In 2018 energy experts Tobias Bischof-Niemz, who was involved in the establishment of an energy research centre at the CSIR, and Johan van den Berg, at the time the CEO of the South African Wind Energy Association, suggested “a simple way to stabilise electricity prices, cast off Eskom’s crippling debt and boost South Africa’s credit rating, while maintaining public sector control of critical assets in the electricity sector”. In a nutshell, they proposed selling off Eskom’s coal-fired power stations. Their ideas, published on BizNews at the time, resonate with Greenpeace as well as local analysts who have put forward ideas to fix Eskom. Chris Logan of Opportune Investments speaks to BizNews editor-in-chief Alec Hogg about why the Bischof-Niemz, Van den Berg proposal is still a smart idea to fix the utility, which is a drag on economic growth. – Jackie Cameron
Well, Chris Logan has been beating a drum on something that we’ve been busy with on Biznews, or rather, we published something on Biznews a while ago, that really is a fascinating concept – the concept that was raised first by a couple of members of the Ministerial Council of Energy for the President and the former head of the energy centre at the CSIR as well as his colleague who came from the Wind Energy Association. We’re talking here about Dr Tobias Bischof-Niemz and Johan van der Berg. I know we published this story on Biznews two years ago, Chris. It’s something that now seems to be coming back into the vogue. You did have dinner with the two of them – Tobias and Johan. The whole story is to do with selling off Eskom coal-fired power stations. Did they impress you?
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Totally, Alec. Thanks a lot. I just had dinner with Tobias but I chatted with Johan quite extensively and I think the thing that first caught my eye was that their ideas were put forward by National Treasury in their paper of August 2019, which was on economic transformation, inclusive growth, and competitiveness. And in that paper, National Treasury suggested that Eskom should sell off it’s coal-powered stations through a series of auctions and possibly raise R450bn.
Which would liquidate the debt that Eskom is sitting with at the moment and presumably take the millstone from taxpayers.
Absolutely. It will be a total game changer for not just Eskom, but for South Africa because it’s not just getting rid of the debt. That’s obviously a big plus. I believe that they just announced a tender on one of the big coal-powered stations, you’d stable to junk rating but apart from the debt, as various proponents have set out, it would also improve the operational performance of the various coal-powered stations because once put in private hands, that operational performance would be for the account of the new owners.
And there’s nothing that really focuses the mind than if your pocket is involved, but there are 15 of these coal-fired power stations, five of which shouldn’t really be in operation anymore. They’re old. They should be decommissioned. What would happen to those five?
Well, Tobias and Johan and interestingly enough, Greenpeace, have put out a 68-page report on transforming Eskom. They also have strongly endorsed and built on the idea of selling off the coal-powered stations and obviously, Greenpeace has got great credentials. Regarding your specific question, the very old coal-power stations should be decommissioned according to all the people who’ve looked at it properly because they’re very costly to run and they’re also a threat to the environment. They’ve come to the end of their natural life so they should. It’s 15 of them that Tobias and Johan classified, which still have useful lives.
So, the ones who would go are Camden, Hendrina, Komati, Grootvlei, and Arnot. I understand that. It was very interesting, looking at the individual amounts involved with the rest of them that are left. Obviously, Kusile and Medupi are the biggest – Medupi at R169bn and Kusile at R105bn – but a raft of others in their as well. Chris, how realistic are these figures? Why would someone come and buy Medupi for instance, for nearly R170bn if all we hear from it is troubles and troubles?
Well, the beauty of this idea is that in essence, you’re not so much buying a coal-powered station. You’re buying a revenue stream, which is determined by the power purchase agreement that would be put in place by Eskom and the new owners. It’s like a property with say, a 20-year lease. To a large degree, the value is determined by the lease rather than the underlying property. The idea is that these coal-powered stations are sold off with a power purchase agreement to buy so much power at such and such a rate over so many years. That’s where the bulk of the value comes from and if you look at what they’ve done, they’ve given a greater margin to Medupi and Kusile so that the debt thereon could be paid off, so there’d be a bigger price realised and the debt could be paid off.
It sounds a bit like the independent power producers for renewables where people bid to have a supply that they could give to Eskom at a certain price and then, if they get that in place, then they go and build that facility.
Exactly. But here, you’d be auctioning off existing assets, getting in cash inflow, which the country and Eskom desperately needs as we teeter on the edge of junk and then deriving the benefit from greater skills brought to bear at the underlying coal-powered stations. It’s likely, if this was done, it would attract expertise from around the globe and so there are really a number of benefits.
So far, what has the reaction been like from government? It’s one thing for Treasury to propose it but there are ideological issues here too.
Correct. Treasury put these ideas forward in 2019 and then Cyril Ramaphosa – our President – actually shot them down somewhat when he visited Medupi and he said this is the family silver and we’re never going to sell it but since then, a lot has changed. We had the tremendous loadshedding crisis in December and we’re now seeing a moving dynamic. Ramaphosa himself was quoted in the paper last week as saying ‘Our thinking has not remained static’ and he’s not talking about selling off the very old power stations. Although that’s not what the authors envisaged, it’s a dramatic shift and it’s a powerful shift.
It’s a starting point. I’m going to ask Erik Smuts, CEO of Nampak who is in studio with us, who worked very closely with Andre de Ruyter, do you think Andre’s the kind of person – you know him well – that would see upside in this?
Alec, I think it would be hard for me to express what Andre’s thoughts would be. I can sort of give my own thoughts on it. I think it is clearly in the country’s interest to privatise some of these assets – to give it into hands that can manage it more effectively. I think the question is, “What will a buyer be prepared to pay for these assets?” If you’re going to invest in an asset like that… if you could build your own, you will design it. You will make sure it is to spec from the start. To take over a different asset that you know is underperforming… I think the valuation of that could be very interesting and might actually give the answer here.
So, that would be the challenge, Chris. Would they be prepared to pay the figures that have been put on the table by Tobias and Johan?
Yes, well obviously, there are a set of assumptions around that but as we say, the major determinant would be the power purchase agreement being the rate at which Eskom would buy power from those coal-power stations and the duration of that contract. Obviously, regarding what Erik was getting at, there would need to be quite a thorough due diligence and perhaps the best way would be to start off, which is what Tobias and Johan recommended with not the big ones first, which we know have design flaws, but some of the old ones, which are fine. Not the very old ones and it would be a lot simpler. They’re also recommending a trial and error process to get kick-started.
So, you could get Matla say at R13bn, Duvha at R18bn, and Tutuka at R27bn. These are big assets and an exciting idea that is being floated now by people looking for solutions. It has as well… I won’t say given the thumbs-up by the President, but he’s certainly starting to look at it as Chris mentioned. Cyril Ramaphosa saying that our thinking is no longer static.
