Unbundling of Eskom key in attracting investment into independent power grid

Eskom is committed to the separation of its transmission and generating functions, a process that has proven to be successful in more than a 100 countries for operational and sustainability reasons. While the debate around alternative generating capacity has shone the focus on the renewable energy sector and its contribution to the power mix, discussions on a revamped transmission system has been languishing since the Independent System and Market Operator (ISMO) Bill was first mooted in 2011. But Eskom CEO Andre de Ruyter pointed out at Nedbank-hosted webinar that the establishment of a standalone Independent Transmission Grid System and Market Operator (ITSMO) had to be prioritised and accelerated to bring renewable energy on stream. At issue was raising R100 billion to fund 8,000 km of power lines to extend the grid to areas where the wind blows and the sun shines. – Derek Alberts

Eskom trotting global path of unbundling

By Denise Mhlanga

Globally, the energy sector is going through changes, and Eskom is no different. Critical for the power utility is the generation of affordable, and renewable power to stimulate growth in the economy. Eskom has started with the process of unbundling its generation from transmission in order to create an independent power grid system. The unbundling will result in three separate entities namely, generation, transmission and distribution.

In March, divisional boards were established and managing directors appointed, says André de Ruyter, Eskom Group CEO.  Speaking at the Independent Transmission Grid System and Market Operator (ITSMO) webinar hosted by Nedbank last week, de Ruyter said the functional separation of transmission, generation and distribution would be completed by March 2021. The legal separation for transmission, and generation and distribution would be completed in December 2021 and December 2022 respectively.

Government’s commitment

This separation follows the Roadmap for Eskom presented by the Minister of Public Enterprises, Pravin Gordhan. It was also a precursor to the creation of ITSMO, and a competitive power generation sector in South Africa.

“We are committed to the restructuring and creation of ITSMO. This would change the architecture of electricity generation and transmission in South Africa,” says Gordhan.

Furthermore, generation would create competition which will drive down electricity prices and increase efficiencies.

“An independent operator and power grid system is critical to the future and investment into that grid. We have great confidence in the Eskom management, and where they will take us,” says Gordhan.

Investments into generation space

Approximately 10,000MW will be retired in the next 10 years, resulting in additional strain on the system. In turn, this creates the need for new generation capacity.

“South Africa has an ageing plant – more generation capacity is needed. We need to bring this quickly and effectively into the power grid system,” says De Ruyter.

For Eskom to achieve this, it is crucial for the power utility to partner with the private sector. “This collaboration will ensure we can provide affordable, reliable and clean power to all South Africans,” he says.

He says the renewable acceleration will be supported by partnerships with Independent Power Producers (IPP) that will develop, construct, operate and own facilities to generate renewable power for sale to utilities and end-users.

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“In addition, a collaborative approach remains key to attracting investment, mitigating risk and creating new jobs.”

According to De Ruyter, power generation will enable the creation of new jobs within the manufacturing sector. An all-inclusive, and new fiscal policy aligned to industrial and energy policy objectives would be required, he points out.

“The generation sector will be attractive if there is less reliance on guarantees from treasury to underpin their (investors) business investment.”

Although the expansion of the transmission grid will require significant funding, transition and green financing is readily available. Eskom is able to access funding in both the local and international markets.

De Ruyter says World Bank and New Development Bank for example, have expressed interest in supporting Eskom’s Just Energy Transition.

Can we trust Eskom?

Gordhan says South Africans need to start developing a high level of trust among themselves. He points out  that since 2019, there has been movement towards the creation of ITSMO as demonstrated in the commitment towards Eskom separation.

“If we develop a common purpose – we can contribute to creating competition in the generation sector.”

I believe the ITSMO board should be appointed by external parties in terms of Section 66.3 of the Companies Act, says De Ruyter. This would create complete independence in the governance of ITSO.

“Our first major objective is not to create alarm that we are about to create a default in as far as our debt is concerned. From a holding point of view, this model is cost-efficient.” De Ruyter is quick to point out that he is not averse to considering other models in future.

Professor Anton Eberhard from the UCT Graduate School of Business says there are short-term operational advantages to the Eskom separation. This includes a stronger focus on management’s role, increased transparency and reduced costs.

He says 106 countries worldwide have unbundled their transmission and generation businesses with success. “This process creates a fair and transparent platform for the planning, procurement and contracting of power going forward,” he adds.

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