Eskom Transformed: Can Private Power Avert the Climate Crisis?

Eskom Transformed: Can Private Power Avert the Climate Crisis?

Eskom Research Reference Group | Eskom Transformed Explainers|10 July, 2020

The necessity of transitioning to renewable sources of energy, away from fossil fuels, has become abundantly clear. The climate crisis threatens the lives and livelihoods of most of the world’s population. In South Africa, we have seen one of the worst droughts on record – a result of changing weather patterns due to climate change. Our reliance on big polluting coal plants only makes this worse, but, as renewable energy only generates around 9% of South Africa’s power, moving away from coal will be no small task. 

In the debate around Eskom, it is assumed that opening up the energy sector for private investment will naturally drive this investment – that investors are ready and waiting for Eskom to open the door so that they may rush in and set up wind and solar farms. It is also assumed that private competition will make sure that this power is affordable – even cheaper than coal. Unbundling and energy privatization is thus seen as a win-win, resulting in cheap and clean electricity.

However, the Eskom Transformed research report shows that this argument is built on unstable ground.

At the heart of the pro-private argument for renewables is the idea that the trend of private investment and interest in renewable energy in the past two decades will only continue to grow. What this ignores is the fact that continued investment relies on the promise of continued profit. In the past, many countries paid big subsidies to private renewable power producers for their electricity, ensuring big profits for investors; this is a large part of what caused the surge in investment in the 2000s. 

This open subsidy system proved to be too expensive, and many countries – including South Africa – instead moved to a competitive bidding system. This worked as intended, driving the price of renewable power down considerably. However, a drop in price also translates into a drop in profit, and a drop in profit makes investors raise their eyebrows. 

The end result of this is what is known as the “three fall effect”: falling prices lead to falling profits, which then lead to falling investment. This effect has been well-observed in Europe, where the growth of renewable energy has started seriously slowing down, barely keeping up with the growth of traditional power sources such as coal and gas.

If South Africa wants to make sure that the private sector keeps investing in renewables, then it has to ensure their increasing profits. This can be done through programmes such as the existing REIPPPP,  where private producers are given long-term contracts at a price high enough to keep investors coming. This is an expensive solution, and the fact that these contracts are set in stone means that they do not change for any future innovations which may lower the cost of generating renewable power. The state, and therefore the public, pay exorbitant costs for these power purchase agreements. 

The belief that the private sector will lead the charge on cheap renewable energy will therefore land us in a dilemma. On the one hand, letting private producers compete for the lowest price means that investors will begin pulling out – crushing any hope of a transition away from coal. On the other hand, giving these producers big above-market contracts will keep the investment coming, but it will also be too expensive for the state to sustain. 

The private sector thus cannot take the lead on renewables. Instead, public funds have to be mobilised to fund the mass roll out of renewable energy.

Whereas the speed and stability of private investment in renewables depends largely on the promised rate of profit, public investment is dependent only on political will. The speed and scale of renewables provision necessary to avert the climate crisis cannot be achieved by the profit-dependent private sector, it must be a public sector initiative.

 To learn more about the Eskom Research Reference Group’s plans for public sector renewables, visit https://www.new-eskom.org/.