/ 17 January 2020

Free up energy before the budget

Graphic Biz Cyril Cooker Website 1000px
(John McCann/M&G)


President Cyril Ramaphosa’s address to 400 business luminaries in Sandton this week, where he promised to cut red tape so businesses and households can come up with their own energy solutions, could be seen as a mini State of the Nation address.

If he follows up and announces that Mineral Resources and Energy Minister Gwede Mantashe will immediately issue the necessary declarations, we will all believe the government is actually leading rather than continually pontificating on the need for reform without doing anything about it.

The energy crisis so threatens our future that Business Unity South Africa’s (Busa’s) Sipho Pityana this week called for Ramaphosa to lead rather than endlessly look for consensus, saying decisive action was necessary to address the “unprecedented economic crisis” the country was facing. Pityana said urgent action was needed to turn what was the longest downswing since World War II.

“We have to do all we can to stave off a sovereign rating downgrade,” Pityana said.

Ramaphosa finds himself in a pressure cooker as business calls for urgent intervention to end the electricity crisis. Finance Minister Tito Mboweni appealed in early morning tweets for structural reforms before the budget next month, lest the country be downgraded to junk.

But there is discord at the highest levels of the ANC. Heavyweights are leading an attack on corruption buster Pravin Gordhan, the minister of public enterprises and a key Ramaphosa ally, by calling for Eskom to be transferred from his department to the energy department.

A Busa sub-committee has called for energy regulation to be taken over by Ramaphosa. He dismissed the idea, telling Busa delegates that he could not be the “minister of Eskom”.

Ramaphosa’s speech to Busa’s indaba stressed the need for economic change, he saying that 2020 would be the year of reform.

But these policy pronouncements need to translate into action, especially of the kind Mboweni would like to be able to use when he tables the February budget.

The Minerals Council’s Roger Baxter said in a statement ahead of the Busa indaba that “Eskom is in a significant crisis and cannot guarantee reliable electricity supply to meet the country’s needs. Eskom has been indicating that it needs two years of permanent stage two load-shedding to give it the space to fix certain power stations [including Medupi] back to a better reliability level. This will be disastrous for the economy unless urgent steps are taken in the short term to encourage additional private supply from existing and new sources.”

Baxter said the government needs to urgently help bring on stream and licence new private sector power options for embedded generation and private generation for self-use, but which is fed through the national grid.

“In addition, government and Eskom should be contracting in, at the least cost possible, any extra renewable energy from existing wind and solar plants that are sitting idle. Government needs to urgently tackle red tape which is holding up significant additional power that could be brought on stream to bridge the gap.

“This red tape includes [Integrated Resource Plan] exemptions, [national energy regulator] Nersa generating licences (especially over 10 megawatts), environmental and land use authorisations, technical barriers and agreement to enable wheeling on the national grid at nominal cost.”

Ramaphosa seems to have listened to this advice. He told Busa delegates that the government was ready to embrace self-generation by households and business as part of the solution to addressing the electricity deficit, which was contributing to an “economic crisis” of low growth and rising unemployment.

Action would be taken to remove the obstacles to distributed-generation plants, because “we cannot stop technology and we cannot stop the future from arriving”, he said.

Mantashe has come under increasing pressure to allow individuals and businesses to generate their own power. He has drawn criticism for appearing to be pro-coal, given his reluctance to free up energy provision. Ramaphosa needs to ensure that the rules on own power provision are eased up and in place before the budget.

He told the Busa indaba that one of his neighbours had installed solar panels on the rooftop of his house and had told him that, if allowed, he would sell his surplus power to Eskom.

So successful has rooftop solar been in Australia, that 2 130 megawatts of this power was added to the grid in the past year. Energy expert Chris Yelland said this would be sufficient in South Africa’s case to reduce two stages of Eskom load-shedding during a working day.

Eskom, meanwhile, appears to have thrown in the towel, presenting its solution to the crisis by suggesting it provide no more than 25 000 megawatts of power, coupled with on-going load-shedding, over the next two years.

Its nominal fleet capacity is 45 000 megawatts.

Eskom warned in an application to the high court this week against Nersa that if it is not granted the tariff increases it wants from March this year, its finances might collapse, triggering a national crisis, because both the state’s credit ratings and consumers’ well-being would suffer.

The power utility has applied for interim relief, asking the court to grant it a 16.6% tariff increase for the current year and 16.7% increase for 2020/2021, Fin24 reported.

“Genuinely, it is a national crisis. We will submit to you, your worship, that there is a very real risk that if we have to wait until the start of 2021/2022 financial year, the country may have collapsed by then,” advocate Matthew Chaskalson told the court.

Eskom is far too old and established to be suckling at its parent’s bosom, but because its finances and operational abilities have tanked, it has increasingly turned to the government breast for sustenance.

The parent, alarmed that this adult, which should be standing on its own feet, said it would set up a chief restructuring officer, who would report to treasury and be charged with coming up with a plan to restructure Eskom’s finances.

After months of nothing happening, a restructuring officer in the person of South African Institute of Chartered Accountants chief executive Nomvalo Freeman was appointed in July last year. Since then, at least from a public point of view, nothing has happened.

Freeman, described by Pityana as an “underwhelming” choice, has given no interviews and made no public statements or reports on possible solutions.

At the same time various proposed scenarios to reduce Eskom’s debt and relieve the over-burdened fiscus have emerged.

One called for Eskom’s power stations to be separately auctioned off to raise R450-billion to cover Eskom’s debt; another mooted accessing a super climate fund in exchange for Eskom retiring its emissions-heavy coal fleet over time; a third wanted a strategic equity partner to be brought in; another argued for those holding Eskom debt to swap this for equity.

Ramaphosa said in a statement while the United Nations climate summit was in session in September last year that a proposed $11-billion just transition was being developed, which would be the largest climate finance deal to date, and which would have a significant effect on emissions.

Trade union federation Cosatu, alarmed that the country’s deteriorating finances as set out by Mboweni in the medium-term budget, in December suggested that R200-billion in equity be put into Eskom by the manager of state pensions, the Public Investment Corporation (PIC), partly as a debt-for-equity swap, with a further R50-billion by development finance institutions (DFIs).

The thinking was that, although this constituted a risk for the pension funds and DFIs, it would get the country’s runaway debt under control and keep it out of the clutches of the International Monetary Fund.

Cosatu’s parliamentary officer, Matthew Parks, says he remains hopeful that a solution such as that presented by Cosatu be in place before the February budget.

Matthew Huxham, of the London-based think-tank Climate Policy Initiative (CPI), says “we all know that Eskom’s financial situation is unsustainable and continues to threaten the South African investment grade rating — we have to assume that Moody’s will downgrade at the next review in March unless there is a credible solution on the table”.

Huxham says a credible solution must tackle corruption, significantly reduce debt levels, change the management culture, keep the government invested and share the pain wider than the public finance institutions and DFIs.

He adds that a just transition be in place, and that there be no expropriation or reneging on contracts. A solution “needs to be seen as a compromise agreement taking into account the wishes of all of the stakeholders, not just pushed by one particular interest group”, he says.

“The PIC is the holder of the majority of Eskom’s unguaranteed debt and so it would make sense that, it like everyone else, might need to take some of the loss associated with restructuring Eskom (that is, allow some of its debt to be converted to equity) just as the DFIs might do in the proposed climate finance deal.

“But in the climate finance deal, the DFIs would be getting something of value in return — incentives on Eskom to decarbonise faster than currently planned. What would the PIC be getting in return under Cosatu’s plan? Or indeed the Development Bank of SA or the Industrial Development Corporation? I can’t see why these institutions would want to take losses unless there was progress on all the other elements as set out in my points above.”

Huxham cautions, though, that even if the right package can be designed, time is in short supply. “There might be value in the equity if there were a clear and enduring plan for the electricity industry in place (resolving all the issues like the municipal bad debts, the single buyer model etc) but it’s unlikely that this will be in place in time.”