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Eskom’s holding us hostage – again

Demanding an end to private power producers damages the economy – again.

The International Monetary Fund’s (IMF’s) latest annual assessment of our economy is blunt and highly critical of some economic policies, as well as the management and performance of State-owned enterprises (SOEs).

The IMF wants more competition in the South African economy and in the labour market. The IMF and rating agencies have also long pointed to SOEs’ big influence on the economy – by creating growth bottlenecks and their insatiable need for government guarantees when they expand capacity.

David Lipton, first deputy managing director of the IMF, speaking at Wits Business School, said: “Then there is the matter of State-owned enterprises. They play a crucial role in the economy, but they are plagued by inefficiencies, poor management, and weak balance sheets.… Moreover, the private sector is unable to enter key sectors dominated by SOEs. This only fortifies the bottlenecks in the economy.”

A few days later Eskom announced it no longer wished to buy more power from independent power producers (IPPs).

This is exactly what the IMF is worried about: a SOE making economic policy by shutting out the private sector, instead of government.

Eskom’s power-generation woes have been a brake on the economy and now, just when they appear to be solved, it influences the economy again.

Eskom prices have driven inflation and it does not make sense to block cheaper power.

Firstly, yes IPP power is more expensive than Eskom power at present, but even Eskom states that the weighted cost of IPP power fell from R2.17 to R1.71 per Kwh. That is a 21% decline in one year, while Eskom’s average cost increased by 5% to 64 cents a kilowatt hour in the last year.

The new independent producers are now at price levels similar to Eskom or even below and prices are declining. It is this new cheaper power that Eskom wants to stop buying.

Prices for renewables have fallen to below current Eskom levels and will in probability continue to decline when compared with Eskom’s own prices. The utility’s new power stations are far more expensive, according to Chris Yelland.

Eskom has not been able to keep a lid on new build costs and calculations show that the cost of production of Medupi and Kusile will be R1.05 and R1.19 per Kwh. These calculations estimate a weighted cost of capital of 8%, while Eskom and government bonds presently have yields above that level.

Further cost overruns are very possible along with higher interest rates, so the average price of Medupi and Kusile could come in at over R1.30 cents a kwh (Any further delays will make for even higher prices). What? Current renewable power at half the price of future fossil fuel power?

Currently, the latest solar prices in the United Arab Emirates show costs declined to less than 43 cents (South African currency), or about one third of Eskom’s new power station costs. Can we ignore this price trend or will we rather risk even higher monopoly prices again?

Weaker economy due to higher electricity prices

Electricity weights over 4% in the CPI basket while Eskom is the monopoly which controls the basic price thereof. This price has increased so much in recent years that the use of electricity declined to the extent that the structure of the economy changed.

Excessive price increases have had a big structural effect on the economy. Beneficiation has given way to services while self-reliance is a major trend too.

According to Eskom, the industrial, mining and transport sectors use less electricity than a decade ago. Yet Eskom receives far more revenue than before.

Electricity bills as a percentage of what we produce:

Eskom 1

Eskom 1

While SA uses less.

Eskom 3

This has resulted in electricity costs increasing from about 3.5% to 6.5% of the value added in manufacturing since 2006! This despite the fact that industry used 12% less electricity than in 2006, while costs increased by 276%.

Despite moving away from beneficiation and heavy industry, SA manufacturing now pays more for power per unit of production.

This makes it difficult for SA Inc to compete. Of course, this hurts growth and jobs – exactly what the IMF has warned about.

Then, just when IPPs can compete on price, Eskom says no. This constrains growth.

Other sources of finance help the SA balance sheet

Eskom was a constraint on the SA economy for nearly a decade when independent producers were welcome. The Department of Energy set up policies bringing in independent producers.

The IPPs also finance their own infrastructure, which helps cash-strapped Eskom, making the decision even more curious. It will ensure less pressure on tax payers to fund coal and nuclear infrastructure.

Government reaction to Eskom will be closely watched by the market.

Uncertainty and investment do not mix well

When Eskom could not deliver for the economy, the economy was forced to adapt at a very high cost to jobs, growth and investment. Some estimate we lost 10% of our GDP potential.

Independent production was encouraged which led to substantial investments in the South African electricity sector. IPPs brought new capacity as did firms that became self-reliant.

Electricity investment became a major driver both from IPPs and Eskom. They all made investment decisions based on a policy.

Now Eskom wants to protect its high-cost investments at the expense of private producers. Eskom wants the rules to change. This sends the wrong message to investors, who want to invest with policy certainty.

South Africa cannot allow policy changes too suit one player. That will destroy investment.

Simply put.

The economy is being held hostage once again by our monopoly electricity producer. The more Eskom wants to do itself, the more expensive electricity becomes. The result is this will push up inflation, cause interest rate increases and slow economic growth. This in turn will result in more unemployment and increased poverty.

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COMMENTS   17

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Yes exactly. The cost of electricity is making many industries uncompetitive. One does not need the tax payer (government) to subsidise electricity via Eskom, just allow people to produce it as cheaply as possible. if we do this maybe we could afford to pay mine workers more. Maybe we could afford to process our own minerals. Produce steel from our own iron ore at a competitive price. In fact revive all energy intensive industries and create rather than destroy jobs for a change. Then we will have a bigger tax base to provide services, better grants and pensions for the poor and those that need it. People who suggest this are for good government not against it. I am a widely read professional scientist not an economist but this is not so-called rocket science.

Brian Molefe is the single biggest cause of unemployment in SA and Eskom ensures that our international competitors have an advantage over SA manufacturers. The cost of electricity serves to handicap the local industry while the power-drunk and incompetent ANC leadership are looking elsewhere.
What Eskom does to the SA economy under leadership of Luthuli House is nothing but sabotage.
In some countries they will face the death squat but here they give themselves performance bonuses.
Eskom should tender for contracts the same way IPP’s have to do. This will halve the cost of electricity for the average user.
It is time for Pravin Gordon to draw the line in the sand, for the sake of social stability in this country.

If Eskom’s average cost is R0.64 and the IPP price is R1.71 (167% higher) it still means that somebody (the consumer) has to subsidise the IPP generated electricity. As Molefe pointed out, at 6PM no solar power is produced, the wind is unreliable. Anybody who ever worked or even talked to somebody at a coal fired power station knows that you can not just start up the power station in a few minutes, just because the wind died. Renewables without the possibility to store the power is very little use. In most countries renewable electricity generation is a tax scam. Denmark, which has very large installed windfarms often has to import electricity because insufficient wind. A few years ago they admitted that there were more than 50 days in a year when the windfarms were electricity users, not producers. France generates most of its power from nuclear, their electricity cost is far lower than in Germany where they are going nuts over renewables. I know that new nuclear generators in SA will involve lots of bribes but the same happened in the case of Medupi too.

Eskoms new coal fired plants are not coming in at R0,64, they are coming in at R1.05 to R1.19. The latest solar and wind projects are coming in at R0.60 to R0.90.

A year ago, government was begging the private sector to bring in new generation capacity as fast as possible. Now Eskom says the opposite. This is how you end up at ZERO percent growth.

The problem with the private generation capacity is that it is either unreliable like wind or at the wrong time like solar. I still maintain that currently the coal or nuclear gives the only reliable base load capacity.

Forgot to mention, Eskom has a very strict guarantee to some large users like mines that Eskom will supply reliable power 24/7. No such guarantee is given by the independents.

Coal is an industry in terminal decline, and financial markets are reflecting this new reality. Drastic new energy policies are still needed to avoid catastrophic climate change, according to nearly every credible analysis. But even setting aside the environmental and health issues, renewables are on a trajectory to outcompete fossil fuels, starting with coal. Between now and 2040, two-thirds of the money spent on adding new electricity capacity worldwide will be spent on renewables, according to BNEF.

Renewables + Gas to Power = stable power supply + lower state expenditure + cheaper electricity price.

Eskom does not like this equation….

Your information is wrong, both on the cost of Eskom relative to IPP’s, as well as on the reliability of wind generation. The generation from a single wind farm in isolation might vary over time, but spread out over a larger area like a province, the combined generation from wind is very stable (there is always wind somewhere).

The IPP would not tender for a wind project where the supply is erratic, for they will not be able to cover their cost.
If you hand out this disinformation as fact one wonders what your agenda is.

Hun, your comment about renewables being unreliable is correct despite protestations to the contrary.

South Australia has the highest proportion of renewables of any state in Australia. They also have the highest unemployment and the most expensive electricity.

But what are the facts? have a read:

http://joannenova.com.au/2016/07/wind-power-sucks-money-and-electricity-in-south-australia/

The amount of renewables under discussion in the SA context is nowhere near the level that would lead to grid instability.

Renewables are intermittent generators, but this does not mean unreliable.

The article linked here is so daft, it may have been written by an Aussie!
If a wind turbine in SA does not generate enough power, or even sucks power out of the grid, as stated in this article, the IPP will be bankrupt. They won’t even get a license from Nersa to start out with. So relax people, we have got the best IPP tender process on the globe and nobody will get a license if they do not add enormous value to the grid. That is why Brian Molefe feels as if the dog took his bone.

Sensei- dude its not often we disagree – but you are missing the point. In South Australia the renewable energy scheme is not run as an IPP but the costs thereof are hidden in the electricity retail price. They cannot become bankrupt as the user/taxpayer just picks up the tab as the price is “averaged out”. As they do on an ongoing basis.

An IPP in South Africa is ring fenced in that they can actually go bankrupt but Eskom is forced by the ANC to purchase electricity at prices over and above that which it actually retails in South Africa after being through the grid and the municipality has taken a cut. This is ridiculous. The costs of renewable power is hidden in the retail price – no ultimate difference really.

It is these economic distortions that I am against. The solution is privatisation- see my post below. Break up Eskom and take the sales function from the municipality.

They did exactly this with British gas- a real success story.

This all leads back to the fundamental reason that Nene was fired. Failure to support NEC, Brian Molefe and number one’s big payout by sanctioning the nuclear deal. I have no doubt that their numbered offshore bank accounts are in place and the smell of the size of the take is driving them all a little balmy. At a time when the rest of the developed world is moving away from Nuclear for glaringly obvious reason, this plonker wants us to believe that sustainable, renewable, environmentally friendly energy is second prize.

One has to chuckle at the irony of jZ’s latest statement with regards to his 6 month dictatorial ambitions and that everything would be straight. Yup, for once you speak the truth…… straight to your pocket mate……but more crooked than ever before….and you could scrap I need 6 months to be a dictator, I am pretty sure that you would entrench yourself as King rottenness for the rest of your miserable life and at the cost of our beautiful country and its wonderful people. You and Bob across the border could compare notes on how to take something magnificent and burn it all to the ground.

Coal is an industry in terminal decline, and financial markets are reflecting this new reality. Drastic new energy policies are still needed to avoid catastrophic climate change, according to nearly every credible analysis. But even setting aside the environmental and health issues, renewables are on a trajectory to outcompete fossil fuels, starting with coal. Between now and 2040, two-thirds of the money spent on adding new electricity capacity worldwide will be spent on renewables, according to BNEF.

Don’t be ridiculous.

The problem is the ANC not Eskom. The ANC oversee and reign supreme over this glorious mess. There is only one lasting solution and that is to privatise and break up Eskom into:

Electricty generation (power stations). Easy to privatise
Electricity distribution (the grid). Harder to privatise, but easy to regulate.
Electricity sales (replace the corrupt municipality). Easy to privatise.

Let anyone who wants to generate electricity can compete in the open market. Let the ultra cheap renewables have their say at 4am on a Joburg winter morning. Let the solar panels sing from the rooftops!

Q: Is the cost of a requisite backup factored into renewables?

The only reason that price increases are excessive is because of the structure of the Eskom monolith. In a free market the best cure for high prices is high prices.

Remember that weighted average costs nonsense is not being thought through. If I owned a supermarket and had a milk supplier whose supply cost exceeded my retail price, I would not be doing business with them- even if the weighted cost of milk (bs, bs x1000) was less than the retail price. Eskom does exactly this with renewables (on being instructed to do so by the ANC). The correct approach is to only buy electricity if you can on sell it at a higher price. If the electricity supply is insufficient to meet demand then the price is too low. Simple economics, folks. The demand is not inelastic. High prices attract competition like bees to a honeypot.

Let the ANC sponsor and subsidise the poor not Eskom. Let the ANC pay tax money to Eskom for the power they supply to the indigent.

Finally, let’s put this climate change fraud to bed. The models have failed dismally and all predictions that hinge on the models did not come true. The climate models grossly over estimate temperature sensitivity to CO2. Empirical data (i.e. evidence or hard cold facts) triumphs over theory.

The problem is ANC incompetence and statism. Time to rid our lives of both.

All I hear is crickets.

There is more to the issue of this than meets the eye. Municipalities are dependent on electricity sales for a large chunk of their income, therefore IPP and off-grid power generation poses a potential threat both to Escom’s monopoly and the free ride local municipalities enjoy.
Secondly while the ¨new generation¨ coal plants employ water cooling technology, they still require huge amounts of water – Madupi and Kusile will require approximately 52.3 million cubic metres of water per annum, increasing Escom’s total annual water consumption by an additional 14%! (Source: Inglesi-Lotz, 2012).

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