After 100 years of Eskom, SA’s energy future hangs in the balance

ANALYSIS

Eskom is 100 years old. The power utility’s not-so-celebrated centenary comes a week after the government threw it a long-wished-for lifeline in the form of a R254 billion debt relief package.

The debt takeover promises to alleviate the extreme pressure on Eskom’s balance sheet — which has fed into a 15-year energy crisis, threatening to break the back of the country’s already fragile economy.

The treasury’s proposed debt relief, which has a number of conditions attached to it, is also aimed at “aiding the restructuring of the electricity market to help South Africa establish a stable, uninterrupted power supply as it transitions to a clean energy future”.

But analysts have warned that this and other interventions to restructure the country’s electricity market do not guarantee energy security. This is as privatisation imperils South Africa’s energy sovereignty, leaving consumers at the mercy of the market’s whims. 

The push for privatisation does not bode well for the next 100 years, during which the country will probably continue to struggle with meeting electricity demand.

‘Privatisation of a special type’

The debt relief package comes with the condition that Eskom concession all power stations deemed viable for resuscitation to the private sector. A concession allows an entity to operate a plant for a defined period, collect revenue through the tariffs, sell to the system operator, all while maintaining the plant according to defined parameters and output. 

Concessions, according to energy economist Lungile Mashele, are very common — especially where the utility faces a financial deficit. 

The Alternative Information & Development Centre (AIDC) has called the condition “privatisation of a special type”. Corporations, the AIDC said, will make a guaranteed profit with no risk, while the public will have to absorb all the risks should the company run into trouble.

The concessioning is not the first step towards the privatisation of South Africa’s energy sector, which has also been reformed through the introduction of independent power producers (IPP), tasked with leading the country’s transition to renewables.

Eskom’s privatisation was first floated in 1998 with the publication of the Electricity White Paper which flagged “significant shifts” in energy policies internationally after the oil crisis in the 1970s, including the view that national energy industries no longer need to be protected from competitors. “Greater emphasis is being placed on commercialisation, corporatisation and, in some cases, privatisation,” it noted.

Established in 1923, Escom — as the utility was named back then — was at the time not required to operate at a profit and was exempt from paying taxes. In its first three decades, the electricity delivered by Escom was generated by a number of different bodies, including 40 municipalities and 18 private companies, including the Victoria Falls and Transvaal Power Company (VFTPC).

One of Escom’s first power plants was built and run in partnership with the VFTPC, which the state utility was eventually able to buy in 1948 thanks to government support. Escom also took over the generation capacities of municipalities in the mid-1940s.

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Between 1923 and 1948, Escom was led by its first chairperson, Hendrik van der Bijl, an industrialist who also laid the foundation for the establishment of Iscor, the state steel company that was eventually privatised, unbundled into what is now ArcelorMittal and Kumba and sold. 

ArcelorMittal went on to sell steel to domestic companies at prices determined by the international market. The higher prices led to a number of companies having to close shop, hamstringing the country’s industrialisation.

During the 1960s and 1970s, Escom rapidly increased its installed capacity, requiring that it borrow more on the foreign market. The utility’s costs came under pressure in the latter decade as the oil crisis sent the price of electricity on an upward trajectory.

The parastatal also incurred huge debt and its new build programme, which included South Africa’s nuclear plant Koeberg, also caused it to hike tariffs.

Corporatisation

Against this backdrop, in 1983 the government appointed the De Villiers Commission to investigate matters relating to costs and Escom’s plant performance. The commission recommended that Escom’s “public interest clause” mandate be scrapped and that the utility operate on a commercial basis. 

Under a new name, and based on recommendations by the commission, Eskom rapidly cut spending, stopping the construction of new power stations, and reducing its workforce. 

The parastatal’s diminished capacity led to the authors of the 1998 white paper warning that South Africa’s electricity demand would exceed supply by 2007 — the year that would go on to mark the beginning of the country’s load-shedding crisis.

In 2000, the newly established department of public enterprises developed and delivered  a policy framework that underlined the importance of corporatising Eskom and unbundling its generation, transmission and distribution businesses into three separate entities — a proposal contained in the 1998 energy policy white paper. 

By 2001, Eskom was fully corporatised. The government has been careful to avoid the word “privatisation”, which has seen the ANC being taken to task by its alliance member, labour federation Cosatu.

In 2003, the government began to revise its plans to privatise part of Eskom’s generation assets, although the utility’s restructuring was still on the table. This was solidified after the ANC’s win in the 2004 elections, when it said it would not sell Eskom’s core assets.

That year, the cabinet approved private-sector participation in South Africa’s electricity industry and decided that future power generation capacity will be divided between Eskom and IPPs, although the policy wasn’t fully put in place until years later.

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Distress

The AIDC’s Dominic Brown points to the decision to corporatise Eskom as being at the heart of its current operational and financial distress.

In the late 1990s, Eskom’s mandate shifted from having to deliver electricity at an affordable cost to the utility having to become a profitable business. The utility lost its tax exemption status and adopted the full cost recovery model, requiring end-users to cover the costs of the generation and supply of energy.

“This created a problem. Because the majority of the population cannot afford to pay for electricity, Eskom invariably is unable to raise sufficient revenue through selling electricity,” Brown said.

“When you couple that with debt taken out in foreign exchange, for example for Medupi and Kusile [power stations], what you get is a situation in which Eskom is unable to meet its operational costs over time. And it turns to more debt to cover its debt service costs.”

The concessioning stands to put even more pressure on South Africa’s already cash-strapped electricity users by ratcheting up prices — making energy poverty even worse.

“For citizens it means efficiency and operational plants,” Mashele said, but also higher prices. Concessionaires will not carry losses for long and will either pass these on to consumers or the concession owner.”

According to Mashele, energy privatisation will not work in South Africa, where high levels of unemployment and inequality threaten to undermine the ability of private companies to maximise profits.

Because South Africa’s energy demand outstrips supply, private energy suppliers will inevitably drive up prices and the National Energy Regulator, which determines tariffs, may not be strong enough to counter a strong private sector push, she added.

“Privatisation starts off well — cheaper, efficiency, competition etcetera. However at some point, the big players cannibalise the smaller players, drive up prices and you’re left with a few entities that become a monopoly again,” Mashele said.

Doomed to fail

Privatisation efforts have failed elsewhere in the world, especially in the wake of the Russia-induced energy crisis, which has shocked markets, causing prices to soar to levels last seen during the 1970s.

Last year, the push for energy nationalisation gained traction in the United Kingdom amid towering energy costs. In October 2022, France began the process to fully nationalise nuclear power group EDF amid Europe’s scramble for greater energy security.

More recently, last December, the Ugandan government said it would renationalise its energy sector, resolving to do away with its concessionaires — the international Umeme consortium and Eskom. 

Eskom Uganda is the largest generator of energy in the East African country. In 2002, the energy company signed a 20-year concession under a government regulatory framework which won’t be renewed when it ends in March year.

There are clear signs of a trend of countries reclaiming their energy sovereignty, Sean Sweeney, the coordinator of the Trade Unions for Energy Democracy, said. At the heart of these renationalisation efforts is the failure of the IPP auction model, he said.

During the 1990s, the World Bank and other international financial institutions advocated for power sector reform in the developing world through the “Washington Consensus”, which paved the way for independent power producers.

In South Africa, the transition to renewables has been put in the hands of IPPs. In August 2011, the department of energy announced the renewable energy independent power producer procurement programme (REIPPPP), a competitive bidding process for renewable energy. The programme was, however, held back by numerous delays. 

According to Sweeney, energy auction models such as the REIPPPP have created a series of disorderly and ineffective transitions. He said the backtracking on energy privatisation in a number of developing countries signals a crisis of this model, which can end up dissuading investment in cheap renewable energy.

By locking itself into this model, South Africa will endure a progressive loss of energy sovereignty, Sweeney said. 

“South Africa will be dependent on the technologies manufactured in Europe, China and the United States. And those IPPs, the source of those technologies, will be able to demand their own price, knowing that Eskom can no longer provide 90% of the electricity … So that means less energy sovereignty and a deeper debt spiral for Eskom,” he said.

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