Where Does SA’s Energy Future Lie?

There is today, a significant restructuring taking place within the electricity market, something that is being driven by a wide range of factors. These include not only customer requirements, but also the desire for greater efficiencies, improved service delivery, the need to address ageing infrastructure, the importance of adopting a diverse energy portfolio and of course the requirement to address global warming challenges.

The need for such restructuring is of such importance that it proved to be a key feature during the SALGA Energy Summit held at the end of 2017. According to Nhlanhla Ngidi, an electricity specialist with SALGA, a key issue raised at the event was the fact that many challenges remain with regard to Eskom.

“The centralised and bureaucratic nature of the South African electricity sector is such that adapting to what are rapidly shifting market conditions was never going to be easy. For example, it is clear that Eskom has not been able to keep pace with increasing electrification demands, and as a result has faced challenges in providing reliable electricity supply in recent times,” he says.

“Furthermore, issues such as decentralisation and digitisation of the electricity sector are going to further impact the ability of Eskom and municipalities to function effectively and efficiently in the future. Moreover, the sustainability of the industry is further compromised by the absence of a clearly defined market and market rules.”

Ngidi explains that in more traditional electricity markets, the generation, transmission and distribution of electricity is typically bundled together in a single, vertically-integrated entity, or in a small group, as is the case with Eskom and the various municipalities. However, he adds, there is now a trend to reform the market by separating out these functions. In other words, to have generation, transmission and distribution all managed by separate entities.

“Discussions relating to whether or not Eskom should therefore undertake some form of restructuring to better contend with the new market forces and to ensure it remains relevant in the future were held at the SALGA Energy Summit, and have since been continued elsewhere,” states Ngidi.

“For example, a recent public debate, hosted by EE Publishers with the South African Institute of Electrical Engineers (SAIEE), Business Day and Axiz, witnessed several hundred people come together to review the various options available to the electricity supplier. Noted energy experts were also called upon to offer different options as to how Eskom should prepare itself for the evolving energy future.

Little needs to change

Frans Baleni, deputy chairman of the Development Bank of Southern Africa, indicated that as far as he is concerned, little needs to change.

“Obviously, Eskom does require renewed financial, operational and maintenance discipline, as well as the rooting out of maladministration and corruption, but this aside, the current Eskom structure as a vertically-integrated state-owned operator is suitable and appropriate for the socioeconomic and developmental needs of South Africa,” he says.

Baleni suggests that Eskom, in its present form, has served SA well, has provided electricity at competitive rates for many years and has aided in the country’s economic development. Furthermore, despite recent challenges like poor financial performance – resulting in part from poor debt recovery and ill-advised management decisions – the organisation still ranks among the top seven utilities in the world.

“Instead of restructuring the power utility, it is necessary that the organisation be stabilised to improve investor confidence. This will be a far cheaper and quicker solution to Eskom’s problems,” he says.

He adds that if Eskom is to properly recover, the following steps will need to be taken to stabilise it:

Firstly, it is imperative to deal with governance issues by appointing a CEO and highly-competent executives who have a strong sense of ethics and integrity.

“Then we need to deal with corruption issues by introducing a transparent and reliable procurement system; focus on business performance by addressing primary energy supply and tariff increases; increase investment by building investor confidence; and improve customer service by playing a bigger role in areas where municipalities are unable to provide adequate services.”

Increase public participation

According to Nelisiwe Magubane, a non-executive director of Eskom and former director-general at the Department of Energy, Eskom’s status quo cannot be kept as is, and a certain level of shallow restructuring, coupled with increased public participation, is what is required.

“A transformed electricity sector must resolve issues of inequality, making electricity affordable for all. More crucially, energy sector evolution must involve public participation and innovation, in an enabling environment, coupled to sustainable skills and financial astuteness,” she says.

“It is vital,” Magubane adds, “that Eskom and municipalities work together to improve efficiencies, to utilise modern technologies such as smart grids and to seek financial assistance to make cheap, reliable electricity available to everyone. In addition, it is crucial to address those legislative roadblocks which may delay or impede progress. Achieving all of this, in turn, will demand strong and decisive leadership.

“It is also crucial to consider other factors, such as the impact on communities that mine or transport coal. Whenever newer generation technologies are planned to be introduced, it is vital to consider the wellbeing of those people who depend on the older technologies too. The long-term solution to this is most likely some form of a re-skilling programme.

“Ultimately, we must always work with our end goal – in this case, sustainability – in mind. To this end, if we are to effect a just energy transition, we will need to undertake constructive discussions between Eskom, relevant parties and the public at large. Then, based upon these, we will need to develop the kind of comprehensive action plan that can enable us to reach our end goal,” Magubane explains.

Complete restructuring 

On the other side of the divide, Dr Grové Steyn, an infrastructure and regulatory economist and director at Meridian Economics, suggests that Eskom’s institutional structure, initially established 95 years ago, has outlived its usefulness.

He states that for SA to address the environmental imperatives in the power sector and to embrace technological disruptors, it is important that the country accept institutional change, most notably the restructuring of Eskom and the opening of the power supply market.

According to Steyn, coal-fired power remains a danger to health, and modern renewable alternatives are far less harmful to people and the environment, while at the same time offering cheaper electricity and the ability to be erected nearer to the load, thereby reducing transmission losses and costs.

“These modern generating technologies also offer greater opportunities for public investment, which will help to relieve the state of the economic burden and risk. However, in order for these new developments to be embraced a new structure for the power system will be needed. I would suggest it be redesigned with a separation between generation and transmission of electricity.

“The ideal solution would be to establish an independent transmission system and market operator that will, among other things, resolve the inherent conflict of interest arising from Eskom as both generator and distributor of electricity,” says Steyn.

There can be little doubt that for municipal service delivery to improve and become financially sustainable, some form of electricity supply industry reform will need to become a reality. A key part of such reform, suggests SALGA’s Ngidi, will be to resolve the issue around the separation of generation and transmission of electricity.

“It is thus to be hoped that the powers that be within the Eskom board, national government departments and cabinet have listened closely to the arguments presented at this debate. Furthermore, that they take cognisance of both the outcome and the overwhelming consensus – some 70% of those attending indicated that major restructuring will be necessary – on the need for deep restructuring, not only of Eskom, but of the whole electricity supply industry,” concludes Ngidi.