The National Treasury says Eskom needs to restructure and modernise its business in light of international developments, as well as its poor technical and commercial performance. Photo: EPA
JOHANNESBURG – The national Treasury has issued its first real indication of its plans to unbundle Eskom, saying that it would consider disposing of the debt-ridden power utility’s coal-fired power stations in an effort that could potentially raise about R450 billion.

In an economic policy paper released for public comment yesterday, the Treasury said Eskom needed to restructure and modernise its business in light of international developments as well as its own poor technical and commercial performance.

It said alternative models such as the separation of generation assets - leaving the state-owned transmission company to buy electricity transparently from IPPs (Independent Power Producers) and state-owned power generators - were also being explored.

“The government could take a decision that Eskom should sell coal-fired power stations, possibly through a series of auctions,” the Treasury said.

“Through these auctions, Eskom would sell the power station itself, all its power station-specific obligations (staff contracts, coal-supply contracts, supplier contracts, environmental obligations, etc), together with a power purchase agreement (PPA) at a predefined, power station-specific tariff.”

National Treasury said the PPA would see new power station owners to supply a specific amount of electricity annually “over the remaining lifetime of the power station to the Single Buyer Office at Eskom at a predefined tariff”.

It said on average, half of Eskom’s coal-powered fleet was over 37 years old. South Africa’s economy depends on electricity produced by Eskom with its primarily coal-based generation plants, nuclear power station and some hydropower and a small percentage of renewables.

However, growth in Eskom’s generation capacity has not kept pace, with ageing coal power plants still making up much of supply and the commissioning of new plants Medupi and Kusile still in progress.

Energy expert Ted Blom said the selling of the power stations was a good idea but government had waited for too long to consider the option.

“The issue is the value of the power stations. There is a big question around the value of coal stations because most of them are not performing optimally,” Blom said.

“You can’t go around selling broken things and expect buyers to pay top price for broken stations while they will need to spend more money fixing them. I believe even if they go ahead and sell them they will not raise the type of money they expect.”

Eskom’s total carrying value of the unaudited debt of the company at the end of March 2019 was R440bn, of which R273bn nominal value is government guaranteed.

The Treasury said it was also considering ring-fencing grid investments which should be monitored by the National Energy Regulator of South Africa to ensure the sustainability of the grid.

It said the restructuring would result in the mooted independent transmission company buying electricity transparently from IPPs.

It said it also wanted regulation to make it possible for households and firms to sell excess electricity they generate.

Capital Economics senior emerging markets economist John Ashbourne said the plans were as a result of Eskom’s investment spending cuts in recent years which saw the utility facing a huge backlog of repair and construction work.

“Things might actually get worse over the coming years; many of Eskom’s ageing coal plants are expected to come to the end of their useful lives in the 2020s and early 2030s.

“Replacing them will require costly investments,” Ashbourne said.

South Africans have until September 15 to comment on the paper.