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Eskom power generation business is not ‘bad bank’

Published Sep 7, 2018


JOHANNESBURG – Minister of Energy Jeff Radebe must be congratulated with the publication of the draft Integrated Resource Plan (IRP) 2018 for public comment. 

The IRP 2018 is not only well-thought through but aligned to the National Development Plan (NDP) to ensure that South Africa invests in a strong network of economic infrastructure that underpins economic development, growth, job creation and socio-economic transformation.

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South Africa is one of the few countries in the world with a “living plan” that is periodically reviewed in an open and transparent manner. 

An additional 18 000 megawatts of new generation capacity has been committed in the IRP 2018 with most of the capacity already connected to the grid.

The role of Eskom as the off-taker supreme is to balance the electricity load and ensure adherence to the grid code the utility has developed over the years, now used as the standard by most Southern African Power Pool (SAPP) member states.

The structured review process that includes constructive engagement with business, and labour and community participation is in stark contrast with the negative and destructive (“toxic”) language used by three “energy experts” at an event hosted in Johannesburg by EE Publishers and the South African Institute of Electrical Engineers, as quoted by Engineering News of August 29.

The mere fact that the cost of new generation technologies has come down only recently is not sufficient motivation to label Eskom’s business model as “relevant to the previous century” and likening it’s generation business to a “bad bank”.

Capital intensive

Energy experts should know that generation is capital intensive and plant life cycles span many decades. Eskom has to play a catalytic role to support the country’s medium- and long-term economic and social objectives. 

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Policies are a means to an end. The intention of government is to use energy infrastructure as a critical component that underpins economic activity and growth across the country and into the region.

Eskom is ranked among the top generation utilities in the world and as a leader on the African continent. Regional initiatives include the Mozambique-Zimbabwe-South Africa (MoZiSa) inter-connector, and the Central Transmission Corridor and Zimbabwe-Zambia-Botswana-Namibia (ZiZaBoNa) inter-connectors, to facilitate regional grid connectivity as well as short- and long-term trade in electricity via the SAPP’s electricity trading platform.

Every plant operated by Eskom is designed to acceptable standards. No Development Finance Institution will sign off on a funding term sheet unless they are satisfied with environmental compliance issues, financial risk, worker support, local community support, viability and the competency of the project management and operations managers – a process Eskom has gone through many times.

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Generalised statements such as “financial contamination”, “cash-guzzling” and “relevant to the previous century” can at best be contextualized as “classroom talk”.

Business Economics 101 teaches that no company can be “reduced to greatness” and Eskom is no different.

The business case of Eskom, its asset specificity, user profile, geographic grid coverage from deep rural farmland areas and small towns to the urban conurbations of South Africa as well as into the Southern African region, are complex. 

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Eskom is playing a leading role in expanding the short-term energy market and the development of the day-ahead market of the SAPP, which hourly contracts can be traded for each of the 24 hours of the following day to enable all participating utilities to sell surplus electricity and to balance the supply.

The introduction of renewable energy into the grid, apart from connectivity issues, has introduced load managing and generation fluctuations when the sun is shining and when the wind is blowing. 

With storage options still evolving, electricity generated must be evacuated, which impacts on the generation capacity factor of the other generation plants and the cost of idle capacity to Eskom.

Cost and viability

The reduction in the cost and viability of solar and wind energy are recent phenomena in the energy market. Baseload generation projects are long-term based and cannot be “ring-fenced” or just left to the mercy of “infant technologies” or the seasonality of renewable energies.

The science of continuously refining the most optimal energy mix, the complexity of determining the cost of generation using different plants and to use “best” cost reflective tariffs cannot be chopped and changed overnight, or be purely based on skewed personal opinions. 

The stable provision of baseload generation capacity cannot be left to the limitations of renewable energy only. The impacts of the recent drought in Zambia and Zimbabwe on the hydro-power generation plants are stark reminders of the vulnerability of economies without an energy mix that can be planned and controlled. Thus, superfluously criticising the South African government and Eskom for “poor project” choices is disingenuous and dishonest. 

We invite all “leading electricity experts” to join us to assist our government to root out all forms of corruption especially coercion, price fixing and exploitation. 

The “cost overruns” the “leading experts” are citing are not fuelled or driven by government, but by corrupt private sector suppliers and a subset of professional service providers that will stop at nothing to overcharge or exploit the public sector, specifically Eskom. 

These corrupt strategies and business practices must be fingered by all and not be labelled as abysmal execution of build programmes. 

Several construction companies have been found guilty in South Africa in this regard in recent years. 

It is high time the practice be stopped whereby such companies are hiring more lawyers than professional engineers, to take government to court about cost variances they create for themselves.

No business, including Eskom, is out to create “stranded assets”. Instead, the deliberate inflating of prices and the engineering of cost variance should be treated as economic sabotage instigated by “agents provocateurs” hell-bent to stifle economic growth and development as well as to tarnish the image of government. Surely Eskom cannot dismantle, close down or willy-nilly “ring-fence” power stations and in doing so create ghost towns, unemployment and social upheaval? There are a number of growing and expanding generation utilities around the world that are sustainable as well as successful. The so-called “death spiral” is only real in the minds of the prophets of doom.

Reviewing the IRP is an all-encompassing process in which all stakeholders can participate. Government should be congratulated for the open and transparent way it is managing the process. The Strategy 2035 mandate from Public Enterprise Minister Pravin Gordhan to Eskom to review and finalise a new corporate plan before the end of this month should be supported. 

It is fair to say that Eskom knows what is “best” for its business and to give practical effect to the policy adjustments as contained in the draft IRP, its social compact and shareholders’ obligations to government.

Developments in the so-called global electricity market cannot be forced on to Eskom, which is expected to play a developmental role in the South African economy and in the SADC region. 

Access to electricity and affordability are major concerns to more than 50% of the households in South Africa. Many workers are still earning a “poverty wage”; according to Statistics SA, this trend is growing and the poverty depth is intensifying.

One agrees with energy consultant Dr Andrew Erickson that utilities must be agile in the context of dramatic changes, however, as there are no guarantees of success, and likening all of Eskom’s generation business to that of a “bad bank”, in the words of Professor Anton Eberhard speaking on behalf of the Cape Town Graduate School of Business, borders on reckless speech and over-simplification.

I am challenging him to assist government, including Eskom, to formulate action programmes that address unemployment and eradicate the extreme levels of inequality in our society. The destruction of Eskom as proposed by the likes of Eberhard cannot be implemented at the expense of the poor.

Sello Mashao Rasethaba is a member of the Gas Agency & Trading Exchange (GAtx) which is in the business of transmission infrastructure planning, energy market maker, gas wholesale and retail market development.

The views expressed here are not necessarily those of Independent Media.

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