Splitting Eskom into three is on track, will cost R500 million

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Eskom CEO André de Ruyter.
Eskom CEO André de Ruyter.
Gallo Images/Business Day/Freddy Mavunda
  • The cost of separating power utility Eskom into three entities is estimated to be R500 million, according to CFO Calib Cassiem.
  • CEO André De Ruyter told members of Parliament that the unbundling process is running on schedule, with the separation of the transmission entity to be complete by December this year.
  • The unbundling also requires a reconfiguring of the tariff structure.

It will cost an estimated R500 million to split Eskom into three entities, according to chief financial officer Calib Cassim.

Eskom officials, including CEO André De Ruyter and Cassim, on Wednesday briefed Parliament's select committee on public enterprises and communications on the progress of its unbundling.

The separation of Eskom into three units is expected to open up the generation space to allow the participation of more Independent Power Producers (IPPs). Eskom will then be able to focus on transmission or managing of the national grid, while also still playing a role in distribution or sales of electricity to customers.

De Ruyter said that the Eskom leadership team is working to expedite the process - which requires collaboration with its shareholder - the Department of Public Enterprises - as well as the Department of Mineral Resources and Energy and National Treasury.

So far, the divisional boards of each of the three entities have been established and the "functional separation" has also been concluded. The next pressing step is to complete the legal separation of the entities.

The legal separation of the transmission business is due to be complete by December this year, while that of generation and distribution is due to be complete by December 2022.

What the money is being spent on

As for the cost of the separation, Cassim explained that the biggest allocation (42%) of the R500 million will go towards information technology - this is for system changes and the transfer of data and implementation of the new entities. The cost also covers legal and audit support. 

About 22% of the amount is set aside to cover costs relating to contracts, including changing commercial contracts and transferring land and servitudes.

More than a quarter (26%) of the cost will go toward "lender engagements" and the changing of lender contracts, if required. De Ruyter explained it is important to respect the terms of loan agreements with lenders and to give them assurance their rights under loan agreements will not be unduly impacted. He said that the separation of the debt must not trigger defaults on repayments. 

It is envisioned that 50% of Eskom's R400 billion debt burden will be carried by the generation entity's balance sheet, while the transmission and distribution entities each are set to carry 25% of the debt.

The debt of the transmission business should be attractive to lenders, and be of lower risk than the generation business, De Ruyter explained.

Grid expansion

In the next ten to 15 years, the grid needs to expand by 8 000km to parts of the Northern Cape and Eastern Cape to access low-carbon electricity, De Ruyter said. The transmission entity will have to approach the markets to fund these costs - possibly by accessing green financing or concessional financing.

Segomoco Scheepers, Eskom's head of transmission, explained that for the transmission subsidiary to be established, there will be impacts on policies allowing municipalities to purchase power from IPPs. 

"With or without the unbundling process, it is important that we understand the implications of the policy changes and we seek to find ways to mitigate negative impacts that may flow from that," said Scheepers.

If municipalities are to procure from IPPs, a change in the current tariff structure will be needed, he explained.

"The current structure of Eskom tariffs is bundled, and it allows other municipalities and any other customer to avoid paying for some of the services that are bundled into the one tariff," he explained. These other costs that customers are not paying include subsidies and legacy costs. The net result is that customers who do not rely on self-generation or procure from IPPs will be forced to pick up a hefty tab from Eskom that covers subsidies and legal costs.

Future sustainability

An appropriate market system must be put in place to ensure the future sustainability of the transmission subsidiary and to ensure the system is equitable for all stakeholders, Scheepers said. 

The new tariff structure must account for the unbundled network charges as well as subsidies and legacy costs.

De Ruyter explained that there needs to be a discrete generation, transmission and distribution charge. Eskom is engaging with the National Energy Regulator of South Africa on this.

"Should we have unbundled tariffs the transmission business will be able to recover the cost from wheeling electricity from an IPP to a municipality in question," he said.

If municipalities are to rely on Eskom as a back-up supplier when IPPs are not available, then there should be a tariff allowing for a capacity charge and an energy usage charge, he added. 

"If Eskom is required to maintain a significant amount of infrastructure generation capacity to act as a virtual battery in the event that a municipality or any customer wishes to access the Eskom grid, then we would want to recover the cost of maintaining this standby capacity from the municipality in question- so we are not disadvantaged by this approach to allow municipalities to buy from IPPs."
- André De Ruyter

Equally so, if municipalities are entirely independent from Eskom and do not require any of the power utility's generation capacity under any circumstances, then Eskom would not have to incur costs to keep the generation system available for them, he said. 

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