Sifiso Skenjana: Eskom unbundling isn't a silver bullet, and it's riskier than it looks

Eskom was the subject of a proposed unbundling by the state president during his State of the Nation Address.

President Ramaphosa revealed that the state would embark on a process of establishing three separate entities – Generation, Transmission and Distribution – under Eskom Holdings. He argued that this move would isolate the costs associated with each "entity" and make it easier for each of the entities to raise funding separately.

Eskom has faced several issues, including ageing plant and operational inefficiencies, completion delays in Medupi and Kusile, high debt levels, corruption allegations, management failures, etc. – all of which comes with the risk of less secure electricity supply to the economy and increased debt burden to the state.

Given Eskom’s problems broadly are well documented, is unbundling the appropriate response? And have we sufficiently reflected on the value vertically integrated utilities ought to bring to the economy?

The business model

Eskom is a vertically integrated monopoly. This means that the company owns all levels within the supply chain (generation, transmission, distribution).

Governments globally have historically favoured vertically integrated utilities for several reasons. Firstly, it’s for security of supply – government requires a stable and secure electricity in order to support industry as well as provide electrification.

A monopoly minimises the risk that otherwise be found in a fully competitive market. The establishment of a body like The National Energy Regulator of SA (Nersa) intends to ensure that the monopoly does not exploit consumers.

In the 1990s, countries like the UK, Sweden, Finland, Norway and the US started moving away from vertically integrated utilities to an open market system. And today, some – including Germany, Australia and Latin America – are trying to find ways to move back to integrated utilities. The Transnational Institute (TNI)’s report, "Reclaiming public services: how cities and citizens are turning back privatisation", examines 835 examples internationally of (re)municipalisation of public services globally since 2000, with 347 of them in Germany alone, and 284 related to energy.

Germany also faced electricity prices that rose beyond palatable levels. In addition, the Hans Böckler Foundation found that more than 600 000 jobs were lost in Germany between 1989 and 2007 due to the privatisation of public services.

A return from privatisation is no cheap exercise, and government would be well advised to understand the implications of opening up the market.

Eskom's development mandate

Between 1991 and 2001, the electrification programme had been funded by the industry, with Treasury eventually taking over the responsibility of funding the electrification programme post 2001, following a 1998 white paper on energy policy.

Government, through Eskom and municipalities, connected more 5.7 million households between 1994 and 2014, more than a million of which were in the Eastern Cape.

The National Energy Act 34 of 2008 states that "the Minister must adopt measures that provide for universal access to appropriate forms of energy, or energy services, to the citizens of South Africa at affordable prices".

Some of grew up to stories of our parents studying via candlelight and we cannot underestimate the importance of the developmental role that Eskom must continue playing to ensure broad-based access to affordable electricity for all.

Cost-reflective pricing vs. competitiveness

Eskom’s business model lends itself to a cost recovery business model. The tariff increases it applies for on a yearly basis are based on formula predetermined by Nersa on how Eskom can recover its costs for generation, transmission and distribution.

The methodology says that Eskom’s Allow Revenue should be equal to the cost primary energy, plus cost of operations and maintenance, plus depreciation of assets, plus return on capital.

Nersa last week approved a 9.41% electricity tariff increase for Eskom for the 2019/2020 financial year; against an application for a 15% increase per year for the next three years.

Eskom was in 2001 named the Financial Times Power Company of the Year at the Global Energy Awards in New York, and additionally cited as a provider of the world’s lowest cost electricity, with superior technological innovation, among other assessed factors.

The challenge this would later bring, however, was probably not fully appreciated at the time.

At current levels, the tariff that Eskom is able to recover is not fully cost reflective; i.e. every year there is a financial under-recovery.

If you couple this with how much debt levels have risen at Eskom, as well as plant failures and inefficiencies, alongside management failures, it is much easier to trace the source of the problems at Eskom and how we found ourselves here.

However, what that also does is suggest that unbundling – preparing for privatisation – is most certainly not the first response we should be exploring in our endeavour to stabilise the state utility so it can fulfil both its economic growth and socio-economic development mandate.

Sifiso Skenjana is founder and financial economist at AFRA Consultants. He specialises in economic policy research, investment strategy and advisory services. He is currently pursuing his PhD. Views expressed are his own.

Follow him on Twitter: @sifiso_skenjana

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