ANTON EBERHARD: Ministers have let Ramaphosa down on unbundling of Eskom

Inadequate electricity transmission grids, rather than the availability of finance, is the main impediment now for new power generation investments and SA’s attempts to end load-shedding.

Transmission constraints to connect new wind and solar generation are ultimately a consequence of not yet unbundling an independent transmission system and market operator from Eskom.

The core diagnosis of SA’s power crisis is captured in a single phrase: new power generation is not being added to the grid at a fast enough rate to compensate for the worsening failure of Eskom’s coal plant.

Of course, Eskom should do everything it can to improve the availability of its power stations. Equally, we need huge investments in new power generation, to create the space for adequate maintenance but also to replace ageing power stations that have reached the end of their design life. Eskom estimates more than R1-trillion is needed by 2030.

The government’s main strategy for adding new power generation capacity has been procurements by the independent power producers office. The first four auctions, run between 2011 and 2014, resulted in about 100 renewable energy projects, totalling more than 6,400MW and R200bn in private investment. But then Eskom refused to sign power purchase agreements, with a hiatus of seven years before the fifth bid window was finally opened in 2021.

The fifth auction revealed that transmission grid capacity in the Northern Cape, which has the best solar resource, had been fully used. The sixth auction, in 2022, demonstrated that there is also insufficient grid capacity in the Western Cape and Eastern Cape, which have the best wind resources, to connect planned power. Of the 5,200MW on offer, only 860MW could be allocated — five projects out of 56 that bid.

Investments skewed

SA’s high-voltage grid was designed to transmit power from the coal fields in Mpumalanga and the North West to the rest of the country. Now, the cheapest power resources — solar and wind energy — are in the Northern, Western and Eastern Capes. The grid needs to be reconfigured, which requires an investment of at least R180bn.

But the transmission grid is now part of, and is controlled by, Eskom, a vertically integrated utility that includes generation, transmission and distribution. Investments have been skewed mostly to power generation. Transmission comprises only about 10% of Eskom’s assets. Despite excellent transmission grid plans, timely and adequate investments have not been made.

A different scenario would have materialised if a separate company was responsible for transmission, fulfilling a mandate to provide a backbone for all power producers and users. Transmission is a well-understood business that can produce predictable, regulated revenue. Investors consider it a quasi-bond; an attractive, relatively low-risk investment. An independent transmission company would achieve progressively higher credit ratings and would be able to access competitively priced capital, thus funding its investment plans.

In December 2018 President Cyril Ramaphosa appointed me to chair his Eskom sustainability task team with a remit to respond not only to immediate challenges but also to propose measures to secure the long-term sustainability of the electricity sector.

Our recommendations on structural and regulatory reforms, accelerated private investment and the energy transition were accepted by the president. We resurrected the proposals of the 1998 Energy Policy to unbundle Eskom. In the president’s February 2019 state of the nation address he announced that Eskom would be split into three separate entities: generation, transmission and distribution, with the initial focus on taking transmission out of Eskom.

Subverted proposal

Public enterprises minister Pravin Gordhan, as the shareholder of Eskom, was given the responsibility for driving this restructuring. Four years later inadequate progress has been made. Transmission is still a division of Eskom. It does not have its own board. It does not have its own licence from the National Energy Regulator. What has gone wrong?

Our task team proposed that a restructuring tzar be appointed, supported by a technical and financial team, to drive the restructuring. Gordhan subverted this proposal by appointing a temporary chief restructuring officer whose mandate was restricted to proposals on restructuring Eskom’s debt. His report has not been published, let alone acted on, and Eskom remains technically insolvent.

The president initially invested much political capital in persuading social partners that unbundling Eskom made economic sense. Yet Gordhan has always been less than enthusiastic, preferring a Band-Aid to Eskom’s ill-health rather than radical surgery, his ideological worldview clouding a clear appreciation of the benefits of structural reforms.

He has been reluctant even to appoint a separate board for the transmission company, even though Eskom ran a highly professional and thorough advertising, headhunting and interview process and recommended experienced and respected candidates, some of them former CEOs of international transmission companies. A separate board would at least have provided leadership in driving the separation of transmission, but independent agency is not something Gordhan has ever been comfortable with.  

Seem arcane

Inaction has consequences. Here we are, four years later — actually, 25 years later if we consider the 1998 Energy White Paper — and Eskom is in meltdown. It remains a vertically integrated, dominant state-owned power utility, an anomaly in a world where 110 countries have unbundled transmission.

Structural reforms may seem arcane or theoretical to some, and not the immediate challenge. But if implemented they can result in profound and lasting changes in incentives and performance. There is no more important reform in SA’s power sector than taking transmission, system and market operation out of Eskom.

It will create a financially viable company, insulated from the financial woes of Eskom generation and able to access competitively priced capital to invest in required transmission capacity. It will guarantee non-discriminatory access to the grid, and provide a fair and transparent platform for electricity trading.

Ramaphosa quickly understood and accepted the need for these reforms. He has been let down by his ministers. If he doesn’t appoint new, young, competent and reform-minded ministers who are far-sighted and brave enough to restructure Eskom, South Africans will remain in the dark ages. Literally.   

• Eberhard is professor emeritus and a senior scholar at the Power Futures Lab at the University of Cape Town’s Graduate School of Business.