Weekend Argus (Saturday Edition)
Short-circuiting Eskom’s power
DURING his State of the Nation address last week, President Cyril Ramaphosa announced that Eskom would be unbundled into “three separate entities – generation, transmission and distribution”. These would be established under Eskom Holdings.
This announcement has been a long time coming. It was first proposed and formalised 20 years ago in the country’s 1998 White Paper on Energy Policy. Among other things, the policy sought to break Eskom into distinct smaller entities.
The unbundling will have far-reaching consequences for the energy sector. Ramaphosa’s commitment also comes at a time when Eskom is mired in financial, operational and governance crises.
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 the functions. The players might compete against one another to deliver the same service. Associated benefits include:
• More efficiency, resilience and sustainability through a tighter focus and clearer incentives in each area.
• More competition and diversification of players.
• Clarity in costs and functions of unbundled entities, which increases accountability.
• Low-cost procurement driven by effective planning, competition and transparency.
Eskom operates as a vertically integrated monopoly. This means it performs the generation, transmission, distribution and retail functions. The outdated structure is characterised by a lack of transparency and accountability. There is a narrow window for municipalities and the private sector to play a role in distribution and retail, and generation, respectively.
Eskom generates about 95% of the country’s electricity. It exercises tremendous power in controlling access to the national grid.
It has used its dominance to oppose national energy policy by, for example, refusing to sign power purchase agreements with independent power producers. 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 these maladies. This has been demonstrated by its conduct with independent power producers, its role in the controversial nuclear deal, and endemic corruption exposed by the portfolio committee on public enterprises’ inquiry into allegations of state capture at the utility.
Ramaphosa has committed to the full vertical unbundling of Eskom. Generation, transmission and distribution companies will have their own boards and executive structures. The process will probably take about five years or so to implement. It will require legislative and, possibly, policy reform.
A good starting point would be the establishment of an Eskom subsidiary with its own board to oversee the migration of assets and personnel.
The intention would be to combine the transmission, system operation, power planning, procurement and buying functions. This separation is intended to leave the grid company free to contract independent power producers and Eskom generation without the conflict of interests. Eskom transmission is incentivised to give its own generation plants preference, blocking new technology and entrants.
Ramaphosa must ensure consultation and dialogue with stakeholders, as well as credible and sustainable plans to address the needs of all those affected.