Eskom to concession coal-fired power stations: Risky move or power play? – Katzenellenbogen

South African state-owned electricity provider Eskom will be required to give concession to private contractors to improve its fleet of coal-fired power plants as part of the government’s bailout plan. With the country still requiring significant new power stations, concessions will be granted to allow coal-fired plants, which provide 80% of South Africa’s electricity, a chance of better performance and longevity. The plants have an average age of 40 years, and many have been poorly maintained, but with proper conditions, they could operate efficiently for longer. The Treasury will have strict control of Eskom finances to ensure it meets the deal’s conditions. Find this article below.


Will a back-door privatisation of Eskom really go ahead?

By Jonathan Katzenellenbogen*

Allowing Eskom to concession its fleet of coal-fired power stations to private contractors would have been politically impossible just a few years ago. With the ANC’s commitment to a large role for the state and the need to dispense patronage, this was unimaginable. Now, Eskom’s near bankruptcy and the growing severity of power cuts have forced a change in thinking by the ANC.

Last week, the Minister of Finance, Enoch Godongwana, said that as a condition of the Eskom debt relief plan, an independent assessment of Eskom’s fleet of coal-fired power plants is being undertaken. Following this, “Eskom must concession all these power stations with clear targets,” for production, in the words of the Treasury.

The deal means that the Treasury technocrats have taken charge. It could be a politically tough deal for the ANC, but it has no alternative but to accept. An Eskom default would have severe repercussions for our financial system and a grid collapse would be catastrophic. None of that would be good for the ANC’s chances at the polls next year.

Concessions to private contractors will give the coal-fired power stations, which provide 80 percent of our electricity, a chance of being far better run and having longer lives. The country still requires sizable new power stations, whether these are nuclear or some form of less polluting coal-fired plants.

Read more: Sworn affidavit: Why Eskom is failing – André de Ruyter

Average age

The average age of the coal-fired fleet is 40 years, and in recent years they have been poorly maintained. Even though they are old and many are scheduled for decommissioning over the next fifteen years, there could still be life in them. Many coal-fired generation plants in the US are well over 40 years old and continue to operate efficiently. In good hands and given the right conditions, the same could be the case in SA.

The debt write-off, which is really another bailout, will also mean strict control by the Treasury of Eskom finances. Under the deal between Eskom and the Treasury, there will be no pay rises for Eskom staff that could negatively affect its overall financial position.

And then there are conditions which will be deeply politically unpopular. The planned 18.65 percent increase in the electricity tariff later this year and the 12.74 percent rise next year will go ahead, despite the popular outrage. And to deal with the problem of non-payment for power by municipalities, the Treasury says that there are regulatory changes to address this. All that is brave on the eve of an election.

The massive bailouts and debt relief exercises for Eskom show how pitiful things have become under the ANC. It means that 60 percent of Eskom debt is being taken off its balance sheet – the price of corruption and mismanagement. The government has provided R263 billion in bailouts to Eskom since 2008, and in the latest budget it will take on R254 billion of the utility’s debt over the next three years. This amounts to more than 11 percent of state spending this year, and will require substantial extra borrowing by the state.

There is still a lot we don’t know about when and how the coal-fired power stations will be put out to concession. The Treasury has said it will give more details on the conditions attached to the deal towards the end of this month. If private contractors take up concessions, will they be able to hire and fire staff, root out corrupt practices, and procure spare parts from reputable companies without empowerment middlemen taking a commission?

While the government and Eskom may want to wriggle out of aspects of the deal, it will be difficult. The credit rating agencies, the International Monetary Fund, investors and holders of our debt will be watching very carefully, as it will be a crucial signal of the ANC’s ability to turn  Eskom and the country round.

If the stations are run by private sector contractors who are accountable and know the power station business, this must instil greater confidence that power cuts will be reduced.

Read more: From the archives: Late Eskom exec Mark van der Riet – how State Capture turned murderous

Too good to be true?

Is this all too good to be true?

The ANC tends to be very slow at implementing anything of importance, and there could well be political impediments to implementing the conditions of the debt relief exercise. But at least the plan is out of the starting blocks with something of a time frame. The consortium is due to report by the middle of this year and Eskom is required to implement the operational recommendations.

Once it is determined which plants can be rebuilt to the original equipment manufacturers’ standards, Eskom is required under the deal to concession these stations out to operators. The greater the speed with which this is done, the greater the chance of success there will be in outwitting potential political opponents.

But it is not clear whether Eskom will concession its coal-fired power plants soon after the mid-2023 deadline. The Treasury says we will hear more about the terms and conditions at the end of the month.

Will they be able to provide concessions for the big disasters and most recent builds in the fleet – Medupi and Kusile?

There are clearly vast entrenched interests against the plan to concession out the power stations. Will the cadres still be able to eat under this new arrangement?

Read more: South Africa’s power woes: Lessons from China, Greece, and Colombia on how to fix Eskom’s problems

Concessions

What will concessions mean for the four Eskom coal power mafias that the recent Eskom boss, André de Ruyter, pointed to last week in his interview with eNCA?

Eskom staff numbers are grossly inflated. To what extent will the firms taking up concessions be able to cut staff and hire and fire new staff according to their needs?

Will the companies taking out concessions be able to choose from whom they buy spare parts? Will they be able to buy directly from the original equipment manufacturer and avoid paying the extra margins paid by empowerment middlemen?

Without a free hand to run the power stations and achieve strict performance goals, the Treasury just might find that there are not too many firms that would want to take out the concessions.

There is still a lot we don’t know about the deal, but it is clear that ultimately the Treasury does not have much leverage if Eskom fails to meet the conditions. The threat to Eskom is that if it fails to meet the loan conditions, the utility will have to repay the Treasury the amount of relief it has been given for that quarter. The government, the sovereign borrower, and Eskom are really in this mess together.

This is not a done deal yet, and there will be a lot of political fallout on the way to its completion. Let’s see what the concession agreements look like and if they provide sufficient incentive for companies to come in and run the power stations properly. This might be a test run for some contractors to see if they want to put together investors to build power stations in the future. If the concessions go well, there is an immense upside for the country.

*Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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