Eskom: Unbundling and Privatisation are not the Answer
Amandla Correspondent | Amandla Issue 67/8 | December 2019
There is clearly an urgent need to deal with massive problems at Eskom. It cannot be business as usual – Eskom does need to be transformed. But this needs to happen in a way that meets the energy needs of the majority of South Africans, many of whom are currently excluded from accessing electricity, largely because of the high tariffs.
Today South Africa faces horrifyingly high levels of unemployment (close to 40%), and massive inequality. It is not surprising, therefore, that we also have high levels of energy poverty, with 47% of all households considered to be energy poor. At the same time, the global climate crisis means we should be increasing the share of renewable energy in the energy mix far more rapidly than we are.
In this context, we would argue, the emphasis must be on transforming Eskom into an effective and efficient public electricity utility that is driving renewable energy. It must work in partnership with local government, community organisations and co-operatives to meet the needs of all for affordable electricity.
Alternative Information and Development Centre (AIDC), together with Trade Unions for Energy Democracy (TUED) and the Transnational Institute (TNI), recently hosted a workshop focusing on how we can transform Eskom to do this. This workshop was part of the research on a “new” Eskom that AIDC, TUED and TNI have been doing in conjunction with NUM and Numsa. The research is focused around three commitments:
- To build a “new” Eskom: fully public and serving the people;
- To secure a democratic and just energy transition;
- To work towards a socially owned renewable energy sector.
Shortly after the workshop, the government released its vision of how to deal with Eskom. The “Roadmap for Eskom in a Reformed Electricity Supply Industry”, released on October 29 2019 by Minister Gordhan (Department of Public Enterprises), clearly sets out the steps towards the deepening liberalisation of the electricity sector. Minister Gordhan, however, was quick to assert that unbundling didn’t mean privatisation, even though the Roadmap explicitly talks about the privatisation of generation through Independent Power Producers (IPPs).
- Government’s plans for dealing with Eskom first became apparent in February 2019 when President Ramaphosa announced that, as the way to deal with myriad problems facing Eskom, the government intended to unbundle the utility. The problems at Eskom are well known:
- a massive debt of R441 billion;
- major governance problems with a rapid turnover of senior management and board members as corruption and state capture eroded the organisation;
- operational problems which directly impact on the public when it finds expression in load-shedding; and
- massive cost overruns as well as design flaws at Medupi and Kusile.
Since Ramaphosa’s announcement, two messages have been constantly relayed. On the one hand, the urgent need to unbundle Eskom as the way to solve its problems. But, on the other hand, the argument that this does not constitute privatisation. These messages have culminated in the document released by Gordhan.
Both Numsa and NUM have vehemently opposed the unbundling. For them it is clear that it is not the solution but will only exacerbate the problem by opening up the electricity sector to market forces. They also recognise that unbundling of state utilities has generally led to privatisation.
At heart, the Roadmap proposes the deepening corporatisation of Eskom and the liberalisation of the electricity sector. It does this in a number of ways.
It proposes splitting Eskom into three entities – generation, transmission and distribution – which would all fall under the Eskom Holdings Company. These entities would be separated out over a number of years, starting with Transmission which, it is envisaged, would be a separate entity by March 2020 – just three months away. Ultimately, the plan would be for three independent subsidiaries. Each generating unit (or group of units) would relating to Transmission through a Power Purchase Agreement (PPA). Transmission, in turn, would relate to distribution through Electricity Supply Agreements.
The long term vision in the Roadmap is captured in the diagram below – Reformed electricity supply industry PPAs are typically used with IPPs to regulate the relationship between the electricity generator and the transmission company. They generally contain agreements on how much power will be delivered, when it will be available and what the price of it will be. With IPPs, these agreements often tie the electricity utility into buying a certain amount of power, at a certain price.
According to the Roadmap, “each power station will have its own Power Purchase Agreement, with predefined, fixed and guaranteed tariffs for energy with the TE [Transmission Entity].”
In this way, most of the risk is carried by the public utility rather than the private entity, as the public utility is contractually required to buy a certain quantity of electricity from the generator.
The Roadmap notes that eventually the relationship between the generators and the transmission company will be based on an open-market model. But this will not create a healthier situation. It will result in public generating units having to compete with private companies. But this is not fair competition.
Private companies are driven by the need for profit maximisation. To achieve this, they look for ways to cut costs. This often means fewer jobs and job intensification. And they won’t deliver services for those who can’t afford to pay for them.
With the public sector on the other hand, there is a greater potential for services to be delivered on the basis of a public sector ethos. This would ensure that all have equitable access to affordable electricity, and that public sector workers have decent jobs. But if the public sector is forced to compete with the private sector, they will be forced to act like private companies, cutting jobs, worsening working conditions and delivering only to those who can afford to pay. This will serve to increase inequalities and deepen poverty in a country where these are already major problems.
Saftu issued a statement in response to the Roadmap in which it argued: “it is plainly obvious that what the DPE is proposing comes straight from the World Bank’s privatisation handbook. It is consistent with the Bank’s “privatisation in stages” approach attempted in many other countries. According to this plan, first the public utility is broken up, but its component parts will remain–for a while–in public hands. Then for-profit independent power producers (IPPs) are offered long term contracts (power purchase agreements, or PPAs) to take over new generation capacity. We have seen this already with the Renewable Energy Independent Power Producers Programme, or REIPPP. Privately owned generation is phased in, publicly owned generation is phased out.”
The roadmap places great emphasis on creating a competitive market between different electricity generators, as though this is the panacea to many of the ills besetting Eskom. It argues that with different generators competing against each other, and an independent Transmission Company buying electricity on a “ least-cost” basis, generation will become more efficient and electricity as a whole will become more affordable. And yet international experience (captured in a European study by the Public Services International Research Unit at the University of Greenwich) has shown that liberalised electricity markets don’t achieve what their proponents argue that they will. Instead, an open market in the electricity sector has led to greater concentration of ownership, and higher prices for electricity users.
There can be no doubt that increasing operational efficiencies and effectiveness must be an important part of transforming Eskom. But there is no clear motivation given for why this has to involve unbundling. Rather, we need a solution that doesn’t leave workers bearing the brunt of the transition by cutting jobs, increasing tariffs, and making electricity unaffordable, as unbundling and privatisation will.
A people’s roadmap
The starting point for transforming Eskom should be giving Eskom greater responsibility for renewable energy, rather than liberalising the electricity sector. Eskom should play this role in partnership with local government, community organisations and co-operatives. All of them should have the capacity to generate their own electricity as well as buy electricity from Eskom. The focus should be on developing this partnership between public sector and not-for-profit entities, to ensure that all have access to affordable electricity, and that basic energy needs are being met. The private sector can’t do this.
By Amandla Correspondent