Power struggle: The 100MW exemption is likely to be a monumental step towards privatisation — not necessarily for the good

Bruce Baigrie | Daily Maverick | July 5, 2021

President Cyril Ramaphosa’s announcement that private embedded generators may produce up to 100MW of unlicensed power has received praise far beyond business. It seems fair to say that the decision to exempt potential generators has widespread public support, and sections of labour through Cosatu have also hailed the announcement.

The president’s announcement is a momentous one. The 100MW is double what business was asking for and completely overrides one of Ramaphosa’s most powerful allies, energy minister Gwede Mantashe, who had been staunchly resisting such an exemption.

Amid yet another period of rolling blackouts, the announcement’s appeal is completely understandable. However, the likely trajectory the exemption will set us on will have widespread ramifications for the energy sector and just transition. 

This is a trajectory towards significant further privatisation of generation and unprecedented complexity for our power system.

Plugging the gap, or expanding the market?

The latest round of load shedding has clearly been the straw that broke the camel’s back. Eskom has a range of crises, but when the lights go off, urgent action is demanded. In this case, something had to be done and it’s hard to see what other option was available other than to open up space for private sector involvement in production.

The government has yet to address Eskom’s crippling debt burden and its inability to build its own renewable energy (although it’s questionable whether the powers that be even want this). The previous layer of corrupt executives — which a certain trade union leader continues to cosy up to — left the ageing coal fleet in such disarray that Eskom cannot do the required maintenance without “shedding” some “load”.

Political interference has held up previous rounds of the Renewable Energy Independent Power Producer Procurement Programme (REI4P), so that new projects will only come online in a few years. This leaves us with embedded generation to plug the gap, an option that likely marches us significantly further down the road to the privatisation of energy generation.

But this is hardly a grudging decision for a ruling party and government that has been eyeing the privatisation of generation since the 1990s, when proposals for unbundling were initially drafted. These included preventing Eskom from adding capacity and forcing it to sell as much as 30% of its stake in generation to independent power producers (IPPs). Such proposals were never implemented, but seem destined to be completed since the current Eskom leadership and Public Enterprises Minister Pravin Gordhan have promised the completion of unbundling by the end of next year.

The AIDC and its partners have written extensively on unbundling: Why it is code for privatisation. Why it will deepen the utility’s death spiral. Why it won’t halt the climate crisis and why it will compromise the just transition.

Unbundling is a prerequisite for an energy market to ensure private players can come in. Now we know that any such player no longer even has to get a licence to build capacity, and we will likely hear in the coming months that they can smoothly sell their energy as well. 

And this is really what it’s about — not plugging Eskom’s gap, but carving out more and more generation of power for profit. 

Don’t take my word for it, take Eskom CEO Andre De Ruyter’s, who recently stated that the decision to lift the licence exemption cap was “the precursor to the development of a new electricity supply industry in South Africa, which is going to be driven by far greater market dynamics than has hitherto been the case”.

Embedding the power market

Beyond the surprise that the announcement happened at all, there was further amazement that the president exempted a capacity twice as much as business was asking for. So how much is 100MW? This is a relatively small amount of capacity, but a quick scan of the renewable energy IPP projects will show that most are below, or just above this amount. 

Taken together, the combined estimates for potential new projects that could come online in the coming years through the exemption range from 5,000MW to 15,000MW of capacity.

Kusile and Medupi are both below 5,000MW, and 15,000MW amounts to more than a third of Eskom’s current capacity. But, as it stands, these generators can’t wheel and sell their power without a licence — they can build for their own self-generation only. Wheeling and selling electricity will still require permits from the national regulator, Nersa, and if this process doesn’t go smoothly it will be a dealbreaker for most potential generators.

The Minerals Council is talking about just 1,600MW (although this would plug Eskom’s usual 1,000MW gap) of embedded generation, and so most of the proposed generators fully intend to produce energy for sale, either to Eskom for distribution or directly to third parties. Without the ability to sell their energy, it makes little sense for most generators to invest in capacity. This is especially the case given these installations will likely all be solar power.

Solar power is as variable as sunlight. This by no means prevents it from being a powerful source of energy, not least because we need it to save the planet and because South Africa has some of the best solar potential in the world — but it does add certain challenges for an energy system to overcome.

From the perspective of the generator, you will produce all your energy during the day and this itself will fluctuate significantly, albeit at least fairly predictably. Further, solar generators that are producing for their own use will likely have an excess of power during the midday peaks of solar radiation that goes beyond their immediate needs, followed by insufficient power in the evenings and throughout the night.

For their investment to be economically viable, they need to be able to sell that excess energy. It’s about selling energy for sufficient profit, and not just to ensure the provision of a stable power supply, the latter being a reasonable expectation in the face of continued load shedding. 

But the implications of allowing unlimited private players to enter the generation sector are vast — and bad for Eskom and for the working class and poor, as demonstrated below.

Eskom bears the hidden costs

The generation and sale of electricity is the backbone of Eskom’s revenue, and selling electricity remains a core component of municipalities’ funding for service delivery. This funding system for municipalities is clearly problematic on its own terms, but until it’s overhauled, municipalities — and the overwhelmingly poor constituents they serve — depend on it.

Barring periods of load shedding, any embedded energy generated is energy Eskom has lost out on selling. Since Eskom will need to keep its coal-fired stations operational to back up the system with reserve capacity, it will increasingly have unsellable excess energy. If private generators are allowed to sell directly to third parties as well as Eskom, Eskom and municipalities are cut out even further (or completely in the latter’s case), while Eskom will still need to maintain the infrastructure — the grid — to facilitate the sale.

Any embedded generators primarily for self-use will still need to access Eskom’s grid to draw power from it as the sun begins to set. So, it is on the transmission side where things will get increasingly complicated and expensive for Eskom.

Variable renewable energy brings a range of additional costs for the system as a whole; costs that are not factored into the increasingly cheap “LCOE” price that everyone quotes. These include backing up the power system through reserve capacity or storage, but also managing a rapidly complicating system that increasingly suffers from “congestion”.

As more and more generators connect to the grid with variable power, it becomes harder and harder to manage that supply that always needs to match the load (demand). The midday solar peaks will see a surge of availability for the system to absorb, followed by a steady drop towards the evening periods of peak demand. As touched on above, the system operator — Eskom Transmission — needs to manage a largely inflexible coal fleet within this matrix of fluctuating power supply.

We desperately need variable renewable energy at scale, but we’re currently doing it all wrong, and this exemption decision may make it much worse. Mass deployment of variable renewable energy becomes increasingly complicated and costly as it penetrates the energy mix.

It is thus best served by one system, a vertically integrated one where transmission and generation are unified in the purpose of delivering reliable and increasingly clean power. Regardless of its crises, Eskom is the only entity capable of doing this, and the more private power that is built, the more Eskom is prevented from taking up its historic task of decarbonising South Africa.

Instead, it seems it is to be relegated to managing a collapsing coal fleet while building a transmission entity that subsidises the guaranteed 20-year profits of private generators.

It remains unclear how expensive upgrading the grid for renewable energy will be, but one source quotes Eskom officials suggesting at least R143-billion over the next decade to accommodate an energy mix with just over 25% solar and wind. Upgrading the grid is something we urgently need to do, not on behalf of private generators, but to halt the climate crisis.

Will the real Cosatu please stand up?

It is hard to know how unified Cosatu is on matters of energy and Eskom. Statements from the federation seem to radically differ from key members such as the NUM and Nehawu — both are vehemently opposed to unbundling and privatisation.

Even more than for most of us, the promise of an end to load shedding is highly appealing to workers who are losing jobs and pay due to the blackouts. In this respect, Cosatu’s support is completely understandable.

However, the uncritical nature of its latest statement, and seeming acceptance of the unbundling of Eskom, indicates a worrying indifference about the implications of increasing privatisation. Instead of demanding the government roll out socially owned renewables through Eskom, it inquired about the latest round of IPPs.

Its understandable frustration with increasing tariffs is never accompanied by a vision for electricity produced as a public good, where the costs are borne by the wealthy in the wider economy. It seems to prefer prioritising collecting from indebted municipalities, installing prepayment meters in every home, and cutting off illegal connections in townships. This is a consolidation of the logic of full-cost recovery forced upon Eskom during its corporatisation.

Workers and the poor — and the climate — urgently need Cosatu to take up the immense political role it is capable of towards manifesting a vision that can see beyond the various crises the federation and Eskom face. It’s a political role that wrestles the transition from its private capture and leads us on a just one, where public investment decarbonises South Africa at a rate that profitability is neither interested nor capable of doing.

This vision can begin with a serious interrogation of the exemption decision. Yes, allow certain generators — such as the mines — to plug the 1,000MW gap; but it’s a firm no to a new Wild West of private power generation. DM

Bruce Baigrie works as an organiser and researcher for the Alternatives to Climate Change and Extractivism Programme at the Alternative Information and Development Centre (AIDC). 

This article first appeared on Daily Maverick and is republished here under a Creative Commons license.