One of the things that have really been putting a damper on the South African economy for the last ten or so years is the unreliability of the electricity supply. Small businesses have been hit hard, losing valuable trading days when the supply is tight, and South Africa’s biggest companies – the mining majors – have lost weeks of production and have seen their costs shoot up as the power supply has struggled to keep up with demand.
Despite the problems, government has resisted pressure to privatise parts of the power system. Instead, the state has tried to improve its central planning. However, legislation has been slowly working its way through parliament that will see the privatisation of elements of the system – specifically, of the pricing mechanism. It’s a small step, but a hopeful one. If the new price-setting mechanism is a success, perhaps the government will be inclined to allow further liberalisation. What’s more the development of shale gas should also create a space for more private sector involvement in power generation. Let’s hope that these changes will ensure that in the future, electricity will cease to be a limiting factor in the South African economy. – FDÂ
LEE SWAN: Eskom is not unique globally in its structure, in my opinion. There are a number of other state-owned entities in the electricity sector in other countries around the world. I guess it’s a matter of a journey rather than being old-fashioned or new-fashioned. What we often see is that organisations, which are in the state Eskom is in now and in the market South Africa is now, are on a journey for change – significant change, as well – and a move where they’re going to have to find their feet in an increasingly privatising electricity market.
ALEC HOGG: That is interesting because it has always been something that has been resisted, or resistance against privatising in South Africa. Why is that?
LEE SWAN: I guess it’s the nature of long-term large-scale infrastructure projects. Energy is not a small business to be in. Historically, over the last 200 years, South Africa actually had quite a good electricity and energy journey. It’s really been over the last 40 or 50 years that we’ve started to shake. The Apartheid government actually put in lots of good infrastructure – maybe one of the good things they’ve done – but unfortunately, over the last 30/40 years, the long-term planning hasn’t quite been there.
ALEC HOGG: And if you do it from a central position, you have to get that planning right.
LEE SWAN: Absolutely. I guess one of the interesting things we’re seeing nowadays or over the last two or three years, is an increasing conflict between the leadership of Eskom – their stakeholder or shareholder, the Department of Public Enterprises -, which has a mandate that is essentially, socially based. They are trying to generate revenue for the ‘public person/pubic spending’, and then you have the Department of Public Energy and the Ministers of Energy on a completely different trajectory. You’re therefore seeing a three-way ‘disagreement’ more and more often these days, which you didn’t use to see in the olden days.
ALEC HOGG: The problem with that is that if you don’t have energy in the economy, an economy can’t grow.
LEE SWAN: Absolutely. Energy in South Africa is the gateway to our economy. We all know that. You only have to cast your mind back to 2007 to understand the true impact that rolling blackouts on Eskom’s side have on the economy. It shuts large businesses down. It definitely shuts small businesses down. The real priority from a public point of view, is to keep our household lights on, so it’s back to the priority social agenda, as opposed to an economic social agenda for business in South Africa.
ALEC HOGG: How do you see this all developing?
LEE SWAN: Gosh, there’s a lot going on currently in the energy sector. It’s certainly an exciting time to be working in this space. There are a few things I guess, which businesses need to be aware of that are very much under the radar. The first is something that’s called the Independent System Market Operatable (in short, it’s called the ISMO Bill). This is a bill, which is basically going to take the decision-making ability out of Eskom and into a separate entity to decide what electricity goes onto our transmission grid and when, and at what price. Currently, that function is sitting on the inside of Eskom. It’s a sign of an early privatising market to see if this function – the market operator function – comes out of the state-owned company.
ALEC HOGG: Just take us back. Where did this bill come from and where is it in the process?
LEE SWAN: Gosh, it’s already on the Parliamentary Registers, so it’s been in the pipeline for a good few years now. It’s certainly been under the radar. There have been many large forces at work to try to stop it. It’s been taken on and off the Parliamentary Register a number of times. Most recently, in the last two months, it’s come off the Parliamentary Register. It’s really in the final stages. I understand now that it will be back on the Parliamentary Register just after elections.
ALEC HOGG: Why is it so important?
LEE SWAN: Gosh, it’s very important. Firstly, it’s important for Eskom because it’s going to change the landscape in which they sit. The worrying thing is that they haven’t really shown a demonstrable track record of being particularly agile, so I think that’s something else they need to worry about significantly. From a good perspective, there are opportunities in this. ‘There is no bill’ is the beginning of a door opening to a privatising electricity market, and there are certainly opportunities in that. Any large companies in South Africa, if you’re not an energy company already, you should start thinking about that. You’re seeing big organisations in South Africa positioning themselves for this. You’re seeing Exxaro now calling itself an energy or a resources company. It’s not a coal miner anymore. It’s controlling more of its value chain. You’re seeing that more and more, either for producing energy for their own mining or manufacturing. The longer-term strategy is probably to sell this back onto the grid.
ALEC HOGG: It’s almost vertically integrated.
LEE SWAN: Yes, absolutely, and that really is where all of this needs to be maturing towards. It’s going to be an interesting time. I guess, whilst there are opportunities, there’s risk with the long-term nature of these kinds of infrastructure. What will Eskom do? Will it be scuppered? I think it’s probably a tumultuous time for business in the next ten to 15 years, but I think beyond that, entering into a privatised market won’t be a bad thing. We got quite interesting behaviours as well from a number of international investors who are coming through to South Africa to look around. We have many large-scale nuclear investors and many large-scale coal investors coming to look at the potential opportunities in South Africa. Many of them are investing in the Renewable Energy Program, which the government is driving. That’s not their core business, so I would guess they’re using that as a way to come and visit South Africa, come and experience it in the way that’s available to them now, but with a bigger picture of potentially getting involved in coal, nuclear, and other things.
ALEC HOGG: And building expertise… It’s a big story. The game-changer though, is shale gas, and we know we have plenty of it. We know the government is determined to bring it out as rapidly as possible. Isn’t that going to bring in a whole bunch of new players?
LEE SWAN: Absolutely. You see them. They’re here. They’re not hiding. You have Shell here, in force. Shell and shale are currently almost interchangeable in South Africa. They’re not hiding. The opportunity is here. It’s declared. It’s a publicly declared resource. It’s just a matter of time to get this out of the ground now, and to find out what the environmental costs and social costs are.
ALEC HOGG: So the cost is the big thing. In the United States, we know they’ve been innovative and they can get shale gas out very cheaply, so much so that they’re putting the coal–fired power stations out of business. In South Africa, if the cost is similar to the United States, isn’t there a similar future perhaps for a coal-fired power station operator, such as Eskom?
LEE SWAN: I would say yes and no. Energy and electricity specifically, is a very long-term game. I think there are very significant strategic risks here, but I think they will take a while to play out. I think the next two years from a decision-making point of view, are critical. In terms of the implementation of those decisions, I think Eskom will have a little bit of a heads-up, but I certainly don’t think we’re going to see the same Eskom in 10/15/20 years from now, than we have today.
ALEC HOGG: Why would Eskom build another nuclear plant if it has the potential of cheap inputs through shale gas?
LEE SWAN: That’s a very good question. Eskom at heart are a coal-fired power generator. That is their core business. The further away they stray from that, the more difficult it becomes for them in terms of their supply chain and their levels of expertise etcetera. I guess it’s as with any business: your easiest place to play is in the thing you know how to do. I wouldn’t say it’s nuclear. I would say its coal, certainly.
ALEC HOGG: So as far as the ISMO Bill is concerned, that might open the way for a Sasol perhaps, or a Shell to have its own power station, fired not by coal, but by fracking – by shale gas.
LEE SWAN: Yes, possibly, or even by coal. We saw an announcement last Monday by the Minister of Energy – Ben Martins – announcing that probably in the next two months, government is going to go out to procure about 800mw of cogeneration power, which is power and heat combined – usually from coal, and sometimes from gas – as well as 500mw of coal-fired power. That is from the private sector. That’s not from Eskom. If Sasol or any other large company has a significant strategic energy problem, there’s a good chance that this is an opportunity for them as well.
ALEC HOGG: So Lee, the idea I guess if you’re in business and you’re in an energy intensive business is to find a way to meet your own requirements and with the investment, you might – not might… You will be able, in the future, to sell into the grid.
LEE SWAN: Absolutely, yes. I can’t see it going any other way if the ISMO Bill goes forward. That system and market operator is going to be the system that grants permission for generated power access onto the transmission grid. I would not even be surprised if all Eskom ends up with, is a transmission grid in 20 or 25 years from now, with ISMO deciding what generated capacity is actually going onto that, and when.
ALEC HOGG: And the coal-fired power stations within Eskom could themselves perhaps be privatised and put into different hands.
LEE SWAN: I wouldn’t be surprised, to be honest with you. I think there are a couple of key assets that Eskom will hold onto desperately and try to stay in that game. There’s a chance that they may not have a choice and they may be told by one or both Ministers to get in or out of certain games. I certainly think that some of their ‘dirty dogs’ that are difficult for them to manage, will come onto the market at some point. You’ll see some sort of enterprising – possibly foreign – investor come in and look at those dirtier assets.
