation – which is incompatible with a least-cost future electricity industry based on renewables.

Industry’s demand side is also changing, driven by energy efficiency improvements and energy-intensive industries limiting production and growth investment in SA, in favour of countries with better price certainty.

There are no indications that electricity demand growth driven by investment in new smelters will return to SA. New smelters will go where green energy is available at predictable costs and shy away from locations with dirty power and no price certainty.

This leaves Eskom with its business out of sync with its market. It’s building inflexible, very expensive new capacity, while the landscape is being changed by short lead-time and ever-cheaper renewables eating into its sales.

The situation is forcing Eskom to recover increasing fixed costs from a declining sales base.

This phenomenon of price increases and demand destruction feeding on each other has become known as the ‘utility death spiral’, and manifests in many countries where fossil-fuel fired utilities are exposed to the energy transition. In SA it may manifest as a ‘debt spiral’ due to Eskom’s massive expansion programme, absence of growth and the push back against further severe price increases.

Beneficiation of raw materials is energy-intensive, and while the industry’s demise will impact on jobs and prosperity, it won’t spell the end of the SA economy. We’ll become a bit more like Australia, where raw materials are largely exported. However, given the size of our industrial demand this could take Eskom over the edge by accelerating the death spiral. The time for intervention is now.

This article is republished courtesy of EE Publishers. Piet van Staden is a senior energy executive at Sasol, and past Energy Intensive Users Group (EIUG) of Southern Africa chair.