Announcing “Eskom Transformed”: The Case for a Big Eskom in the Age of Austerity

Announcing “Eskom Transformed”:

The Case for a Big Eskom in the Age of Austerity

Eskom Research Reference Group | Amandla Online | 24 June, 2020

For most of the Ramaphosa presidency, the struggle over the future of the nation’s economy has taken a particular form. Against the narrative backdrop of stagnating growth rates, falling government revenues, increasing expenditures, and a slowly building debt crisis, the President and his allies in the Treasury have been tinkering at the levers of control. Carefully stepping around their opponents both inside and outside of government, they have been slowly reforming their way to a restructuring of the economy along investor-friendly lines. Key to this program has been a firm commitment to shrinking the size of the state; a slow but ceaseless trimming of the role of the public sector in South African life, including cuts to the public wage bill and local government spending.

This afternoon’s Special Adjustment Budget will put an end to the careful manoeuvring which has characterised this period. The ongoing COVID-19 crisis has brought the economy to a point which most had predicted would be years away, a crisis which calls for decisive action. The state’s deficit is expected to double to 14% due to a huge drop in revenue during the year, leading to an expected debt-to-GDP ratio up to 80% in this coming budget year. The government’s response to this will be drastic – possibly enough to recast the ground of political struggle – as it is widely expected that the government will use the crisis as a means to follow through on their push for economic restructuring on a scale that they were unable to before. In tomorrow’s opening salvo, this will take the form of austerity – deep cuts across the board.

For a government set on cutting away at the role of the state and now given a window in which this can be justified and acted upon, Eskom is the ideal candidate and an easy target. The COVID-19 crisis has seriously exacerbated all of the utility’s existing issues, largely due to the loss of up to R20bn in revenue during the lockdown period, while its debt has only grown in the past few months – all of which has increased its burden on government. The need for a solution to the Eskom crisis has become clearer now than ever before, and the chief decision makers are standing firm on their solution: Eskom has to be trimmed down and unbundled at last, fully opening up the energy sector for private invest

In the eyes of the state, this approach hits two birds with one stone. On the one hand, it gives them the opportunity to reject or at least minimize the public sector’s role in energy generation, by means of unbundling Eskom and breaking its monopoly on generation. This is a commitment that is at least partly ideological: Tito Mboweni himself has repeatedly expressed his opinion that large SOEs like Eskom are unnecessary relics from a bygone time, while just yesterday the Eskom CEO, Andre De Ruyter, publicly stated that “the days of the vertically integrated monolithic utility like Eskom are behind us.” On the other hand, the state believes that turning the energy sector into an energy market will help solve not only Eskom’s drain on the fiscus, but will also lead to large-scale private investment in renewable energy, in turn solving both the nation’s capacity problem and its pollution problem.

Their approach relies on several key assumptions. The first is that Eskom’s current financial crisis is a result of the utility being “too big”; too close to government to avoid corruption and mismanagement. Thus, the obvious solution is to trim Eskom down, ensuring that it is run as one efficient business among many, instead of being run as a public utility. The second assumption is that market forces, especially the low cost of renewables, will be enough to bring about sustained large-scale investment in renewable energy. From this assumption, it follows that South Africa’s energy sector ought to be turned into a marketplace, where competition between independent renewable energy producers will drive a transition from coal to clean power while creating enough energy to meet the country’s needs.

The contemporary energy debate has seen very little serious interrogation of these assumptions. Perhaps this is because in the absence of a credible alternative, any criticism of a solution can look weak. The advocates of unbundling, whether in government, business, or elsewhere, have set up a persuasive dichotomy between the indebted, corrupt, polluting monopoly that is Eskom on the one hand, and an efficient modern energy market on the other. Armed with this dichotomy, much criticism of unbundling and energy privatization, such as labour’s concerns about job losses, has been easy enough to defuse by simply pointing to the current state of Eskom. This has allowed the advocates of unbundling to present themselves as the only credible voices in the room for quite some time now.

There is little doubt then that Eskom too will go under the knife today. However, are the assumptions underlying this decision as valid as they are assumed to be? And if they are not, what is the alternative – is our only choice really between keeping Eskom-as-is, or a marketized energy sector? For the past year and a half, a coalition of researchers from the Alternative Information and Development Center, the Transnational Institute, and Trade Unions for Energy Democracy, have been working on a research document aimed at answering these questions. This research had two major concerns:

The first was to trace the future trajectory of unbundling and the consequent privatization of energy. The research here focused on interrogating some basic assumptions behind the government’s current approach, namely the idea that the low cost of generating renewable energy will ensure investment, that private competition will drive the price of electricity down, and that subjecting Eskom to this competition will discipline it into being able to stand on its own feet again. Drawing on international experience, the research shows that this trajectory is riddled with far more problems than anyone has thus far been able to publicly admit. Renewables-for-profit are facing a coming investment crisis, not a glut; a greater integration of private renewable energy will lead to higher electricity tariffs, not lower; and subjecting Eskom to competition in an energy market will lead to a need for more bailouts, not less. 

The second prong of this research aimed to provide what has been sorely missing in the current debate: a credible proposal for a way out of the current crisis aside from unbundling. Any such proposal needs to not only solve Eskom’s current financial and capacity crises, but also take stock of the worsening climate crisis – to which Eskom is South Africa’s biggest contributor. The research argues that it is only a modern, fully public, and vertically integrated utility that can truly ensure stable energy generation at low cost while also conducting a long-term “just transition” from fossil fuels to renewable power. It is therefore vital that Eskom is transformed and reinvigorated rather than unbundled and slowly dismantled. To this end, the report presents proposals for how this might be done, ranging from alternative solutions for the debt crisis, to reconfiguring Eskom so that it may play a leading role in the transition to renewable energy as part of a socially owned renewable energy system.”.

While acknowledging the multitude of challenges facing these proposals, the report opens the door to a much-needed fresh assessment of South Africa’s energy crisis and the longer-term challenges of transition, showing how public energy and a transformed national utility provide the means to deal with the current crisis and transition-related challenges, both technical and economic, in ways that are effective and equitable. The hope is also that this report will give unions and other progressive formations a serious alternative proposal to bring to a debate currently dominated by an unbundle-and-privatize narrative at odds with the interests of labour.

In anticipation of the Eskom Transformed virtual launch on the 23rd of July, Amandla! Media will be posting a series of short “Eskom Explainers” in the coming weeks, each outlining a central argument or proposal from the research. Keep an eye on the Amandla! Media Facebook page for these, as well as for more information on the launch of this exciting research.