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Unbundling Eskom is code for privatisation

Unbundling Eskom is code for privatisation

By Sean Sweeney | Original Source: Business Day | 18 February 2019

Unbundling serves a privatisation agenda by making electricity and its provision a commodity rather than a public service and human right

Supporters of the proposal to unbundle Eskom into three separate parts — generation, transmission and distribution — would be advised to take a long hard look at what this normally leads to in terms of social and ecological outcomes.

First, unions and their allies in SA are correct: unbundling is about privatisation. It is a policy that comes straight out of the privatisation manuals of the World Bank and the International Monetary Fund (IMF). Whatever claims are made to the contrary, unbundling is not an end in itself, but a means to “engage the private sector”.

The process can stretch out over a period of years, but privatisation is the goal. There has not yet been an unbundling process that did not lead to incursions by the private sector into publicly provided electrical power.

Unbundling serves a privatisation agenda by consolidating the idea that electricity is a commodity; it shifts the focus towards trading in electrons, thus obscuring the fact that it is the actual use of electricity that has real social and economic value — it delivers a hammer blow to the idea that electricity should be a national public service and access to affordable electricity a human right.

Unbundling also fits with the market logic of “full cost recovery” — the idea that the costs of a service must be fully covered by end-users. It is easier to account for these costs, and their recovery, if the parts are divided up. But if this logic had prevailed in decades past, most of the world’s population would still be without electrical power. The obvious contribution of electricity to human development in the form of improved health, education, productivity, and so on, has no place in full cost recovery calculations.

Privatisation problems

Privatisation is actually what is being proposed. Developed countries that privatised electricity in the 1980s and 1990s are now facing severe problems — among them under-investment and neglect of infrastructure, rising prices, poor customer service, and rising energy poverty.

Moreover, because the power sector is today saturated with “investor risk”, there will soon not be enough investment with electricity supply not able to meet demand. Where did this risk come from? It came from the enforced chaos of “competitive” electricity markets that were — after the unbundling — introduced as part of the privatisation process.

If the break up of Eskom succeeds, SA’s vital energy assets will eventually be owned and operated by multinationals whose primary purpose is “satisfactory returns” (making money). The UK was the first country to unbundle its national electricity system in the 1980s. What was once public property is now owned by a handful of foreign-owned companies. In the US, many investor-owned utilities are foreign-owned.

The social impact of privatisation is almost invariably negative. The last thing private capital wants is to have to meet any social obligation to provide electricity as a universal service. If you can’t pay, you’ll be cut off — or you won’t be connected in the first place.

A recent report on privatisation from the UN Special Rapporteur on “Extreme Poverty and Human Rights” is worth quoting at length: “Profit is the over-riding objective, and considerations such as equality and non-discrimination are inevitably sidelined … Rights holders are transformed into clients, [as well as] those who are poor, needy or troubled are marginalised.” The report continues, “privatisation directly undermines the viability of the public sector and redirects government funds to subsidies and tax breaks for corporate actors.”

Moreover, it must be asked whether the proposed break up of Eskom accelerates the phase out of coal and increases the pace of deployment of climate-friendly renewable energy?

Sidelining renewables

Privatised electricity systems actually create a hostile environment for renewable energy, because in liberalizsed electricity markets everywhere else in the world renewables are being asked to compete with coal and gas. At the end of 2015, wind and solar power combined generated just 4.6% of global electrical power. It could be, and must be, much higher than that. The proportion of electricity generated by fossil fuels globally — roughly two thirds — has barely changed since 1990. But since then, the quantity of electricity generated has grown dramatically. Energy-related harmful emissions levels have almost doubled during the same period.

The suggestion that a dismembered Eskom will attract private investment is baseless. Investment is generated when governments agree to “risk mitigation” measures, such as power purchase agreements (PPAs) that can last up to 20 years.

SA’s renewable energy independent power producer (IPP) procurement programme inflates the costs of renewable energy in particular. Eskom is locked into purchasing the power from the IPPs at above-markets rates. The largest single contributing factor to the cost of renewable energy is the cost of up front financing. IPPs pay higher interests rates then adjust their bids to account for both the costs of capital and the profit rates needed to satisfy investors. But these costs could be reduced if Eskom were building the renewables itself on a non-profit basis — something called “utility-owned generation.”

Because renewable energy cannot compete with already built fossil-based power, renewable energy needs subsidies. PPAs are subsidies, so too are feed-in tariffs. Governments have opted to provide favorable financing (“concessionary lending”), which is another subsidy. This means public money has been used to make profitable what would otherwise not be profitable. As the International Energy Agency (EIA) recently observed, “Market-based, unsubsidised low-carbon investments have been negligible.”

IPPs are an expensive way of doing renewables, and the pace of deployment is far too slow. Public renewable power would be faster, cheaper and fairer. The future of humanity cannot depend on whether the “levelised cost of electricity” is 8c or 12c per kilowatt-hour (kWh). These things matter only when someone is trying to make money. A radically reformed and socially owned system would end the war between different sources of energy and plan the transition. It would set prices based on a new set of social and ecological criteria.

‘Death spiral’

However, the current market model creates other problems. In expressing support for breaking up Eskom, Business Day’s Carol Paton referred to the “death spiral” of the utilities that has occurred “elsewhere in the world.” What is the “death spiral”?

Let’s look at Europe. The growth of subsidised renewables meant that utilities lost market share. Renewables need only generate 5% or 10% of total generation to disrupt the utilities’ entire business model. The utilities’ stock market values plummeted by about 50% from 2008 to 2013. And on sunny and windy days renewable energy floods into the grid, causing prices to drop almost to zero. During these periods, the utilities suffer an additional drop in sales revenue. With revenues and profits falling, the infrastructure decays. This is the death spiral.

But wind and solar still generate only about 15% of Europe’s energy, so what would happens if the utilities go bankrupt? This was clearly not an option, hence the extended subsidies (“capacity payments”) to coal, gas, and nuclear companies to keep them solvent and to lure investors back into the power sector. This has created a “subsidies for all” situation, whereby governments reward the capacity to produce power even though the power may not be actually sold or used.

This means that the death spiral of the utilities quickly becomes a death spiral for the renewables sector. With the utilities’ protected, Europe’s investment in renewables has collapsed. At its 2011 peak, EU investment hit $132bn, but by 2017 levels had plunged to $41bn. Deployment levels have already fallen sharply, particularly in onshore wind and solar. This could be SA’s future, and it is one that must be avoided.

The country’s decision to go along with the IPP model has already contributed to the death spiral of Eskom. The solution is not to halt renewables, or unbundle/privatise Eskom, but rather to speed up renewable energy deployment in the public sector, and to phase out coal in an orderly and equitable way over the next decades.

While the ANC government is proposing to break up its public utility, there is growing pressure for electricity systems to be reclaimed and re-integrated so as to serve the public good. In Latin America, it’s called “deprivatisation”. In the UK and Australia its “renationalisation. In Germany it’s called “remunicipalisation” and more than 100 cities have taken their transmission and distribution systems back from private companies. Whatever it’s called, it amounts to a public reclaiming of power systems having lived through the failures of privatisation.

“Rebundling” the system, however, once it’s been broken up and sold is difficult. Much better, therefore, is to avoid doing it in the first place. SA has this option, and it would be well advised to use it.

• Dr Sweeney, an AIDC visiting researcher, is with the City University of New York’s School of Labor and Urban Studies.

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