How Eskom could help implode SA’s economy

Eskom LogoLike many myopic monopolies, Eskom, has kept the door firmly shut to healthy competition, in this case from renewable energy sources. It’s particularly short-sighted – insane some would argue – when you consider the consequences on all fronts. Unless the policy is changed in the current final countdown to SA’s credit rating crunch – it could push us into a junk status downgrading, the author, a renewable energy practitioner who’s been at the centre of things for a long time, contends. He makes a compelling argument. But what he fails to add is the fast-emerging likelihood that those at the helm of Eskom have (or shall we say had, now that the two Gupta-linked senior executives have jumped ship?) everything but the national interest at heart. As long as the right people benefit, they’d rather have a monopoly and generate nuclear energy at double the price of say, wind-power. It’s not ignorance. That would be bad enough; it’s downright obdurate stone-walling. Read just how cynical Eskom was in preventing renewable energy companies from competing to supplement the national power grid over recent months… – Chris Bateman

By Johan van den Berg*

What Eskom does in the next few weeks to facilitate an open electricity sector, or not, may determine the country’s sovereign credit rating for years to come.

How so?

For a seeming eternity, South Africa has been staving off the day of reckoning on our sovereign credit rating. In December, it will come up again, and we will either scrape through or be downgraded to junk status by the slimmest of margins. The impacts will be felt for years. If we’re lucky, it might be the closest of close shaves that we joke about in years to come.

Top SA cartoonist Jerm (aka Jeremy Nell) offers his take on Nenegate. Access more of his work by clicking here.
More cartoons available at www.jerm.co.za.

We would however only joke about this in future if we managed to pull the country back onto the “High Road” in the interim, if we’ve weeded out corruption, restored good government and good governance, created jobs, ensured profitability for companies so they can invest all the cash on their balance sheets into the economy again and get us growing.

But it may also be looked back on as the time, after skirting with disaster for decades, when we finally lost it and went over the precipice. A tighter government budget leading to lower welfare grants. Discontent and lawlessness. Student protests and all the destructiveness of that zero-sum thinking at a national level, involving a very large part of the population. Capital flight and economic contraction. The stakes could hardly be higher.

This macro picture contextualises Eskom’s obstinate refusal to continue signing Power Purchase Agreements with Independent Power Producers.

Eskom is a vertically integrated utility. It is in a deeply conflicted position as both generator and buyer of electricity. It sells power at an average tariff across all customer types of approximately 83 cents per kWh, which will rise into the nineties soon. In its MYPD4 application, Eskom will likely apply to raise this price to about R1,50/kWh in 2020. The nuclear power it is so insistent on building will cost at the minimum R1,20 – if we don’t have cost over-runs. More realistically, we’re looking at perhaps R1,70/kWh. If the cost over-runs are in the order of Medupi and Kusile, we are looking at figures going off the charts.

The CSIR has just modelled the lowest cost energy future for South Africa. Its pillars are renewables (wind and solar PV) and gas. This plan will conservatively cost R90 billion per annum less than one containing big nuclear. That is more than double the cost of free tertiary education.

We could say: “Wow! If only we had world leading companies ready in the country to invest their own capital so South Africa only has to pay for the electricity, not the capital! If only we started eight years ago with environmental impact assessments, logistics studies, grid studies, so we were ready to go now! If only we used the time to build capacity in the banks, the construction firms, the legal fraternity, so we could learn how to do this and get comfortable with it. If only we had already gone through a procurement process a few times so we can show people we can bank on this. That we can do it, that it is easy, that it works, that it is an utter and complete no brainer. That it could build a R192 billion infrastructure sector in four years and contribute 30% to foreign direct investment. If only we added about 2 cents per kWh to the price and asked the private sector to invest it into social development and job creation in these deep rural places. We could have leveraged R19 billion in social spending and created hope where none existed before.

If only we started then.

And the answer would be, we did. We already did all those things and achieved all those things. We already won international awards for our innovative procurement programme. We already committed the R19 billion in social spending over the next two decades. Already the money is going into schools and small enterprises and already the surrounding communities own shares in renewable energy plants worth billions. Most of all, already the electricity is flowing and there were no cost over-runs and no delays. As of this moment, there are additional projects worth more than R50 billion that can put spades into the ground practically the day after Eskom has complied with its legal duty to sign the agreements. Work and jobs for construction workers, engineers, logistics companies, hotels and guest houses, fuel stations, cafés, supermarkets, restaurants.

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But Eskom does not perceive this to be in their interest. They do not want wind power at perhaps 62c/kWh. They would rather have a monopoly and buy nuclear at double the price than promote the good of the country. Five times since September the Department of Energy’s IPP Office wrote to Eskom to set up the signing of the agreements that conclude procurement processes that have come for more than two years and where winners were chosen after rigorous competition. Not once did Eskom even bother to reply. On the contrary, it systematically allowed Budget Quotes to lapse, thus creating for itself a pseudo defence that there is no binding document to determine the cost of connecting these projects to the grid and that all these projects would have to go back to the start of the queue, sorry.

The sad reality is that Eskom would put itself on death row if it succeeds with what it is endeavouring to do. By 2020, solar PV on rooftops with batteries may cost as little as R1,50-2,00/kWh. Municipalities still mark up Eskom power by as much as 100% before selling it. If they are buying from Eskom at R1,50 and selling at R3,00, there would be a massive incentive for grid defection. Rich customers would leave, poor customers would stay behind, Eskom would sell fewer units still, its fixed costs would remain as before and the electricity price would spike again, repeating the cycle. The utility death spiral would be irrevocable.

In December, these factors will go into the mix when the ratings agencies make their decision on our country’s sovereign credit rating. They know that Eskom has received government guarantees of about R350 billion. They also know that economic growth is critical to turn our fortunes around and that, if the monopolistic mindset of a single state entity is allowed to immediately scupper more than R50 billion in infrastructure investment and compromise perhaps the best news public private story we’ve ever had to tell, the future is not a happy place.

The margins by which our credit rating goes one way or another will be slim, but the effects profound. The single decision to sign (or the illegal refusal to sign) the fourth round of the REIPPPP projects may sway the ultimate outcome. After all, ratings agencies cannot be oblivious to government’s ability to police its State Owned Enterprises. They cannot turn a blind eye to behaviour that sabotages competition to the detriment of the country at large.

Eskom needs to be made to sign, and sign now, before the December decision-making takes place. The stakes are too high to allow any other outcome.

  • Johan van den Berg is a renewable energy practitioner. He serves on the Ministerial Advisory Commission on Energy and is the African Private Sector Focal Point for the Africa-EU Energy Partnership. An advocate, he has spent more than twenty years in dispute resolution; environmental mediation; climate change avoidance/emissions trading; and efforts to deploy renewable energy in Southern Africa. He was awarded the 2015 Global Sustainable Leadership Award by the World CSR congress in Mumbai, India. He is the author of “Nero’s Violin – the art of conviction in a divided world”.