Lessons for Eskom from the Philippines
Dagupan Electric Corporation collects from customers within 10 days of billing. The only effective way to institute this is to cut supply when there is non-payment
Intrigue and debate have started up about Eskom again, the two main triggers being President Cyril Ramaphosa’s statement on its unbundling, and Eskom duly providing the drama with recent spectacular blackouts.
Many are commenting, and public enterprises minister Pravin Gordhan bringing in Italian “experts” from Enel seems contentious. considering the motivational level of the expert skills that do exist within Eskom. It’s a real mess now, and it’s sad to see the racial comments from what appears to be South Africans abusing social media — anonymous comments are so easy.
There are several basic facts on electricity supply that have been known for years but are nevertheless important to restate:
- Stable and low-cost electricity is core to a country’s economy and growth.
- It is personally extremely rewarding to switch on electricity supply to a town for the first time. There are endless benefits to the social development of a community, including the benefits of being able to study at night and less risk of candle fires. To many, however, electricity supply is a given, and quality and continuity of supply should never be in question if a country is to compete internationally.
- Electricity supply is a natural monopoly, but distributed or own generation in the form of renewables is the current game-changer (a disruptive technology) for those who can afford the necessary capital up front.
- Warning signs of poor technical and financial performance at Eskom have been there for years, and insufficient long-term structured (and unpopular) actions were not taken.
- Eskom controlled the SA electricity supply industry by being allowed to keep the single-buyer model, something that should have been changed years ago.
- You cannot have poor payment of electricity from any customer, whether residential, commercial, or government institutions. A culture of on-time payment has to be in place for the electricity supply industry — and any other viable business — to work.
As a distribution utility in the Philippines, Dagupan Electric Corporation (DEC) collects from customers within 10 days of billing and pays generation bills in real time, with a monthly lag. The only effective way to institute this is to cut supply when there is non-payment. Ask any electricity distribution utility about this principle. Although hugely politically unpopular, it is the only way to get payment compliance. We have cut municipalities in the Philippines for a token period just to make the point, and only for a few hours, as residential consumers who diligently pay their bills should not suffer at the hands of delinquent municipalities. This is a short-term measure, just to improve cash flow.
Payment defaults should never have got to this level in SA. To fix it takes political and leadership will. There is a good case study in the Philippines, where there has been a culture transition to payment on time from huge previous losses.
There are still many good engineers at Eskom. They are, however, really disenchanted. I chatted to some of them as recently as September, and the lack of motivation is really disturbing.
To fix all of this in the long term the president (and his advisors) made the wise decision to unbundle Eskom. Unbundling will not fix the current scenario in itself, but it is a start in the right direction. It sets the scene for the next important actions.
Having studied whether vertically integrated utilities (Eskom, Enel and EDF Energy being good examples) are more efficient in terms of economies of scale versus a competitive electricity market, this is, for me, still a hot topic for debate. Australia is relatively expensive and has been running a good, competitive electricity market for quite a while.
Those that suffer from the change from an integrated monopoly to a market are residential customers, because hidden subsidies that benefit residential customers are eroded.
The core issue now is Eskom’s debt. The Philippines electricity industry was in a similar situation at the start of the century, with its government bailing out the state-owned utility on an annual basis, and local government institutions not paying their debts. Drastic action was eventually taken in the form of the Electric Power Industry Reform Act, which transformed the industry from being vertically integrated to a competitive generation market; a privately run transmission operator (a Chinese company called NGCP); a mixture of private distribution utilities, which had historically always been there; and electricity co-operatives that were introduced by Ferdinand Marcos based on US practices.
The only long-term fix for Eskom debt is, via a bidding process, to sell off the generation assets and introduce generation and supply competition. An independent market operator is needed for this change
Entities known as retail electricity suppliers were also introduced to competitively serve large customers, and will be rolled out to smaller consumers over time. An electricity market operator (the Wholesale Electricity Spot Market) was introduced in 2006.
I was on its board from inception until 2018, when the independent market operator was formed. The generation assets were sold via a bidding process and privatised, and the proceeds went to the state coffers to go towards government debt alleviation — once specific market conditions were fulfilled to try and prevent monopolistic behaviours (such as percentage ownership limits), and market trading conditions were introduced or relaxed (such as market price caps).
Whether this change has brought down the price of electricity is questionable — the Philippines is still one of the most expensive electricity markets in Asia, alongside Japan, which can better afford it. A lack of local generation fuels is seen as mostly responsible for these high prices, but it has solved the huge debt issue.
There have been some market manipulation issues, as this natural oligopoly is still a challenge. Another noticeable positive development is that many of the vertically integrated utility staff were taken up into the new generator ownership and market operator. It is hard to replace these specialised skills and experience.
To summarise, the only long-term fix for Eskom debt is, via a bidding process, to sell off the generation assets and introduce generation and supply competition. An independent market operator is needed for this change.
The market must be opened for new generators to operate on a competitive basis as the country develops and grows. International market players are already showing keen interest in participating in electricity supply in SA after the president’s unbundling statement.
The long-term issue in SA of whether distribution should be by local government or another entity needs to be resolved. Municipalities use income from electricity to subsidise other services, so there is no transparent pricing of electricity in their case. Remember the issue of regional electricity distributors (REDS), which didn’t come to fruition due to resistance by municipalities? Politics played a key role in not resolving the REDS issue.
It is critical that politicians (and their cronies) not run this industry. SA is a sad case study for this once jewel of efficient operation.
• James, a former Eskom regional distribution manager, is currently chair of Dagupan Electric Corporation in the Philppines.