Power Industry Reform Project in South Africa: Lost in Translation?
South Africa’s ruling party recently proposed creating a second state-owned electricity company. The aim is to compensate for the “serious strategic risk” of depending on Eskom, the country’s monolithic public service.
Fifteen years of poor operational and financial performance and disruption to the country’s electricity supply led President Cyril Ramaphosa to speak of a ‘spectacular disaster’ the nation would face if Eskom failed as a company. In his July speech to the 15th National Congress of the Communist Party of South Africa, he said that Eskom had been
operating on a model that is no longer suited to current technology or economic conditions.
Ramaphosa would then have presented the Chinese electricity sector as an example from which South Africa could draw inspiration.
China’s experience shows that supply shortages and lack of investment in the sector during the 1980s led to the unbundling of the State Power Company in 2003. It was split into five power generation companies. electricity and two transmission companies. Complete legal separation from the State Power Company was essential because China wanted the private sector to invest in power generation. Investors were to be protected from the financial legacy of the State Power Company and allowed to compete.
Ramaphosa did not mention Australia’s experience in restructuring the industry, but there are also lessons to be learned.
Read more: Ramaphosa acts to ease South Africa’s energy crisis: impact will be felt in renewables
In a nutshell, over about three years, the Australian state of Victoria unbundled its State Electricity Commission. The lignite, gas and hydropower plants were established as legally separate state companies. Transmission was created as a proprietary company. System Operations was established as an independent, not-for-profit company under shareholder oversight. Grid rules were developed, an economic regulator was created to oversee grid charges, and short-term bulk power supply agreements were handed over to generators.
South Africa’s energy roadmap
The South African government released its own reform options in the form of a “roadmap” in 2019. It planned to unbundle Eskom Holdings into several state-owned power generation, transmission, and system and market operations companies .
The roadmap envisaged that the reform process would take place over several years. Eskom would emerge with streamlined operations, restructured finances and a sustainable business model. It would have “appropriate controls to ensure that the recent incidences of irregular, vain and unnecessary spending are a thing of the past”.
Three years have already passed and these results will not be achieved within the time frame.
Transmission was to be established as a subsidiary of Eskom Holdings by the end of 2021. Generation and distribution would be established by December 31, 2022. Generation, transmission and distribution divisions have already been formed . But it has been a license condition since 2005 and was part of Eskom’s corporate structure until 2010.
Why then does it take so long to complete the task?
One line of reasoning is that it is impractical to restructure when the system is in such dire straits.
But Victoria’s case gives some perspective. The initial reforms undertaken in Victoria were led by a group of around 20 professionals from the Ministry of Finance, alongside a small number of senior government officials. From this resource base, the necessary operational, business, legal, legislative, governance and employment structures were created to restructure Victoria’s electricity industry.
Surely South Africa can find a similar level of national and international experts to avert the calamity feared by President Ramaphosa.
Read more: South Africa needs tough security to stop sabotage of its power supply
But it doesn’t have to end in calamity. Some solace can be found in South Africa being a ‘last in line’. Wholesale electricity trading agreements such as those found in Australia and across Europe must now integrate new electricity generation technologies into existing market structures. This has led to investment shortfalls, supply constraints and exorbitant price increases.
This recent experience may suggest that South Africa should focus on a relatively simple task. In other words, to separate Eskom Holdings into legally distinct power generation companies, a transmission company and an independent network operator. He could leave market operations and commercial agreements within Eskom Holdings.
Two points arising from international experience deserve to be developed.
The first point is that the bundling of transmission with system and market operations, as proposed in the 2019 roadmap, channels transactions and default risk through transmission activity. Market participants could demand government guarantees, which would increase the burden on the national treasury. This would complicate and delay the creation of the transmission company – the least complex element of power sector reform.
The second insight concerns the impact of new production technologies. Today, relatively simple wholesale trade agreements (perhaps based on wholesale supply tariffs) are likely to outperform the more sophisticated real-time wholesale markets established in the 1990s. now inapplicable in systems that derive much of their power from renewables.
Read more: South Africa’s struggling power utility is being reset: CEO explains how
The simple unbundling of South Africa’s electricity sector to which the President alludes could herald a new era in South Africa’s energy future. This could allow well-run public entities to thrive and leave uncompetitive ones to be reshaped by market forces.
For example, underperforming or aging power plants can be leased under concession agreements with private operators. Basically, long-term leases containing a set of defined operational requirements would be agreed with the operator. The power plant would remain state property. This would provide cash flow to the government and a reliable flow of power from the concessionaire.
It is important to note that this new energy future does not imply a complete disregard for workers who may be laid off as the industry restructures. Any well-planned reform begins with consideration of those who built the industry. Consider the 25 billion rand (about $1.5 billion) of irregular spending that Eskom has allegedly racked up over the past two years. If the expected efficiency gains from the unbundling of Eskom Holdings cut this loss in half, these funds could go a long way towards meeting the needs of those displaced by the transition to an efficient and reliable energy future.
Power sector reform really isn’t that complex – it just takes the will to do better.
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