Sinking in debt, Eskom – as both a national generator and distributor of electricity – is the biggest stumbling block to developing affordable, clean power in South Africa, and should be unbundled.
This was a broadly consensual view among financiers, business owners and energy experts at the African Utility Week conference in Cape Town this week.
“Take transmission away from Eskom and put it into an independent transmission and market operator. This could be a subsidiary of Eskom initially, as a first step,” said Professor in UCT’s Graduate School of Business’s Infrastructure Reform and Regulation Management Programme, Anton Eberhard. Eberhard has presented before the public enterprises committee state capture enquiry into allegations of corruption and capture at Eskom
Under disgraced former Eskom CEO Brian Molefe, the power utility for over two years delayed its mandate to sign off on 27 renewable energy initiatives worth R56bn, arguing it didn’t want to buy electricity it was able to generate more cheaply with coal.
This argument, however, has been criticised as not taking into account the cost of power station builds, nor, argue environmentalists, the costs of pollution from coal. Furthermore, technological advances have seen the price of wind and solar generated power drop by 50% and 80% respectively in South Africa since 2011, while Eskom currently seeks a 35% increase in power prices to allow for cost recoveries of R6.6bn.
Energy Minister Jeff Radebe, in his budget vote speech on Wednesday, stated: “The IPP (Independent Power Producer) programme provides the much needed competition in power generation with the view of providing lower prices to the economy, but most importantly, to indigent households.”
But as the main generator of power, as well as owner of the transmission grid which it has to pay IPPs to feed into, Eskom remains player and referee in the power sector.
This conflict would be removed by placing the management and development of the transmission grid in control of a separate entity, said Eberhard, and allow Eskom to focus on dealing with its problems in power generation and become more effective and competitive.
It was “absolutely criminal” to deny the private sector access to only well-connected grid in sub-Saharan Africa, said principal infrastructure investment officer at the International Finance Corporation SA, Soumya Bannerjee.
“Use it and pay your charges,” said Bannerjee. “You have to free up generation, have to let the private sector in.”
He said if the right environment for the private sector to invest in Independent Power Producer (IPP) projects were created, “there would be a deluge”.
Despite the signing of the latest round of IPP agreements this year, Eskom remained one of the risks investors faced, said managing director of Pele Green Energy, Gqi Raoleka.
“After experiencing three years of no movement, can we rely on knowing Eskom, who is the single buyer, won’t find another way to stop the buying programme?” said Raoleka.
He said the risk surrounding Eskom made raising the R2bn – R3bn capital finance for an IPP project more difficult, particularly for black-owned IPPs such as Pele which were at a disadvantage when it came to raising debt. In this way, Eskom was also responsible for stymying transformation in the renewable energy industry.
“This is also why there are not more black-owned IPPs,” he said.
The future, not just in South Africa but on the continent, would see a shift “to a host of all energy players and strategies, as opposed to the previous focus on large-scale utility builds”, said SA head of infrastructure, energy and telecommunications at Nedbank CIB, Mike Peo.
Rather than large power plants, “it makes more sense for smaller independent renewable energy power producers to feed into the grid” at competitive prices, said Peo.
From an investment point of view, which was led mainly by direct foreign investment, there were “significant constraints to procuring large-scale generation projects”,
“Governments in Africa are constrained regarding their quantum of debt vs GDP and can’t provide the kinds of guarantees direct foreign investors require for 20 to 30 year agreements on big builds.”
Additionally, utilities such as Eskom, had “not improved one iota” in the last 15 years, and incurred losses as a result. With Eskom’s debt at R360bn, that it would enter a debt spiral was “a given”.
Although each country needed to be considered on a case-by-case basis, he said continent-wide there was “a convergence of cheaper and hybrid solutions”. Some of these were tied to a national gird, while other were not. Mobile payment solutions such as M-Pesa also enabled mini and micro grids, as end consumers did not have to be banked to pay for power.
“Additionally, with certification agencies able to develop standards for installations, banks are able to look at risk differently from the old fashioned single utility for 150MW plus projects, and rather considering groups of small scale providers.”
More micro and mini-grids supplied predominantly by renewable energy, also meant power could be provided to remote communities, he said.
While there was a role for state power utilities to play in terms of ensuring power on demand, investors were looking at an African future of smaller power projects, predominantly in renewable energy to balance out Africa being home to 15% of the world’s population, but having only 3% of global power.
Only four large power plants with capacity of 300MW or more had achieved financial close over the last five years in sub-Saharan Africa, and these had taken eight years to reach closure, said Peo.
Meanwhile, Eberhard stated in the region of 142 IPP projects had reached closure in sub-Saharan Africa between 2012 and 2017.
“There’s a definite shift to smaller projects,” said Eberhard, with “significant activity” in Uganda, Ghana, Kenya, Namibia, and Senegal, as well as the success of the REIPP programme in SA.
In many countries, renewable energy was now the cheapest source of grid connected power, he said, and this “will have profound impacts on how utility systems grow in the future”.
“We’re on the brink of revolution around this in SA.” — WCN