Abstracts

6 There Is Room for Improvement Overcoming debt, igniting competition The upcoming restructuring of Eskom may be an opportune time to consider the privatization of electricity generation in South Africa. Not doing so further commits tens of billions of dollars to supporting Eskom and continues to risk national creditworthiness. In the Roadmap , the government discusses plans for the recovery of proceeds lost to corruption and outstanding fees owed to Eskom by municipalities and neighboring countries. Although these measures should be executed, they will only lessen Eskom’s financial hemorrhage at best, not resolve its debt crisis. Eskom can raise more money than it owes by auctioning the majority of its coal-fired generation assets. Two inaugural members of the Ministerial Advisory Council on Energy in South Africa published a cost-reflective financial model that illustrates that the auction of Eskom’s power stations could raisemost of the funds needed to finance Eskom’s R454B ($32B) debt. They propose a multi-year staggered auction whereby ten coal power stations would be sold—all except the oldest five of Eskom’s 15 power stations due to be decommissioned within five years. Each sale would be bound by a fixed-term PPA that entitles the purchaser to supply at least a specific amount of electricity over the remaining lifetime of the power station, at a predetermined station- specific tariff. 4 The model’s estimations leave a margin for the purchaser, after accounting for the cost of coal, labor, operations, and the eventual decommissioning of the power station. The authors estimate that with good implementation, the proposed auctions could raise R450B ($32B), effectively settle Eskom’s debt, and retain national creditworthiness. Furthermore, fixed-term PPAs would determine electricity prices for years to come, which provides industry, investors, and 4 Seven out of ten of the eligible power stations are due to be decommissioned by 2040; the majority of PPAs will be less than 20 years long (Bischof-Niemz & Van den Berg, 2018). To reflect the effect of inflation, predetermined tariffs would have to be accompanied by reasonable annual adjustments. households with certainty (Bischof-Niemz & Van den Berg, 2018). Although it is unclear how much interest there is in Eskom’s coal-fired plants from private companies, traditional coal mining companies like Glencore that already supply Eskom and multinational energy companies like Enel that have the capability to run coal-fired power plants would be logical buyers (Caboz, 2019). Given the political challenge of privatizing Eskom’s generation assets completely, some of these assets can be publicly owned, perhaps through instruments such as pension funds, while the rest can be auctioned to private companies. AuctioningEskom’s generation assets also would begin to introduce competition to the electricity sector. Instead of taxpayers carrying the burden of Eskom’s underperformance through the national budget, such a burden would be rightfully passed on to power station operators who have every incentive in a new competitive market to produce electricity more efficiently and less costly than Eskom. This decentralization of generation ensures flexibility, which is required to absorb new technological innovation. Recent innovation has been achieved in solar and wind, for which costs have been falling. Nonetheless, detachment of generation from transmission and distribution will allow Eskom, as a system operator or steward of the national transmission grid, to still be a critical but more focused part of the electricity sector. 5 Furthermore, this separation opens up transmission and distribution to exciting customer-friendly opportunities; electricity retail markets can be set up to allow end-customers to choose an electricity supplier by source type or to receive compensation for supplying excess on-site generation capacity to the grid. Embracing renewables Unbundling Eskom is the only way to challenge South Africa’s dwindling minerals- energy complex by which Eskom came to 5 Unlike generation, which can now run well on smaller distributed plants than in the past, transmission and distribution can be run well on one set of wires, so they continue to have increasing returns to scale and network effects that make them natural monopolies and unsuited to competition (Hunt, 2002).