Light at the end of Eskom tunnel?




Chef extraordinaire and Finance Minister Tito Mboweni put down his cooking spoons long enough this week to issue a spring surprise, a 77-page document written by the treasury that seeks reforms large and wide to put what has been a moribund economy on to a new growth trajectory.

There is hardly a sector that does not get the attention of the treasury and, in the main, the mooted reforms steer away from advocating privatisation and job cuts to save the day, measures which are likely to run into significant headwinds from the governing party’s trade union allies.

Mooted reforms across various sectors include beefing up the Independent Communications Authority of South Africa so that it can bring down data and voice prices, enforcing local loop unbundling, making banking licences less onerous, decreasing red tape and other barriers to entry for small business, promoting labour-intensive jobs, allowing installers of rooftop solar to sell excess electricity into the grid and encouraging the self-generation of energy.

The treasury document, Economic Transformation, Inclusive Growth and Competitiveness: Towards an Economic Strategy for South Africa, is not formal government policy, but has been circulated to ministers and the public has been invited to provide feedback. It estimates that the envisaged reforms could bring economic growth of two to three percentage points and create a million new job opportunities.

We know there is no solution to the country’s woes without fixing the Eskom problem. An internal Eskom presentation to executive staff, which was leaked this week, warns: “If we do nothing, Eskom will collapse and bring down South Africa. An Eskom collapse would have devastating consequences for South Africa, [including] a sharp depreciation of the rand, a downgrade of credit rating to junk status, a sell-off of South African bonds and an international bailout.”

The presentation says: “Eskom ran out of cash and came close to complete collapse on multiple occasions in 2019. Company debt represents [about] 17% of total sovereign debt. Eskom’s importance to South Africa is the only reason why the company still exists.”

Mboweni’s document proposes that Eskom’s coal-fired power stations be sold, possibly through a series of auctions, to raise R450-billion and wipe out Eskom’s debt.

The auction would include the power station, all its obligations (staff contracts, coal-supply contracts, supplier contracts and environmental obligations), together with a power-purchase agreement (PPA) at a predefined, power station-specific tariff.

The PPA would entail new power station owners to supply a specific amount of electricity annually over the remaining lifetime of the power station to the single buyer office at Eskom at a predefined tariff. “Assuming cost-reflective tariffs, the sale of these assets could raise around R450-billion,” the treasury said. It references an article published by EE Publishers by energy specialists Tobias Bischof-Niemz and Johan van den Berg, who write: “There is a simple way to stabilise electricity prices, cast off Eskom’s crippling debt and boost South Africa’s credit rating, while maintaining public sector control of critical assets in the electricity sector.”

The Eskom generation fleet consists of 15 coal-fired power stations. All have a limited lifetime, with scheduled decommissioning dates to start soon and end in 2050 or later. “The value of the power stations does not stem from their steel and metal, but from the fact that they are able to produce electricity over the residual lifetime of the plant. If we can manage to sell the Eskom coal fleet at the ‘net present value’ of this residual lifetime value, we will be able to raise enough money to pay back the Eskom debt,” the authors said.

The duration of each PPA would be linked to the planned decommissioning date, but capped at 20 years in light of the fact that by then energy from new solar-photovoltaic, wind and batteries will be significantly cheaper than energy from existing coal-fired power stations.

Jobs would not be lost under this proposal: “In terms of the bid conditions, staff and existing coal contracts would be maintained as before, and would be transferred to the buyers,” Bischof-Niemz and van den Berg said, adding that it might also be possible to finance equity for trade unions in these investments.

Organised labour stands to benefit from such a plan, in that there would be no Eskom (or state) collapse and pension funds could be securely invested in certain cash flows.

If this sounds like privatisation, think again. The new owners are likely to be those already highly exposed to Eskom, the Government Employees Pension Fund (GEPF) through the Public Investment Corporation (PIC), which holds about R90-billion in Eskom bonds, being a case in point.

“There is every possibility that public sector entities like the PIC could invest in the auctioned Eskom power stations, either through equity or debt, or a mix of both, and pay a specialised service provider to operate the power stations on its behalf,” Bischoff-Niemz and Van den Berg said.

“They would, in fact, be exchanging an open-ended and precarious Eskom bond for an equity investment in a long-term infrastructure asset with a very predictable, long-term return — a much better position to be in.”

These authors say that in this way the PIC may be able to significantly reduce the risk profile of its local investments. Because the electricity price would be fixed per station, inefficiencies at any of the coal power stations would lead to a lower profit for the owner, but would not affect the electricity price and the scope for corruption would be significantly curbed.

The treasury would be rid of a multibillion-rand Eskom headache and the utility would be able to concentrate on what it can do well — designing, building and maintaining the grid and operating the power system as a whole.

In June, Greenpeace published a similar plan to restructure Eskom, which would also allow the country to be able to move from being a carbon emissions pariah into a global leader in renewable energy. The plan also argued for the closure of the oldest coal plants, auctioning the others and decommissioning all coal stations plants by 2040.

Greenpeace suggested that the investors in the auctioned power stations would be public funds, but raised the possibility of private funds being invested too.

How selling the coal-fired plants would work

According to energy specialists Tobias Bischof-Niemz and Johan van den Berg, existing coal-fired power stations can be grouped into three categories.

Category 0 comprises the oldest stations that have been calculated to be more expensive to keep than to shut down immediately, namely, Camden, Hendrina, Komati, Grootvlei and Arnot. Category 1 would include most other stations, that is, Kriel, Matla, Duvha, Tutuka, Lethabo, Matimba, Kendal and Majuba, and category 2 would consist of Medupi and Kusile.

Category 0 power stations would remain with Eskom for controlled, immediate decommissioning over the next five years (in synchronisation with Medupi and Kusile coming fully online). Category 1 and 2 power stations would be sold by Eskom in a staggered manner, over the next five years.

One category 1 power station could be sold first as a trial. After adjustments to the bid rules to take account of lessons learnt, the remaining power stations would then be auctioned, starting with the remaining Category 1 power stations, in ascending order of their remaining lifetimes.

Category 2 power stations would be sold in a package with higher tariffs — and resulting higher margins — to take into account the fact that enough capital must be raised to be able to pay back the associated loans on Eskom’s side. They would also be sold last, after being fully commissioned.

The power station-specific power-purchase agreement tariff would be high enough to cover all coal, employee and operational costs, and leave a margin. The present value of that margin over the lifetime of the power station, minus the present value of the expected rehabilitation cost, is the amount of money that can be raised through the auction.

The purchase sum would be payable upfront as a lump sum. Those prospective buyers able to operate most efficiently would be able to bid the highest, and will win.

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Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.

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