/ 17 September 2010

Fix our energy mess first

Fix Our Energy Mess First

The ruling party and its alliance partners head to Durban next week for an expected showdown on the nationalisation issue.

Papers have been prepared and debating points sharpened. As the big shootout nears, vast amounts of news space are being devoted to what is increasingly seen as the defining issue of our time. The voices of rationality appear to have been all but drowned out.

One is that of Reserve Bank governor Gill Marcus, who told a university audience in Soweto that there were more pressing matters, notably energy, to consider before nationalisation. But if you do a word search on the collective position papers the ANC, Cosatu, the South African Communist Party and the ANC Youth League have prepared ahead of the ANC’s national general council (NGC) meeting in Durban, you’ll find that energy gets a cursory mention at best.

The ANC’s paper wants a focus on reducing emissions and energy intensity. Cosatu wants redistributive policies to target areas such as water, health, education and energy. It also wants policy to make services in these areas available at affordable prices.

On Eskom it prioritises maintenance and the extension of electrification, as well as exploring alternative energy sources in rural areas. Not reflected in these papers is the fact that while the lights are still on, the energy sector is in crisis — deep crisis.

Eskom is going ahead with building two of the biggest power stations in the world, Medupi and Kusile, as part of a R400-billion capital expansion programme. This is either incredibly brave or stupid, because it does not have the money to do the job.

The power utility posted a profit of R3.6-billion when it reported last week, a nice turnaround from its previous loss of R9-billion. But the profit hides its parlous cash position as it tries to fund a truly ambitious capital expansion programme without having the money to finance it.

For the ordinary person it would be like buying a house because you thought the bank would fund it, only to find out, after having begun extensive, expensive renovations, that the bank will not put up the cash. Eskom has been looking to its bank, the national treasury, to provide more cash and guarantees so it can raise the R190-billion or so shortfall it faces to fully fund Medupi and Kusile.

The treasury continues to issue statements saying it will support and back Eskom, but it is yet to sign off on the loans and guarantees Eskom needs to get itself out of the dwang. Observers say that this is because by pumping (yet) more money into Eskom, the treasury will be fixing Eskom’s broken balance sheet, but risks breaking its own balance sheet in the process.

The government hardly wants to end up with a credit rating downgrade for itself in the act of assisting Eskom with a rating upgrade, does it?

My information is that the treasury is tired of Eskom coming back to the fiscus each year for some kind of top-up or bailout. It wants Eskom to pay its own way. This means that it wants cost-reflective tariffs where consumers pay the true cost of electricity, including the costs of building new capacity.

The idea is also that higher user charges will lead households and industry to use electricity more efficiently. But the treasury cannot make this decision by itself. It needs the energy department to give political leadership and for energy regulator, Nersa, to agree that electricity tariffs have to become cost-reflective sooner rather than later.

This will need a much wider debate about the type of energy mix we need, what levels of subsidy to the poor are justified, how electricity theft can be countered, what revenues the municipalities can justifiably cream off to run non-energy activities and whether BHP Billiton, one of the world’s richest companies, should continue to be treated like the indigent poor in the pricing it receives.

In truth, such a conversation is already happening, but largely quietly and behind closed doors, developing what is called the Integrated Resource Plan. The process is understood to be nearing completion and is intended to be made public soon.

My information is that the government intends ratcheting up the debate about our energy future. It would have done well to do this ahead of the NGC meeting so that discussions could be more tuned in to the real crisis the country faces.

But a rational outcome of this process, in which the country’s energy needs are meant to be debated by all stakeholders, was actually in part prejudged by Eskom as far back as December 2007, when it decided to award, a contract for six giant boilers to Hitachi Africa, a company that has the ANC’s investment arm, Chancellor House, as a shareholder.

The decision was made as part of a “fleet strategy”, whereby the contract to supply six boilers to Medupi was extended to Kusile. The decision is justified by Eskom on the basis that it was concerned that under conditions of rampant economic growth at the time, it would not find vendors who were prepared to do the job and the country would run out of electricity capacity.

But the decision meant that Eskom committed to expenditure on both power stations even though it did not know how they would be funded. It has since committed to R90-billion of contracts in the case of Kusile, of a total estimated cost of R145-billion.

Cancellation costs for Kusile are estimated by Eskom financial director Paul O’Flaherty at R30-billion. That’s a lot of money to walk away from in a developing country with as many pressing social needs as South Africa has. But what this means is that in 2010 we are trying to decide rationally the best energy options for the country, but are making these decisions with the noose of a 2007 legacy decision around our necks.

Where we could be rolling out much more green power (the little that we are offering to the market via the Refit tariffs is hopelessly oversubscribed), diversifying our energy mix and championing energy efficiency, we are committed to building another giant smokestack in the sky.

Eskom has tried to flog a share in Kusile to anybody who it thought could be remotely interested, but it is too rich and no one is biting. Most participants in this debate who I have canvassed believe that Kusile should go ahead, as growth projections suggest the country will need it.

One issue that should concern the treasury is how it puts a cap on Kusile’s costs. Some observers think that its ultimate cost could be close to R200-billion. Eskom is the project manager, meaning that delays and cost overruns are for its account.

How do the treasury and, for that matter, Nersa, ensure they do not continue to be a fountain of funds for Eskom? But, in the meantime, let’s all go to Durban and debate nationalisation. Let’s ignore the fact that our (nationalised) state electricity utility is in a monster mess that needs to be fixed if we are to run any kind of economy, nationalised or not.