The beginning of the end of Eskom’s monopoly (really)

Department of Public Enterprises releases the roadmap to Eskom’s unbundling.
Public Enterprises Minister Pravin Gordhan unveiled what is arguably the biggest change in a strategically important area in SA’s recent history. Image: Moneyweb

The start of the breakdown of Eskom as a monopoly supplier and provider of electricity to South Africa will take three years.

Government has finally unveiled the timelines and plans to “unbundle” the debt-laden utility, that supplies over 90% of the electricity in South Africa with an ageing, poorly maintained fleet that is struggling to meet electricity demands.

Read: Soweto residents to take Eskom to court 

After acknowledging that Eskom cannot continue to operate as a vertically-integrated utility, Public Enterprises Minister Pravin Gordhan outlined how the government plans to unbundle the institution, starting by immediately establishing transmission and generation subsidiaries within Eskom Holdings. 

The functional and legal separation of Eskom, described as the largest institutional transformation the country has undertaken in a strategically important area in recent history, will be completed by 2022. 

The special paper on the roadmap for Eskom’s future comes as South Africa await details on how the government will approach the utility’s bailout from Finance Minister Tito Mboweni’s mid-term budget policy speech on Wednesday.

Not privatisation

“We have got to change the monopoly culture and monopoly pricing,” said Gordhan. 

The fundamental issue here is saying monopolies by their nature are wasteful; monopolies by their nature are extravagant costs; monopolies by their nature are self-interested. They don’t look outside of themselves.”

But this will not be done through privatisation as envisaged by Mboweni’s economic discussion paper, at least for the medium-term.

Read: Ramaphosa pours cold water on Eskom sale

Transmission

The transmission entity will be 100% government-owned. Its core function will be to act as an “as an unbiased electricity market broker”.

The business will have two key roles: acting as a systems operator that will invest in and manage the transmission grid that includes 33 000km of transmission lines, and as a market operator that will balance demand with supply on a least-cost basis.

Watch Gordhan explaining on Tuesday why the situation at Eskom needs to change:

Gordhan said the operator will have a buying component, purchasing energy from Eskom’s generation arm and other independent power producers (IPPs) through power purchase agreements (PPAs) with “predefined, fixed and guaranteed tariffs” which, in the long term, will transition to an open market model. 

Functionally, the transmission entity will be set up by March 2020, including the appointment of an interim board, while the full separation into a commercial subsidiary should be completed by December 2021.

Generation

Eskom’s generation company will consist of the current fleet, with each power station having a PPA with the transmission entity. 

The paper states that the government is considering creating two or more generation units, in order to increase “intra-company competition amongst the generation subsidiaries and drive efficiencies in generation.

“Over time the generation market will become more competitive and decentralised with new public, private and other generators entering this market as well as the [Integrated Resource Plan’] energy mix, including Eskom ‘newbuild power stations’,” the document states.

Distribution

There is little detail as to how the separation of the distribution function – currently handled by municipal- as well as Eskom distributors – will unfold. Gordhan said more consultation has to take place with municipalities that fall under this, due to their dependence on revenue from electricity tariffs.

Six benefits

In a nutshell, the restructuring of Eskom is expected to: 

 > Increase transparency with regards to operations and costs

> Promote innovation and entrepreneurship

> Drive economic growth in the country

> Drive increased competition in generation

> Provide a stable robust system, and

> Drive compliance with environmental legislation and policy.

Level playing field

Energy expert Chris Yelland says the 66-page plan is broad and not readily implementable at face value. 

“The only thing they have committed to is the setting up of the transmission company as a subsidiary of Eskom and that is a long way from setting up an independent grid system operator which is something that has got to follow.”

Yelland says the current situation where Eskom controls access to the grid and is at the same time a generator means it gives preference to its own generation because it is not independent.

“We really need to create a system where there is a level playing field for all generators,” he says.

“At the moment there are perceptions – and, more than that, a reality – that IPPs do not operate on an equal playing field.”

Read: The beginning of the end of Eskom’s monopoly

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Let’s see.2 years to set up two subsidiary companies under Eskom holdings.

Gee. What a cracking pace. You’ve got get 2 shelf companies, register them for VAT, pass a journal entry to transfer their assets, split the heads on the payroll – and all of this by 2021.

At this rate I’d he amazed if much will happen this century.

What am I missing here?

You are missing the period of horsetrading for the fat cat seats on the boards of the new companies.

Yep … great time to be a corporate lawyer, the only growth industry in SA over the last 25 years.

Just sell parts of it to generate cash to pay the debt. The privateers will pay for the improvements as they will want an efficient system. Yes the price of electricity will probably increase but we will be able to offer secure supply which will bring investment. This nonsense of Government lending itself money and competing against itself simply won’t solve the problem.

Spot on Navigator, but you’re missing the fact that the cattle have to be counted first, and there are 12 of them but only ten fingers to count with, so it’s taking a lot longer to get around to this challenge! Bear with us, we have time on our side because the sun is blessing the ANC by still coming up every day!!!!

Someone must explain to ‘them’ what a monopoly is.

Minister Gordhan lacks any substance, has a track record of being the Zupta CFO. His only positive attribute is that he is a slick (and slimy)eloquent salesman.

Competition is something where the buyer has choices i.e Pick n pay vs Checkers not Pick n Pay Umhlanga vs Pick n Pay Durban North!! So power stations competing with one another achieves NOTHING!

Splitting a hopelessly overstaffed( World BAnk said 65% -lets make it half) piece of rubbish into 3 simply creates 3 head offices with more dead wood at the trough, more lack of controls for buying, less focus on debt collection from broke municipalities and -most important-more stealing.

Pravin-please retire and go read the memoirs of Marcus Wolf

Yup – for instance SAA split into flying and airports. Airports now makes big profits and SAA bigger losses. Nothing has changed! (Except more office jobs, as you said)

Isn’t it that little board game?

Apparently the DA arrange for a Cape Town addition

Yes it is.

But their version does not have the “GO STRAIGHT TO JAIL” section.

Dividing one big pile of poop into 3 smaller piles does not mean you will have less poop when it is done. Get rid of it as fast as you can and replace it with gold – piece by piece.

But then you can employ 3 people to look after the 3 pieces of poop instead of just 1.

Government creating jobs in action.

It’s the immutable Physical Law of The Conservation of Poop.

So eventually we end up with 3 boards, their attendant staff, offices and perks like housing, cars etc etc – Just love the opportunity for further cadre deployment Ne!!!

This whole thing is just a smokescreen to con Moody’s and the ignorant taxpayer who will be expected to keep supplying money to steal.

The simplest and most essencial cost cutting measure is the bloated and overpaid labour force if they are trying to run it like a business.

No talk of that so who in his right mind thinks they are serious about fixing ESKOM. Come on man. Why even analyze it any further. Don’t waste your time.

Agree, without significant and deep labour force reduction, there is no turnaround for Eskom.

Mmmm I so agree with u. I dont think though that Moody’s is stupid and nor are we the taxpayers – we’ll see (unfortunately)

This one had me ROFL: “The paper states that the government is considering creating two or more generation units, in order to increase “intra-company competition amongst the generation subsidiaries and drive efficiencies in generation.”
This is the kind of tragicomedy that plays out when bureaucrats and cadres attempt to decode and apply free-market principles to the self-created apocalypse.

According to Eskom board member and BUSA CEO Busi Mavuso the power stations are held together with sellotape and prayers. I simply cannot see viable units being created from these.

Too many plans, but little or no action and implementation. And then we say that Eskom is essential and of great importance to SA and its economy.

I wont hold my breath for this

Have you ever had that funny feeling?

Feels like someone pushing a prickly pear up your b..!

Got that feeling right now.

No, I’ve never had that “funny” feeling. Seems you have. Good luck with that.
🙂

The government are experts at making it APPEAR as if they doing something while actually doing nothing at all. No real fundamental change, just putting lipstick on a pig.

Except that this proposes getting more pigs: a new state-owned company (pig) for the transmission function, additional pigs for the generating functions, bailouts for municipal pigs for distribution, most likely more pigs for additional government administration functions.

Then there will be a shortage of lipstick, so that warrants a pig lipstick industry…

Pravin is really showing his outdated thinking. Whilst transparency of each division’s efficiency and effectiveness is important, market based competition can be really unhealthy and counterproductive in a sector where there is: declining long run costs, environmental externalties, opportunity for skills transfer and large intergenerational transfers of assets.

A much more simpler and less cadre intensive system would be to use Public Private Partnerships where certain responsibilities are outsourced rather than the entire service model. Those private partners that can build, maintain and/or operate more efficiently than the others would be rewarded through higher profits whilst the externalities, pricing and funding issues should be centralised, co-ordinated and driven by a higher purpose rather than simply commercial profit which can be ineffective. Social Security funding like that used in the Roosevelt’s New Deal or the basis of Hindu Samsara work a lot better than private funding when it comes to intergenerational assets.

I am with the EFF on this one the Ghordan’s (Ketso and Pravin) appear out of their league and in serious need of spiritual guidance.

Nothing will change. This idealistic approach cannot even be called a plan. Government poor at implementing anything. All the effort should rather go into fixing the operational issues, not splitting up a problem into 3 parts. Load shedding will remain and with global recession around the corner, Eskom will not be able to save the SA economy. Sorry, just being realistic.

There are a few positives in the Minister’s presentation:
1. Beginning of an undertaking as per Thuma Mina SONA.
2. Unbundling ESKOM to simplify business units.
3. Introduction of competition into the space.

Poor things:
1. Still a long way off the intended point.
2. Contrary to FM’s Economic Recovery Plan, giving an impression the right hand doesn’t know that the left hand is doing or basically a confused governance system.
3. Transmission Subsidiary to continue with the current ineffective expensively priced electricity which is a combo of coal and IPPs.
4. The new governance structure will cost a fortune on top of what is currently paid to the existing top structure of ESKOM.
5. Restructuring does not remove ESKOM’s debt of over R450bn, it still has to be repaid. So why the mambo jambo juggling?

Viewpoint
Can’t trust a Minister who interferes so much with daily activities in an SOE but won’t take accountability for downfalls. Mavuso made a few scathing points the other day regarding ESKOM woes. There are many. This long expensive restructuring ain’t the solution. One other interesting observation is that nuclear was previously rejected as part of SA’s energy plan. It now is part of IRP. What is really going on here? Is it because it was previously mentioned by former President Zuma?

So tax payers continue paying for the malfunctioning Medupi? Gordhan is so past his sell by date (also with SAA) that Ramaphosa should get rid of him in cabinet, never mind BACK him!
Mboweni is the one who deserves presidential backing.

He seemed to be OK as tax collecting burocrat – therafter it was a slippery slope of commie economics!

Sure, especially since he too doesn’t seem to play 100% open cards with the public; see Sake Rapport, 3 Nov

“Promote innovation and entrepreneurship, drive economic growth in the country, increased competition in generation, and drive compliance with environmental legislation and policy”. This is just a lot of business school waffle to fool the citizens of S.A. and the ratings agencies.
The Corrupt Eskom in whatever guise, doesn’t fool anyone.

varkinhell….the socialist said nothing

Still the same debt, same operational costs, same technical problems, same BEE contracts. What is the splitting of Eskom supposed to achieve?

It means you can put all your current debt into 1 of the 3 entities. This then leaves another 2 entities that can also incur debt with government guarantees.

Very few South African’s would take the time (or possibly lack the basic math skills) to add the 3 entities combined debt together and realise the full extent of the problem in a year or two.

The government will enforce and entrench this split as three totally separate and independent run and managed entities, when in reality its still one ESKOM.

So we all know that Eskom can’t repay its debt without government support. Now giving all Eskom’s debt to one entity with an even smaller income will require even more government support.

Umm, and let’s not forget SOE’s will not get bail-outs anymore but loans which have to be repaid with interest. Repaid how?? So the tax payer must now lend money to bankrupt SOE’s?? Are you kidding?

Mboweni says citizens must pay for services such as e-tolls. He did not mention the R 18 billion due to Eskom from Soweto, that’s a lot more than what is owed to Sanral.

End of comments.

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