Why Should We Oppose Unbundling?: The Death of Eskom? (Part Two)

Why Should We Oppose Unbundling?: The Death of Eskom?(Part Two)

Eskom Research Reference Group | Eskom Transformed | 22 September 2020

In the last summary, we went into some detail about why there is such a big push to unbundle Eskom. In short, we outlined the fact that the real focus of unbundling is on Eskom’s transmission component, the part which controls the power lines and acts as middle-man between power producers and municipalities or individuals. The plan is to turn this transmission into an independent, profit-driven buyer and seller of electricity – what is known as an “ITSMO”. This will lay the foundation for the creation of an energy market, where power producers compete with each other in order to sell their electricity to the ITSMO for profit.

The most important result of this is the fact that all power producers will have to try and keep their prices as low as possible, because otherwise the ITSMO will just buy electricity from somewhere cheaper as soon as it can. This includes Eskom’s current nuclear and coal plants, which would be treated just the same as any private producer in the eyes of the unbundled ITSMO, and will be forced to lower their prices. This may sound like a good thing – the cheaper the power the better, right? However, our research has found some serious problems with this approach. 

For one, not all of the competitors will be treated equally. Independent power producers (IPPs), and specifically renewable IPPs, are currently given government subsidies in order to give them an incentive to invest and build wind farms or solar panels. These used to be more direct subsidies, but these days they take the form of “Power Purchase Agreements” (PPAs). PPAs are contracts between Eskom and IPPs, where Eskom (specifically transmission) agrees to buy electricity from them for a set price and for a set number of years. The government holds auctions where IPPs bid on these contracts, but they need to keep the price high enough to make sure that IPPs will want to keep investing. This means that IPPs are indirectly subsidised, as they are purposefully paid above-market prices for their power in order to ensure that they keep coming to the table.

In a post-unbundling world, this already puts Eskom’s generation division at a disadvantage, having to now compete with private companies who enjoy indirect subsidies. What’s worse is that if Eskom were to be unbundled then it is clear that its generation component will inherit most of its problems: massive debt, inefficient and expensive coal power plants, and serious long-standing maintenance problems. In order to resolve these problems, Eskom’s generation will have to turn a profit and therefore raise its prices, while also getting private investment on board. But, because it will be a money-bleeding junk-status utility trying to compete in an energy market with profit-turning IPPs, it will be unable to do so.

In all likelihood, this process would lead to the death of Eskom generation, and there are some who think that this would be a good thing. However, this attitude is short sighted. The honest truth is that South Africa still needs coal power, and thus we still need Eskom’s generation. While it is vital that we move away from fossil fuels, no country can where 90% of all electricity is sourced from coal can do this in only a decade or two. If unbundling goes through as planned then Eskom will still need to be saved, because otherwise we would simply not have enough electricity. 

In all likelihood, an unbundled Eskom generation will become what is known as a “zombie” utility; a utility that is financially unviable but too important to fail, kept in a constant state of semi-death by state bailouts and payments made in order to prop it up. Our research on this has found that this has already happened in some countries with open energy markets; there are European energy utilities already stuck in various stages of this process.

The question then remains: Why unbundle when it only takes us back to where we started?

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