The unbundling of Eskom, Not just a Roadmap, But a Death Trap for South Africa’s Energy Independence

Pravin Gordhan, South Africa's minister for public enterprises, arrives for a news conference to announce the Eskom Holdings SOC Ltd. rescue plan in Pretoria, South Africa, on Tuesday, Oct. 29, 2019. Photographer: Waldo Swiegers/Bloomberg via Getty Images Background: Eskom power lines run through an open field in Johannesburg, South Africa, 08 June 2015. PHOTO: EPA/KIM LUDBROOK

The South African Federation of Trade Unions (SAFTU) joins NUMSA and NUM in opposing the decision to go ahead with the unbundling of Eskom.

What is at stake here is much more significant than simply breaking Eskom into three separate parts. The proposals made in the DPE’s Roadmap for Eskom in a Reformed Electricity Supply Industry, if implemented, will wreak havoc on South Africa’s energy system. The reason offered for the restructuring of Eskom into three subsidiary businesses – generation, transmission and distribution – is to “reduce the risk that Eskom poses to the country through its dependence on fiscal allocations and inability to supply the economy with adequate power.”  But what is being proposed will leave Eskom in a worse state and leave consumers worse off. By 2030, South Africa will have lost its energy independence, sovereignty and will be dependent on multinationals based in Europe and China. Costs will rise astronomically, and these costs will either be recovered through increased tariffs, state interventions, or both. We will be back to square one, but we will have lost control over our energy system.  

Moreover, there is no attempt to account how it came that a world leading energy company ended up with a massive debt of between R450 and R500 billion. There is no attempt to explain how unbundling will address this debt trap. No explanation is given as to how breaking up Eskom into three components with three CEOs, three executives, three boards and staff will drive the costs down.

Information is hidden to the public that Eskom is effectively subsidising overseas private firms.  The country is not being told that the Independent Power Producers are importing readymade renewable equipment such as solar panels out of the country. They are creating employment in other parts of the country but generate profits at the expense of the public utility, Eskom. Above all, Eskom is not allowed to enter the renewable space which is designed and reserved for the Independent Power Producers who have been asked to invest in renewables without taking any risks. Their profits are guaranteed for the next twenty years. This is a rip off and a deliberate milking dry of the public utility. This will render Eskom useless to bolster the chance of the private sector to take over the provision of the public good not in a too distant future. The question that arises is who really stand to benefit from this? What model of a competition is this? Wake up South Africa and smell the coffee, the country is being sold the to the highest bidder!

The DPE’s Roadmap claims that breaking up Eskom will usher in a “new business model.” This model is not consistent with the principle that electricity is a public good that should be used for human development and to strengthen the national economy. The proposed new model can be labelled “electricity for profit” where private interests, many based outside of South Africa, will enjoy Government backed guaranteed returns on investment as a result of 20-year power purchase agreements (PPAs).

Without mentioning the word “privatisation” once in the entire Roadmap for Eskom document, it is plainly obvious that what the DPE is proposing comes straight from the World Bank’s privatisation handbook. It is consistent with the Bank’s “privatisation in stages” approach attempted in many other countries.  

According to this plan, first the public utility is broken up, but its component parts will remain–for a while–in public hands. Then for-profit independent power producers (IPPs) are offered long term contracts (power purchase agreements, or PPAs) to take over new generation capacity. We have seen this already with the Renewable Energy Independent Power Producers Programme, or REIPPP.  Privately-owned generation is phased in, publicly owned generation is phased out.

According to the DPE, Eskom’s future in power generation will be as one of many generators bidding for PPA contracts. It is claimed that this is but a steppingstone that “will thereafter transition to an open‐market model.” In other words, Eskom’s generation must first compete with other IPPs as if it were a private entity. According to the DPE, “Consideration is being given to create two or more generation subsidiaries to introduce intra‐company competition among the generation subsidiaries and drive efficiencies in generation.” In other words, separate parts of Eskom’s fleet will be forced to compete against each other on what will be an overcrowded generation market and sluggish energy demand. This is how privatisation happens: impose “market rules””, split up the business and sit back and watch how public entities struggle to reconcile their public mission of providing affordable electricity with the imperatives of profit making.

The DPE points to Vietnam as a successful example of this approach, but it fails to mention that demand for electricity in Vietnam has been rising at an average of 7% per year and nearly all of this added demand is being provided by new coal-fired capacity. In the context of South Africa, revenues from what is now Eskom’s existing fleet will plummet and the “death spiral” will intensify. With the planned decommissioning of 12GW of coal by 2030 under IRP 2019, it is clear where things are heading. Eskom’s share of generation will fall from 90% to 60% by 2030, and fall still further after that.  The share of private generation will rise accordingly. But South Africa will still be dependent on coal-fired power for most of its electricity.

The DPE’s Roadmap for Eskom proposes that a separate Transmission Entity be formed, one that is “100% Owned by Eskom Holdings” (Eskom-TE). Eskom-TE will buy energy from generators as procured by the Minister of Mineral Resources and Energy. Therefore, Eskom TE will have no control over the mix of generation that will be procured; it will simply have to do what it is told. The current use of PPAs for renewables will ensure that Eskom TE will be required to purchase ever larger volumes of wind and solar power, which is variable, costly and “non dispatchable,” at a pre-agreed price that must be high enough to deliver returns on investment for private developers and technology companies based overseas. The DPE says the goal is to “foster a competitive” market, but without the certainty of an “out of market” PPA, no private company will be able to raise finance for new projects. , nor will there be competition without an explicit sovereign guarantee that REIPPP currently enjoys
The proposal to create a separate Transmission Entity is both myopic and inward looking. The DPE should learn the lessons from other countries. As more renewable energy comes on line, the greater the technical and financial burdens fall on the transmission networks. Seen in the context of the adoption of the IRP, this will incur costs to upgrade the grid and–because renewable energy is variable–the development of storage capacity, spinning reserve costs and technologies that better balance supply with demand. Who will pay for this?  Not the IPPs. The system costs associated with integrating an enormous amount of privately-owned renewable energy (an estimated 16.5 GW of additional capacity by 2030) will become Eskom-TE’s responsibility. The DPE says these costs will be “ring fenced and clearly defined.” But this does not make the costs go away. To recover these costs, tariffs will have to increase, or the state will need to provide public money in order to sustain the “energy for profit” business model.

Meanwhile, if the current REIPP programme is allowed to grow as projected, more than half of South Africa’s generating capacity, and virtually all of its renewables’ capacity, will by 2030 be operating under long term PPAs with companies that are not based in South Africa and who source technologies mostly from Europe or China. With up to 12GW of coal-fired generation decommissioned in the next 15 years, South Africa will be vulnerable to price blackmail by multinational companies. The country will be in danger of both losing its energy independence, sovereignty and of being denied access to the technologies needed to generate its own electricity.  

It is ironic that the proposal to unbundle Eskom and to introduce a “new business model” (electricity as a profit-making commodity, and not as a public service) is being pursued at a time

1.     When the World Bank is itself questioning the viability of this model. According to a recently released World Bank sponsored review of thirty years of privatisation and liberalisation of power systems in developing countries, 60% of new generation investment is publicly funded and transmission and distribution systems remain publicly owned. Furthermore, “Extending access to electricity to the peri-urban and rural periphery often leads a utility into diminishing and even negative marginal returns on investment, particularly if the power consumption of poor households remains very low. Thus, universal electrification cannot be achieved purely by allowing a utility to pursue commercial incentives.” (See World Bank report “rethinking power sector reform in the developing world” published by the World Bank group, Washington DC 2019)Opposes the breakup of Eskom. This is privatisation by stages. Generation, transmission and distribution must remain public
2.     This model is sustained by expensive power purchase agreements (PPAs) with IPPs where the costs of sustaining and balancing the system fall on the shoulders of public entities or end users.
SAFTU stands ready and in fact demand that the government creates an energy crisis conference wherein we together with progressive local and international energy policy groups can make proposals on how we can rescue Eskom and build a socially owned renewable energy sector in South Africa.

1. Opposes the breakup/unbundling of Eskom on basis of legality and rationality.
Eskom is an organ of statute and any breakup/unbundling thereof must be preceded by constitutionally valid legislative amendments. Parliament is called to urgently play its constitutionally entrenched role in regard to this matter.
The breakup/unbundling of Eskom as proposed is a disguised but brutal form of privatisation of Eskom’s business activities which are essential to sustainable economic growth and job creation.
SAFTU insists that Eskom must remain state owned as an integrated utility with generation, transmission and distribution.

2. Rejects the “new business model” based on electricity-for-profit. This model is sustained by expensive power purchase agreements (PPAs) with IPPs where the costs of sustaining and balancing the system fall on the shoulders of Eskom whilst electricity consumers suffer higher electricity prices which have increased by more than 310% in the past ten years.

3. Supports a just energy transition in South Africa that is carefully planned, avoids job losses, with a reformed vertically and horizontally integrated national utility taking the lead.

4. Supports social ownership of renewable energy, with deployment levels based on a clear set of goals and principles. The immediate task is, therefore, the plan to insource the skills and technologies needed to develop a domestic renewable energy industry from 2025 onwards, or sooner if possible.

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