Unbundling will switch us on to reform

DURING his State of the Nation Address President Cyril Ramaphosa announced Eskom would be unbundled into “three separate entities – generation, transmission and distribution”. These would all be established “under Eskom Holdings”.

This was first proposed and formalised 20 years ago in the 1998 White Paper on Energy Policy. The unbundling will have far-reaching consequences for the energy sector. Ramaphosa offered a comprehensive outline of the plan. It seems an electricity reform may be on the horizon.

Unbundling is a type of structural reform. In the electricity sector, vertical unbundling refers to the separation of a utility’s generation, transmission, distribution and (sometimes) retail functions. Horizontal unbundling refers to the creation or entry of multiple players into each of these functions. The players may compete against each other to deliver the same service.

There are benefits associated with unbundling, including more efficiency, resilience and sustainability through a tighter focus and clearer incentives.

Eskom currently operates as a vertically integrated monopoly. This means it performs the generation, transmission, distribution and retail functions. Its structure and governance systems were cemented by apartheid’s internationally isolated security state. This outdated structure, which is characterised by a lack of transparency and accountability, has continued to shape the utility in the years since democracy.

There is a narrow window for municipalities and the private sector to play a role in distribution and retail, and generation, respectively.

But Eskom still generates about 95% of the country’s electricity. This kind of monopolistic structure is unusual by international standards. And it often comes with operational inefficiencies, bloated costs and poor governance.

Eskom has experienced all of these maladies. This has been demonstrated by its conduct with independent power producers, its role in the controversial nuclear deal, which has now been put on ice, and endemic corruption exposed by the portfolio committee on public enterprises’ inquiry into allegations of state capture at the utility.

These challenges are not unique to South Africa. But the country is behind the curve when it comes to addressing the structural factors and ensuring that its energy sector is well positioned to benefit from technological developments and shifting investment trends.

Ramaphosa has committed to the full vertical unbundling of Eskom. Generation, transmission and distribution companies will have their own boards and executive structures. This process will take time to implement, probably in the region of five years.

It will require legislative and possibly policy reform. Due to the urgent need for transformation in the sector, the president said immediate attention should be given to the establishment of an independent, state-owned transmission grid company.

A good starting point for the unbundling process would be the establishment of an Eskom subsidiary with its own board.

This subsidiary would oversee the migration of relevant assets and personnel. Eskom is in the midst of extreme financial, operational and governance crises which it will not be able to solve alone.

But Ramaphosa must ensure meaningful consultation and dialogue with all key stakeholders, as well as credible and sustainable plans to address the needs of all those who may be affected.

Without this the president’s announcement will meet the same fate as previous South African energy policy reform pronouncements under former presidents Thabo Mbeki and Jacob Zuma, which were not followed through.

Reform is a complex social and technical process. It is not without risk and costs. Failure of implementation is not something the country can afford. | The Conversation Lauren Hermanus and Catrina Godinho are research associates at the University of Cape Town.