Time to Privatise South Africa’s Power Sector

South Africa’s state owned utility expects consumers to pay for its ongoing mismanagement, resulting in billions of debt.
Published: Tue 26 Jan 2016

Eskom is looking to recover a US$750 million (ZAR12 billion) loss in revenue during the last financial year plus an additional R11.1 billion and customers are expected to cough this up.

The state-owned utility seeks to recoup this money by increasing the tariff by 16%. Eskom has already requested the increase with the National Energy Regulator of South Africa (NERSA) and public hearings have now been launched, with NERSA already querying Eskom’s inability to manage costs effectively.

Devastating effect of power outages and tariff hikes

Eskom’s communications advisor, Khulu Phasiwe, says the economic downturn is largely to blame for the power utility losing billions in revenue. According to Phasiwe, the manufacturing and mining sectors have cut their power usage due to a “poor economy”.

However, the lower level of consumption is probably due to the high level of outages (both planned and unplanned) that the country has been facing over the years, as well as gross company mismanagement.

South Africa’s ongoing electricity crisis has come about because the country has not invested enough in the expansion of its power generation capacity and has also neglected much-needed maintenance over the years.

In 1984-85 the country had 40% surplus power generation capacity. Today the economy is estimated to be 100% larger — with manufacturing 70% bigger — but potential generation capacity has remained the same at about 44,000MW, forcing the utility to load-shed on a regular basis. Independent Power Producers (IPP) were meant to resolve the generation capacity issue by selling power back  to the utility but because Eskom failed to line up the IPP process with the expansion of its transmission grid, resources are going unused. Solar farms and  wind turbines gather dust due to their being no critical infrastructure to integrate the power into the grid. In an interview with  Mr Mbulelo Kibido, General Manager of Transmission Grid Planning, Eskom, at last year’s African Utility Week, project gaps are revealed. [South Africa's IPP Challenges Renewables Integration]

Major manufacturers have been very open about the devastating effect that the ongoing electricity outages are having on their operations. Many are struggling to stay afloat.The country’s second-largest steel maker, Evraz Highveld Steel & Vanadium, entered into business rescue in April last year and many face liquidation.

Power outages are crippling business

The country’s largest steel producer, ArcelorMittal SA, reports that erratic electricity supply is making it difficult for it to compete with an increasing flood of steel imports from China. As one of Eskom’s biggest customers, it has been sent demands at short notice for load shedding, and since March/April last year, the company has faced load shedding almost every day.

Henk Langenhoven, chief economist at the Steel and Engineering Industries Federation of Southern Africa (Seifsa), pointed out last year that the instability of electricity provision is a serious constraint on the country’s metals and engineering sector. He explained that the sector has been struggling for over five years as a result of fierce import competition from Asian economies, industrial action, increasing production costs and last but certainly not least, power outages.He says the stable supply of electricity to industries is as crucial as its costs.

With large companies buckling under great commercial losses already due to power outages, the  proposed 16% tariff increase would be the final straw for energy intensive companies as investment uncertainty rises to the surface. Business is no longer able to absorb further electricity tariff hikes, particularly given the impact on an already weak South African economy.

Many businesses feel that the compound effects of previous years' increases should be more than sufficient for Eskom. [Eskom Applies For a 16% Tariff Increase]

Increase will not resolve gross mismanagement

If Eskom gets its increase, the utility is likely continue to display a poor level of management and planning. The increase will simply give Eskom an excuse not to find more innovative ways to address current issues.

In response to the tariff increase,  consumers and particularly business and industry will further reduce their usage of power as encouraged by Eskom. Also, as prices escalate, a vicious circle of lower revenue, surplus capacity and further price increases will be the order of the day.  This is bound to lead to a further reduction of investment and employment in many industries. Based on this, it is clear that Eskom does not support an industry which increasingly needs to be globally competitive.

For instance, NERSA is questioning the use and maintenance of Eskom’s diesel generators, which cost the power utility R8 billion in just one year. NERSA says it approved R10 billion for the open cycle gas turbines over a period of five years. The regulator’s chairperson Thembani Bukula said, “Their application in the multi-price determination only wanted R10 billion for the five years. So to spend R8 billion in the first year is something that we are struggling to understand.” Eskom blames the over-expenditure on the prevention of further load shedding.   

The South African Local Government Association (Salga) has also spoken out against Eskom and says the utility should be held accountable for its apparent lack of cost control, a statement that probably reflects the feelings of the majority of the country’s consumers.

Privatisation-a sustainable solution  

In the absence of a competitive market for electricity supply in South Africa, NERSA is obliged to play the highly important role of protecting the consumer from Eskom merely increasing prices. Independent Power Producers (IPPs) are merely supplying Eskom with additional (clean) power but they have yet to really liberalise the market and create a “disruption” in the power sector.

But perhaps, more importantly, the country needs a sustainable plan-privatisation. Firstly, it would be highly beneficial to the country’s economy and it would take financial pressure off the state by getting private investors to help fund electricity supply generation.

Secondly, it will also increase efficiency in the sector by introducing competition. And as the industry grows, it has real potential to also create a large number of jobs, particularly in the renewable energy sector.

Private power is opening up throughout Africa and there are many pioneer countries including Kenya, Nigeria, North African countries (especially Morocco), and the Ivory Coast, amongst others. [Africa Finally Embraces Private Power.]

While it is true that Eskom buys extra power from IPPs to avoid outages, it still doesn’t solve a number of Eskom’s problems.[IPP Contract Extensions with Eskom]

Nigeria, for instance, has privatised eleven distribution companies, one of which is Eko Distribution. Prior to the privatisation, the sector struggled to overcome challenges relating to funding, technology, customer engagement and management. With privatisation, the sector was able to overcome these. [Eko Distribution Aims To Be Africa’s Leading Utility.]

Another good example is Kenya’s utility KenGen which was made private. By transforming the utility’s ownership from government to private, stakeholders were significantly increased. KenGen now achieves ambitious goals thanks to better strategic long term planning. Once the company became privately owned, accountability became a reality and long-standing plans were finally executed, according to former MD and CEO of KenGen, Eddy Njoroge. [KenGen-Achievements and Challenges]

While privatisation is not an easy path, it’s certain to provide a more sustainable solution to the country’s energy crisis.