​Divide and conquer, Eskom

Electricity pylons at Eskom's Koeberg nuclear power plant on January 9 2015 in Cape Town. (Nardus Engelbrecht, Gallo)

Electricity pylons at Eskom's Koeberg nuclear power plant on January 9 2015 in Cape Town. (Nardus Engelbrecht, Gallo)

ANALYSIS

The process of grid liberalisation is already under way in South Africa. But rather than being a threat, it presents opportunities for all participants in the energy market, particularly Eskom.

Rising electricity prices and cheaper alternatives are the cause of a considerable increase in investments in energy efficiency and embedded generation. The past few years have seen high-profile users such as the V&A Waterfront in Cape Town, long-haul company MAN Truck & Bus and Johannesburg’s Clearwater Mall install significant generation capabilities.

This trend has been helped by the major metros and several smaller municipalities putting in place systems to allow embedded generation, a dozen of which allow some form of remuneration or benefit to those that generate in excess of their immediate need.

The recent publication of the NRS 049-2, or smart meter specification, will allow municipalities to add significantly to their ability to adopt embedded generation and reduce the cost for private users of connecting and contributing excess energy to the grid.

This move towards an energy market made up of multiple generators, buyers and sellers is the antithesis of South Africa’s historical monopoly model. Although a shift towards distributed generation and grid liberalisation could be viewed as a threat to monopoly energy utility Eskom, international trends indicate an opportunity to transform the utility’s increasingly outdated business model.

A core problem with Eskom’s combined generation and transmission business is that it creates internal conflict for capital resources. The utility’s primary source of revenue is from the sale of energy, so there is an incentive for Eskom to invest heavily in generation. This is amplified by the need to keep the lights on. Unfortunately, this can be at the expense of the transmission side of the business.

Last week, Energy Minister Tina Joemat-Pettersson said in response to comments about the Integrated Resource Plan that the growth of renewable energy must be limited because of constraints of connecting to the grid.

The second significant flaw in Eskom’s combined generation and transmission model is that it makes it difficult to ascertain the true cost of generation. Cost overruns affect the entire business because generation and transmission are in the same pot.

In the case of large-scale generation infrastructure projects, such as the Medupi and Kusile power stations, there are well-founded fears that the unanticipated cost and time overruns will impact on Eskom’s ability to raise capital for necessary transmission and distribution projects.

The solution is for the energy department to liberalise the market and split Eskom’s business into its two constituent parts: generation and transmission and distribution. This would reduce large-scale procurement risks and remove internal conflict over where money should be spent.

This is important with regard to projects not owned by Eskom, such as those in the renewable energy independent power producer procurement (REIPPP) programme or gas and coal independent power producers (IPPs) that have experienced transmission infrastructure issues.

Separating the generation and wires business would make it possible for Eskom’s generation arm to compete with IPPs in the gas and renewables market. As it stands, Eskom is understandably not permitted to compete in the IPP space because it is a buyer and a seller of energy. The result is that the utility is limited in terms of the generation capacities available to it, primarily coal and nuclear.

Separating generation and wires would allow Eskom generation to compete on a like-for-like basis with renewables, gas and coal IPPs. This would force Eskom to be transparent about nuclear and coal costs as any generation project would get a fixed price, in the same way that REIPPP projects do.

This would alleviate fears about cost overruns as additional costs would affect Eskom generation and not the transmission network.

Introducing competition into the generation market would likely result in a reduction in sales for Eskom. But it would shift the risk of decreasing sales — caused by other sources of generation, such as rooftop photovoltaic power — away from the transmission business.

If South Africa continues to fight the natural process of grid liberalisation, Eskom and municipalities stand to lose more of their “good” clients — heavy industrial users and unsubsidised private users — to more cost-effective embedded generation solutions. This has already started happening and is unlikely to slow down.

If, however, we embrace the process and the department of energy liberalises the market, Eskom and municipalities have the opportunity to develop strong and profitable wires businesses and maintain a smaller, but sustainable generation business.

The choice is ours.

Bruce Raw is the energy programme manager at NGO GreenCape.

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