Download ESKOM FUNDING

Philip Lloyd, CPUT
Rob Jeffrey, Econometrix
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Eskom must grow if our economy is to grow
Many decisions about Eskom’s operations in
recent years have been political rather than
commercial
Because of the structure of Eskom, it has
proved very difficult to see the cost impact of
these decisions
It is therefore most desirable to advance
restructuring so the costs of decisions can be
better identified
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Shortage of capacity is disastrous to the economy
◦ Every kWh demanded but not supplied costs the
economy about R85 (2015R)
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The idea that the energy intensity of our
economy has fallen in recent years is misleading
◦ Energy intensity is the ratio kWh per unit of GDP
◦ If kWh are essentially constant and GDP increases,
intensity MUST fall
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We need about 4TWh additional energy every
year
◦ Equivalent to about 500MW of base load capacity
◦ Just to cope with our growing population
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Output from manufacturing
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Examples:
◦ Delay in the construction of the new power station
called for in the 1998 White Paper
◦ Free basic electricity against recommendations of
research
◦ Below-inflation electricity price increases in the
early 2000’s
◦ Renewable energy programme by DoE rather than
Eskom/DPE
◦ Coal purchases from small Black-owned coal mines
◦ Ballooning debt from municipalities
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The delay in building the new power station
not only led to the present power crisis, but it
result in the loss of the construction
expertise that had completed Majuba on time
◦ This included major foreign firms employing
hundreds of engineers
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Provision of free basic electricity led to a
culture of non-payment
◦ And was seen as unfair by those who had no
electricity
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Below-inflation increases have led to above
inflation increases today
Separation of the renewable energy
programme has meant unexpected costs of
connection for Eskom
◦ One large project has not been connected for over a
year
◦ And the future costs for renewable energy have
been fixed contractually – no competition
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Coal from small mines is costing far more
than that from large mines
◦ And causing both quality and transport problems
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CUMULATIVE REDUCTIONS BY 2030
 Impact of Renewables
 GDP growth: -6.2% R300 billion
 Employment: -1.5 millions
 Impact on Fixed Investment
 GDP growth: -10.0 % -R500 billion
 Employment: -2.5 million
 Total impact on GDP and employment
 GDP growth: –R800 billion
 Employment: -4million
Parliament, June 2015
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Eskom as presently structured has been able
to mask the costs
For instance, the very volume of its sales have
given it a nominal cash flow that has allowed
it to be highly geared
◦ The impact of non-payment on that cash flow has
now fed through into questions about gearing
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Similarly, transmission costs have long been
hidden in a controlled tariff
◦ So connection costs for renewables and other
independent power producers are not readily
identifiable
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This was foreseen in the 1998 White Paper
There have been several attempts to carry it
out
◦ For instance, the stalled Independent System and
Market Operator Bill
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The present proposals for restructuring the
finances of Eskom should call for a
commitment to restructure the business
◦ And to do so in a way that would make the cost of
future political decisions more readily visible
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In considering how to restructure, we note
the three overall functions of Eskom
◦ Generation, which is now in competition with
renewables and other independent generators
◦ Transmission, which creates a national highway for
electrons, and which has no competition
◦ Distribution, with Eskom responsible for about half
the electricity supply and municipalities for the
other half
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This suggests a structure:
◦ Esco, an Electricity Supply Company, supplying
electricity in open competition with other suppliers
◦ Etcom, the Electricity Transmission Commission, a
national resource purchasing electricity from
suppliers and shipping it in bulk to distributors and
bulk users
◦ Edco, an Electricity Distribution Company, buying
electricity from Etcom and distributing it to users in
open competition with other distributors
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Esco and Edco would be expected to make a
profit in order to fund their operations
◦ They would then contract with the State to
undertake politically desirable projects such as the
further roll-out of electrification
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Etcom, however, as a national resource,
would be a cost-plus operation
◦ Its capital expenditure would be a direct charge
against the fiscus, much as national roads have
been
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This would change the nature of NERSA
In the restructured world, it would regulate:
◦ Prices for generated power
◦ The cost of transmission
◦ The cost of distribution
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This should significantly improve State
oversight of the industry
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Divide Eskom: base power generation; transmission,
market and control operator; and distribution.
Fund each according to business requirements.
Partially privatise generation and distribution
Expand independent power producers and foster equal
competition
Practice best commercial business procedures
Independent management and board appointments
All tenders awarded on strictly arms-length business
Maximise security of supply of electricity generation
transmission and distribution
Ensure sustainable and efficient operations at the
lowest possible cost
Prime objective reduce the cost of doing business in SA
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