Updated: Jul 31, 2020
A new study of electricity sector reform in South Africa warns that opposition to private ownership has the potential to become a barrier to decarbonisation and recommends further research into how public, municipal or community ownership could be incorporated into the deployment of renewables.
Titled ‘Rethinking Eskom: Lessons from electricity sector reform in India and Mexico’, the paper was published this week by the International Institute for Sustainable Development (IISD), an independent think tank.
Presenting its findings, IISD energy policy consultant Chido Muzondo noted that, as with India and Mexico, various stakeholders in South Africa were wary of privatisation. “And because most renewable-energy projects in South Africa are both privately developed and owned, reform could result in further opposition to private ownership, which may create a barrier to decarbonisation,” she cautioned.
India and Mexico had sought to adapt the ‘standard model’ for reform to their specific contexts by implementing only partial privatisation as part of their reform processes. The ‘standard model’ focuses on maximising economic efficiency and involves not only independent regulation, competition and the break-up of monopoly utilities, but also promotes private sector investment in new assets and privatising existing assets.
“If public enterprises and public ownership are to continue to play a strong role in the sector there remain questions about how these can also support decarbonisation and a just transition. Given the dual need to both decarbonise and retain a form of public ownership in South Africa, future research is needed to evaluate how municipal, public and community ownership could integrate renewables in the South African context,” Muzondo said.
The report also recommends that South Africa, as has been the case in India and Mexico, adopt a pragmatic approach to its reforms and consider other impacts beyond economic efficiency.
“Reforms that ignore the need to keep prices low, provide decent jobs, reduce coal dependence – as well as calls to retain forms of public ownership – are not tackling South Africa’s most pressing problems. The reform approach will have to be able to demonstrate that its impacts will be in line with social and environmental priorities, not just economic considerations,” the IISD argues.
The report also warns that, in the absence of pricing reform, the unbundling of Eskom alone is unlikely to have a major impact on South Africa’s electricity prices over the medium term.
These positions were strongly supported by African Climate Change Foundation executive director Saliem Fakir, who participated in the virtual launch of the report.
He said that it was necessary to gather political coalitions around the reform of the electricity sector to ensure broad-based support for the changes that would be implemented over time.
Fakir, thus, expressed support for Eskom CEO Andre de Ruyter’s cautious approach to the unbundling of the utility, which prioritised the divisionalisation of the generation, transmission and distribution businesses, under Eskom Holdings, before proceeding to full legal separation.
He said the approach showed sensitivity to ongoing divisions in society over how the reform process should unfold.
UNBUNDLING IS NOT PRIVATISATION
Emeritus professor and director of the Power Futures Lab at the University of Cape Town’s Graduate School of Business Anton Eberhard also agreed that South Africa could not adopt the standard model of reform.
The approach outlined by the Department of Public Enterprises in its roadmap for the reform of Eskom and the sector, he argued, was pragmatic, as it did not envisage privatisation, or full retail competition.
Unbundling of Eskom was, however, an important step for two reasons: “The one is around operational improvements and these are largely being achieved through the current divisionalisation initiative within Eskom. But divisionalisation is just a step, it’s not sufficient, to the fundamental transformation of the sector and that occurs when transmission and the system operator come out as a separate legal entity that is still State-owned.”
The creation of an Independent Transmission and System Market Operator (ITSMO), which also incorporated planning, procurement and contracting functions, was particularly important to help shepherd in much-needed sector reform. “It’s fundamental and transformational in the sense that it allows a fairer and more transparent platform for then contracting least-cost power, which will be mostly renewables and will set the entity on a new path.”
Simultaneously, urgent resolution was also required to address Eskom’s unsustainable debt of well above R450-billion, while ensuring new investment to deal with an immediate supply deficit. “Eskom has zero ability to raise additional finance . . . which again highlights the importance of creating a transparent and fair platform, or ITSMO, as a mechanism for contracting and procuring new investment in the sector,” Eberhard added.
Congress of South African Trade Unions (Cosatu) parliamentary co-ordinator Matthew Parks was more dismissive of the need for unbundling, describing it as “moving the deckchairs on the Titanic”, until and unless the governance, corruption, operational, maintenance, revenue-management and financial problems of Eskom were addressed.
If they were, there was potential for electricity to be a “game changer” for South Africa, with Eskom investing in renewables directly and government coordinating efforts to ensure a just transition for coal workers by ensuring that new wind and solar farms were developed in the country’s coal belts.
Cosatu, he said, was not waiting on government to begin taking action and had already initiated a process, through the National Economic Development and Labour Council, for the crafting of a social compact on Eskom, a framework agreement which would be signed in early July.
Ahead of the framework negotiations with business and government, Cosatu proposed that Eskom’s debt be reduced from R450-billion to R200-billion through a special purpose vehicle involving workers’ pensions, government, business and development finance institutions
“There is a significant degree of consensus on what needs to be done at Eskom . . . We think the Public Investment Corporation has to come to the party and that government and the private sector must all come to the party, as this is our greatest asset and greatest risk,” Parks averred.
This article was originally published by Creamer Media’s Engineering News.