When Eskom’s monopoly is broken

Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service.
Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service.

With the spectre of yet another bailout for state-owned electricity supplier Eskom looming, the old argument of breaking up the parastatal’s monopoly to improve competitiveness and governance is bound to be raised once more.

An end to Eskom’s monopoly would lead to the introduction of new entrants in the power generation industry and prevent taxpayers from having to pick up the tab for future bailouts, which arise mostly from mismanagement, corruption, and the absence of competition to the state power utility’s unchallenged market dominance.

In recent months, the parastatal has been plagued by allegations of corruption and capture by the controversial Gupta family, leading to the departure of CEO Brian Molefe and chairman Ben Ngubane under a cloud.
The man who temporarily stepped in as CEO after Molefe’s departure, Matshela Koko, has since been suspended for alleged corruption. 

He is facing a disciplinary hearing after Eskom awarded contracts to a company linked to his stepdaughter. Even the chief financial officer, Anoj Singh, who has also been suspended, stands accused of helping businesses linked to the Guptas to secure lucrative contracts worth hundreds of millions of rands.
Acting Eskom chairman Zethembe Khoza and acting CEO Johnny Dladla are promising to clean up the organisation and usher in the highest standards of good corporate governance.
While Eskom says it will borrow from the capital markets against the guarantees government is providing, finance minister Malusi Gigaba hinted recently that the electricity supplier may require financial assistance to help it implement its capital expenditure programme, which involves building new coal-fired power stations and buying wind and solar energy from independent power producers (IPPs).
There is a view in some quarters of the energy sector that Eskom’s woes are self-inflicted and that the parastatal would long have been out of the market if it was not a monopoly protected by the government.

Tinkering with and restructuring the company’s board and management is not a long-lasting solution. 

What needs to be restructured is the market in which Eskom operates. Eskom’s monopoly needs to be dismantled and the electricity market opened up to serious competition. 

A new mechanism needs to be created to allow IPPs to sell directly to household and industrial customers. If direct competition were to be introduced, Eskom would be forced to shape up or get out of the market. 

What we have learnt from the string of scandals that have been playing out in the media is that Eskom is a piggy bank for politically connected people who are looting the parastatal and then ask taxpayers to bail it out.

The best way of ending Eskom’s monopoly is to separate transmission and distribution assets from the power-generation business.

Once Eskom has relinquished the transmission and distribution infrastructure, it can be taken over by a new operator that provides a service to all IPPs and Eskom, whose market participation will be limited to power generation. 

The state power utility would then compete directly with IPPs on an equal footing in power generation. 

Under the current market structure, IPPs are Eskom’s suppliers, not competitors.

The electricity supplier has used its dominance to restrict IPPs, which are supplying it with solar and wind power to the national grid, which Eskom then sells to household, municipal, and industrial customers.

In February, President Jacob Zuma said Eskom would sign 26 outstanding power purchase agreements (PPAs) for renewable energy with the IPPs, paving the way for the construction of new wind and solar farms. Six months on, the PPAs are yet to be signed. 

All that has come out of Eskom is a string of corporate scandals and revelations of irregular and corrupt deals. 

Meanwhile IPPs that have invested more than R200bn into our country have been left in limbo.

Eskom can even raise money from its old coal power stations by selling them off in an open market to IPPs, which could retrofit them with cleaner power-generation technology. 

Funds raised from the sale of old power stations could be used to fund Eskom’s power-generation operations. 

Competition would boost power output and result in consumers being able to buy power at competitive prices.

The dependence on Eskom, which has been prone to corruption and rent-seeking by its officials, is precisely the risk that we as South Africans do not need. 

They can inflate the cost of electricity and the cost of building the infrastructure needed to provide electricity.

The entity that operates the transmission and distribution infrastructure can probably be owned by government and private investors to ensure that it operates efficiently and in the interest of all stakeholders, particularly consumers and producers. 

The entity has to be independent and ensure that it provides equal and fair access to its infrastructure to IPPs and the state power utility.  

And if a restructured Eskom, operating only in power generation, can’t get its act together, then partially privatising it could be considered to inject private sector skills and capital to improve its performance and governance.

Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service.

This article originally appeared in the 24 August edition of finweekBuy and download the magazine here.

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