Analysis

Unbundling Alone Will Not Help Eskom Woes, Run It Properly

By John King

THIS topic of bundling Eskom was researched and modeled and debated back in the day when the government of 1994 was not trying to solve financial survival issues, but rather issues of principle that would allow South Africa to progress economically and socially.

Context 

South Africa has enjoyed some of the cheapest electricity around the world, in its history, so much so that in the mid 1990’s the then management of Eskom, including a very esteemed man by the name of Sir Mick Davis, who recently was involved in the Presidents Heavy hitting advisers on this matter, undertook a 5 year price increase moratorium (called the price compact). Any economist will explain the huge positive multiplier effect of this decision on the economy. Through this time, Eskom took on commitments to extend its own investments in the distribution of electricity to previously unconnected communities (what was to become known as electrification). Eskom became a Company for legal purposes (no longer governed under the Eskom Act) and it started paying taxes on profits.

Anyone want to guess what the Eskom c/Kwh is? 5.8c/Kwh … yes near the bottom of the table. But there is a serious warning on these prices:- they are from Eskom and do not reflect all the additional charges that municipalities add to the charge that get used for subsidies of other parts of the municipality. But the POINT remains – South African Electricity is still very cheap.

How did we get here

Poor decisions and corrupt procurement aside, lets roll forward 20 years and what we have is a very mixed up business model – the shareholder gets their dividends through taxes. The demand for electricity eats steadily away at the capacity that existed and new capacity is proving to be more costly than planned and delayed in start and in being finished. A master plan was tabled with the shareholder in late 1990’s to restructure the industry so that private producers could enter the market and avoid the huge investment needed for massive fossil fuel power stations. But the shareholder who needed dividends, and was not interested in making investments then loaded Eskom with various burdens – build capacity, hold the price moratorium, pay the taxes and realign its employment profile with minimal retrenchments. The 1996 parliamentary plan for the industry was all but ignored, and All of this combined with a growing culture of non-payment for services, which had worked effectively in the pre-1994 country was a perfect storm.

Eskom is a perfectly well vertically integrated business, just like a Shell or BP in the petroleum industry, but with one big difference:- South Africa still has massive social injustice in that many citizens do not have access to electricity and cannot afford it (but this is a social responsibility that a government should take and it should raise taxes to make the investment to address this issue).

Global experiences

There are many global examples of countries which had previously operated with a single vertically integrated electricity industry and which successfully de-monopolised aspects of their industries. State owned monopolies are not a bad thing – especially where the nature of the business requires massive investment, a very long repayment cycle and the need for massive integration and economy of scale.

A frank view

Unbundling any organisation is NOT a substitute for running an efficient business, and unbundling is not a proxy for privatisation.

Unbundling is about focus on your business, and when you have a vertically integrated business then you need to separate your business into those segments that allow the management to run their business efficiently.

In the case of any supply chain – manufacture (in Eskom it is called Generation), wholesale supply (in Eskom its called Transmission) and then a retail operation (called Distribution). They are all very different businesses, with different risks and different products (electricity is not all the same – in our plugs it is a product of 220v, in transmission its as high as 760,000 V and at a power station it’s measured in GW).

I support the decoupling of Generation, Transmission and Distribution. BUT NOT BEFORE EACH BUSINESS IS RUN PROPERLY (debts collected, productivity levels appropriate, procurement governed well, overall business governance). An unbundled mess is still a mess but is worse because people change and basic good business practices take a backseat and any economy of scale is lost (by economy of scale I mean things like Management costs, IT costs, central HR costs, shared facilities, shared auditors, etc)

We should not unbundle the electricity industry right now. But we should unbundle within the next 3 years.

Can unbundling force good efficient business?

Yes in the case of Generation and Distribution – because in the case of generation you can privatise production (which has already happened with the IPP’s) and in the case of distribution this should be transferred to the relevant local authority.

No in the case of Transmission – the efficiency we need here is that the transmission business becomes more the business that matches demand and supply, yes it owns a huge asset (called a national transmission network of cables), but these are pretty safe and stable assets.

Once unbundled ?

Privatise Generation as soon as possible after being unbundled. Allow the IPP’s to sell their power onto the independently run Transmission network. Sell off those power stations for which there is an interest and invite new investors into new capacity. Economics will dictate which power generation will get purchased – its all about supply and demand. This will drive the cost of generation downwards. Technology in generation has changed the most and the options are the most varied – fossil fuel, nuclear, renewable, hydro etc. The cash generated by the sale of these assets (oh and the right to be a producer and sell to Transmission) is used to settle Eskom debt.

While I am addressing this area – privatize every other non-core part of Eskom (facilities, security, catering, accommodation, training, IT, etc)

Do not privatize Transmission. The nature of the business is that it is a national asset that gets power, in large amounts, to the areas that the State wishes to expand. This will be an awesome tool to address historic spatial inequalities and to encourage large scale manufacture in areas where people live but economics has ignored (the Bayside smelter of years ago is a great example. Low electricity prices gave rise to significant employment and economic activity in Richard bay). This is where government policy should apply to price differentials for socio economic issues. Call this the “stock exchange of electricity” – matching buyers and sellers.

Split up Distribution into the REDS (as they were known) but do not privatize. I think this is the most difficult one to do because this is where provinces, municipalities and other local authorities are all involved. It is further complicated, because there is a large asset based in Eskom for distribution of electricity to end users (including domestic) but for which most municipalities cannot pay (because they have no funds). I think the only solution here is that the ownership of the infrastructure gets transferred to municipality at no cost, but all future upgrades and maintenance is funded by the RED.

What we should be hoping for

Every South African should be hoping for the lowest possible cost (long term and including environmental impact costs) of generating electricity, followed by an efficient market where the electricity is bought and sold so that the government can transparently direct expansion of the grid to areas that require and justify economic development for the creation of industry and jobs, with the price of power being charged at the distribution point reflecting the quality of the service (not everyone can afford 24×7 uninterrupted power and they should not be forced to pay for it).

What we need though

Is for a properly run Eskom, that procures without corruption, that employs and remunerates based on productivity and that is devoid of political interference other than for the Transmission business which directs investment for creation of industry and employment.

 

Show More

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Close
Close