Eskom power shift: Grid reforms and energising competition

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JEREMY MAGGS: South Africa’s electricity market is moving into a new phase as Eskom’s long-standing monopoly slowly starts to loosen. Government says its Eskom restructuring task team has made some progress towards creating a fully independent, state-owned transmission system operator.

Now that would be separate from Eskom to own and control the grid and run the future electricity market.

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But the deadline for the task team’s first report has already shifted from the end of May to the end of June.

And the reform, as I understand it, still has to navigate Eskom’s debt, grid constraints, investor confidence and obviously the risk of political delay. It’s a big issue.

I’m in conversation now with energy analyst and commentator, Ruse Moleshe. Ruse, a very warm welcome to you. So is Eskom’s monopoly, in your opinion, really ending – or do you think there’s more promise here than practical reform?

RUSE MOLESHE: Good day to you as well. I think Eskom’s monopoly over time will reduce. However, we need to still understand that Eskom is very big in South Africa and there are attempts to deal with that, but not yet. We are looking at it from a long-term perspective.

JEREMY MAGGS: Why is an independent transmission system operator so central to fixing the electricity market? Can you break that down for me?

RUSE MOLESHE: Yes. An independent transmission operator allows other players, other competitors, to come into the market and be able to access the transmission grid, and able to sell to others.

As you would know, it was initially wholly owned by Eskom. It still is a subsidiary of Eskom, but that meant that Eskom determined who comes in and who connects, and who doesn’t.

So allowing third parties to now access that will open up the market for South Africa.

JEREMY MAGGS: And that’s critical, isn’t it, because, as you say – and government endorses – this will enable competition.

But I guess the question is competition for whom and, most importantly, Ruse, how quickly would consumers actually feel things?

RUSE MOLESHE: Competition [will be] for independent power producers, so that we don’t have a single party dominating all the generation of electricity. You have other parties. That helps government financially because it has to back Eskom financially.

So when you introduce other players that can bring in their own resources, their own financing, you are now allowing the level field to be available to everyone.

JEREMY MAGGS: Providing, of course, those independent players are up to the task. They would need to be very carefully chosen, managed and regulated, surely?

RUSE MOLESHE: Yes, when it comes to competition, I suppose whoever has the financial muscle, has the technical capability to build that infrastructure, will be the parties that will be able to come through.

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So, for instance, under the Renewable Energy IPP Programme, we already have independent power producers playing in that space – and these are international players that have experience elsewhere.

So that is what you expect for competition to really materialise.

JEREMY MAGGS: Is the major benefit more reliable supply, or do we feel it in our pocket?

RUSE MOLESHE: It’s more to diversify, firstly, the sources of our electricity so that we don’t rely on one entity.

The second thing is that they build their own infrastructure and then supply to government. So that means financially you are at least trying to manage the fact that you don’t have one entity. When things go wrong, government supports that.

So it’s for that reason – reliability at this point. Still Eskom, because most of the entities’ IPPs are renewable energy, you still need Eskom to back them up when there’s no supply coming from where there are base-type technologies. In the long run, hopefully that will open up to others as well.

JEREMY MAGGS: As I understand it, the reform also depends on what is termed ‘non-discriminatory access’ to the grid. So who decides who gets grid capacity and why does that matter?

RUSE MOLESHE: In the past Eskom has been the generator, and then you had other IPPs also as generators. They would apply to Eskom to be able to connect. But remember, they are still competitors to Eskom. So you want to take that, the playing of two roles by Eskom, and have an independent person.

It’s similar to what is happening in Transnet, where you are saying, ‘let everybody have access’. Then they can supply whoever they want to supply, because without access to the grid you cannot transmit electricity to other customers.

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So if the IPPs do not have access to that, they are not able to effectively apply –  or Eskom may take time or whatever. They had all of those complaints to say you can’t be a referee and a player at the same time.

JEREMY MAGGS: And that’s worrying. You’ve got to question then how independent the transmission company can really be while it sits within the structure of Eskom.

RUSE MOLESHE: I think the most important thing is to ensure that there is governance of that. You have a regulator, you have an independent entity out of Eskom – and to make sure that there’s monitoring of how those players, the system of connecting to the grid, is regulated.

Otherwise, yes, there’s a risk that if there’s a player that also has an interest, that player may not be impartial or may be biased.

JEREMY MAGGS: Which puts a lot of pressure on the regulator. Do you think it’s up to the task?

RUSE MOLESHE: [Chuckling] There are examples elsewhere in the world in terms of how the transmission system operator manages the connection by others.

Firstly, you have to have proper guidelines. You have to have proper legislation in place that indicates how this whole thing works.

Whether the national regulator is up to the task or not is a different question, I guess.

JEREMY MAGGS: All right. Well, time we’ll see because it is an important issue.

What is also worrying – and I did allude to this earlier – the task team’s first report has already been pushed from May to June. So the end of this month. Surely that’s a warning sign?

RUSE MOLESHE: Well, I think actually it’s not about the timeline. It’s about the thought process that goes into this whole restructuring process because there’s a critical question here.

While you are trying to make sure that there’s competition in the system, you’re also trying to make sure that Eskom’s strategic assets – remember this is a strategic asset for Eskom and it’s one of the key ones that are generating revenue – if you take it out and take it out with the asset, what does that do to Eskom and Eskom’s balance sheet?

What does that do in terms of debt allocation, lenders’ protection? What do you do with asset transfers?

So it’s not something that you can take two days thinking about because it has huge implications.

Remember, if you take it out, you will be left with Eskom generation.

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Eskom’s generation is struggling from the debts of municipalities and those challenges. So it’s something that really needs a proper thought process, proper solutions.

Rating agencies are bringing this up as a risk. South Africa cannot always be in a hurry for deadlines. There needs to be a whole thought process before even the president goes and announces what happens, without really reviewing properly what the implications are for the country.

JEREMY MAGGS: And that fundamentally is the issue – about whether this transmission operator will actually be able to raise the money needed for grid expansion without worsening the fiscal position.

It all comes down to the money and the funding.

RUSE MOLESHE: It all comes down to that. Everybody accepts that there’s a need for other players to come into the market, there’s a need for an independent system operator.

Listen/read: Eskom unbundling faces fresh hurdles as energy reform drags on

But the key question is how do you do it, and whether government can create one that is truly independent while preserving Eskom’s financial sustainability, protecting taxpayers, and actually accelerating the investments that the country urgently needs into transmission.

JEREMY MAGGS: Ruse Moleshe is an energy analyst and commentator. Thank you very much indeed.