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Eskom needs private money

Mar 15, 2019
Not unbundling is not an option. Unbundling will enable the ‘good parts’ to thrive while applying remedies to the ‘bad parts’, writes Thembani Bukula
Unbundling Eskom is not necessarily the silver bullet for all the power utility’s woes, but it certainly is the trigger that fires the silver bullet.
Indeed, some of the solutions required to the complex and complicated Eskom problems are as simple as maintenance planning and execution, while the funding problems will require somewhat “magical” solutions.
Eskom’s debt of more than R420 billion mainly arises from the construction of the two coal-fired stations, Medupi and Kusile, and the pumped storage scheme Ingula with interest during construction in excess of R100 billion.
More than 20% of its “ageing” and inappropriately maintained generation fleet is unavailable because of breakdowns and ill-considered maintenance planning and execution.
Its ability to provide electricity services is further hampered by the shortages or poor quality of coal at some of its power stations, bad designs and/or workmanship in the newly constructed power stations, lack of funds to purchase fuel, bad debt, declining electricity sales, inadequate management and corruption.
As a result, Eskom at times is unable to supply the electricity demand of less than 30 000MW in summer, when the installed capacity is in excess of 52 000MW.
Eskom has three distinct businesses – generation, transmission and distribution – so unbundling it along these lines makes business sense.
More than 80% of Eskom debt as well as assets are associated with the generation division with less than 20% being from the transmission and distribution divisions.
In Eskom’s application for the Regulatory Clearing Account, it is stated that the approved capital expenditure for the transmission and distribution business enhancement was re-allocated to the generation capital expenditure.
This implies that the necessary upgrades and improvement of the transmission grid are being compromised by the ever-increasing generation expenditure.
It is reasonable to expect that the focus of the Eskom board and management will be on the generation business and less on the transmission and distribution business.
Furthermore, the ability of the transmission and distribution businesses to raise funds is negatively affected by the overall Eskom financial position.
Unbundling Eskom into generation, transmission and distribution will enable each business to raise funds based on its own balance sheet and allow its management structures to focus on the core business without being overwhelmed by the dire situation of the generation unit.
Yes, the R420 billion debt still needs to be repaid by Eskom.
This is the part that might and will require participation of the private sector. The division of Eskom that incurred the debt is the generation division, which has assets that have been re-evaluated at more than R1 trillion, according to the Eskom Multi-Year Price Determination application for the period 2019/20 to 2021/22.
Allowing for private sector participation, in part or in full, will provide the necessary liquidity and capital to reduce or negate the debt. Guaranteed returns in the range of 7% to 9% will attract meaningful participation from the private sector.
The transmission division accounts for about R100 billion of the total asset base with a projected capital expenditure budget of up to 8% of the asset value per annum.
Participation by the private sector in this part of the business might not be necessary, though in other countries, such as the US, private sector participation in the transmission business is permitted.
Assets of the distribution business are estimated to be about R150 billion with less than R10 billion projected capital expenditure requirements a year. New distribution and localised generation technologies, such as solar photovoltaics, wind turbines and storage, will be mostly integrated at the distribution level and hence there is a need to get the distribution infrastructure future-ready.
South Africa is already seeing private sector participation in this space in various estates and other gated settlements, where the local distributor only provides the bulk supply to a point and thereafter the distribution as well as reticulation to the consumers is undertaken by the private sector.
In many countries (for example, Namibia, Brazil, Peru, Turkey, the US and the UK), private sector participation in the distribution sector has been introduced to enhance the operational efficiency as well as attract investment.
The unbundling announcement by President Cyril Ramaphosa, affirmed that the unbundled Eskom would be housed under Eskom Holdings and would be in turn still be owned by the state.
This is in line with the White Paper on Energy of 1998 and makes this unbundling easier to implement as there is no new law to be enacted.
Electricity supply industries across the world have been unbundled into different forms, with governments either wholly owning or partly owning the various entities.
Private sector participation in the generation sector has already started in South Africa with the Renewable Energy Independent Power Producer Procurement Programme.
Efficiencies in funding, construction and delivery on time have already been demonstrated.
In Eskom’s case the transmission business is the most ready division to be unbundled and there is already significant work that has been undertaken through the Independent System and Market Operator Bill that was proposed to Parliament three years ago.
The distribution business is both politically and structurally complex in that about 50% of the distribution industry is owned and operated by municipalities and the rest by Eskom.
It is the most fragmented part of the electricity supply chain with some of the licensed municipalities inadequately positioned to undertake this function due to inappropriate customer categories or mix.
There are pockets of excellence in some of the municipalities, mainly the metros, but overall it is an inefficiently structured business for the country. Municipalities derive a significant amount of their revenue and surplus to subsidise other services from electricity sales, hence careful consideration of how this industry should be handled is critical.
The last attempt at forming regional electricity distributors was abandoned because it required amendment of the Constitution. But this time around something must give.
Not unbundling Eskom is not an option as its problems cannot be resolved with it unchanged. Unbundling will enable the “good parts” to thrive and facilitate proper management focus on the business at hand, while applying the appropriate remedies on the “bad parts”.
Eskom has all the electricity generation capacity to meet the demand in South Africa any time.
What is required is operational efficiency and optimal financial management of the utility.
It is a reliable, safe and secure electricity supply that is required to grow the economy and create the necessary jobs in South Africa.
Unbundling Eskom and allowing private sector participation will facilitate operational efficiency and prudent financial management, as well as offset years of under investment in the generation, transmission and distribution sectors.
An unbundled Eskom is more likely to attract investments to fill the funding gaps than today’s Eskom.
Offloading part or some of the generation assets will raise the necessary fiscal revenues that can be used to alleviate the debt burden Eskom has created.
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