Frequently asked questions – Eskom

1. What is this Competition Commission application about?

OUTA is asking the Competition Commission to unbundle Eskom from a vertically integrated monopoly responsible for generation, transmission and distribution of electricity into two distinct, state-owned enterprises – one for generation (“Genco”) and the other for the grid (“GridCo”).

2. Why is this necessary?

There are several compelling reasons. Eskom has become a rogue agent deeply implicated in State Capture and corruption. It has become a very inefficient generator of electricity, due mainly to massive cost over-runs at its new power stations. It is denying Independent Power Producers (“ÏPP’s”) access to the grid by refusing to sign properly procured and very cheap contracts with such. Furthermore, it is diverting money from grid maintenance and upgrades into its new-build activities and all the corruption associated with that. It is working ceaselessly to ensure a nuclear build programme that the country doesn’t need and that will cost between ZAR 2 trillion and ZAR 6 trillion rand, depending on how large the cost over-runs will be. Eskom is pricing itself out of the market with people starting to defect from the grid and making electricity more expensive for those who remain. If Eskom is not unbundled, its flirtation with insolvency threatens not just their power plants but the entire South African grid.

 

Plant Initial capex ZAR billion Estimated final capex ZAR billion Cost over run Initial commissioning date – commenced 2008 Estimated final commissioning date Time over run
Medupi 69 193 180% 2012 (6 years) 2021 (13 years) 116%
Kusile 80 213 166% 2012 (6 years) 2023 (15 years) 150%
Ingula 9 36 300% 2012 (4 years) 2016 (8 years) 100%
Average 215% 122%

3. How is the electricity sector structured in South Africa?

The market is regulated by the National Energy Regulator of South Africa (NERSA). Because Eskom has a monopoly on an essential service (electricity) and can effectively block competition from the market, It is very important that they be policed stringently. This is the task of NERSA.Eskom sells electricity directly to large users and also to municipalities.   The municipalities then on-sell electricity to domestic users after adding a mark-up that is used to cover municipal electricity expenditure and also to cross-subsidise other municipal activities

Eskom sells electricity directly to large users and also to municipalities.   The municipalities then on-sell electricity to domestic users after adding a mark-up that is used to cover municipal electricity expenditure and also to cross-subsidise other municipal activities.

4. Is NERSA trying to resolve the situation?

NERSA may have concurrent jurisdiction on this matter. The South African Wind Energy Association lay a complaint with NERSA about Eskom’s refusal to sign Power Purchase Agreements for winning bidders in the Department of Energy’s REIPPP Programme. It deals only with that aspect and not with the thrust of this application. It is anticipated that NERSA and the Competition Commission will collaborate on this matter.

5. What is the status quo on Eskom’s dominant position?

As it stands Eskom is responsible for over 90% of all electricity generation in the country and has a complete monopoly on the grid. If Eskom is allowed to build approximately 20 GW of nuclear energy its monopoly will be assured into the 22nd century unless they should meet with insolvency.

6. What is the structure that OUTA is aiming for?

OUTA wants a grip operator that is completely independent of Eskom and can thus make objective and rational decisions about what electricity to buy and from whom on the basis of what is best and most efficient for the country. It is OUTA’s conviction that this separation should be effected before any further decisions are made for Eskom to build additional, new power plants to ensure such a decision is objectively assessed and not clouded by corruption.

7. How is Eskom implicated in State Capture and corruption?

The following visual presentation was drawn from the public protector’s “State of Capture” report. It is clear that Eskom should not be trusted with any money until all these irregularities are fully investigated.

Source:  https://www.superlinear.co.za/visualising-the-web-of-state-capture/

8. What is the future price path of electricity?

This is not published by any official source. OUTA’s estimates are given below, based where possible on real figures and OUTA’s expectation of the electricity price increases Eskom will ask NERSA for. All prices below exclude inflation but are expressed in constant 2017 rands.

 

2017 — Electricity price 2021 Electricity Price (Increases already locked in by historical Eskom over-spend) – in 2017 rands excluding inflation 2050 CSIR lowest cost scenario (2017 rands excluding inflation) 2050 Eskom nuclear scenario (2017 rands excluding inflation)
Eskom price to large consumers and municipalities (average excluding time of use etc)  – wholesale  ZAR 0.83/kWh (excl. VAT)  ZAR 1.1 /kWh  ZAR 1.2 R/kWh  ZAR 1.45/kWh (Optimistic)

 

Municipal price to consumers (assuming 100% markups) – “Retail” ZAR 1.66/kWh for residential (excl. VAT)  ZAR 2.20  ZAR 2.40  ZAR 2.90

(Optimistic)

9. Can the electricity price be subsidised to avoid further increases?

Eskom has no retained earnings (financial reserves) as it turned out everything to the government in good years as a dividend. Thus, if electricity prices were to be subsidised, the onus would fall on the tax payer. This would be unfair and would lead to price distortions that would mean that electricity is used inefficiently.

10. What is happening on the electricity front internationally?

The international move in electricity is driven by the twin developments of carbon constraints driven by international climate policy and the dramatic lowering of the cost of renewable energy, especially solar. Many countries are now working towards a 100% renewable energy future. Renewable energy in many parts of the world is now the cheapest source of new power.

At a local level consumers no longer have to buy electricity from a utility but increasingly have the choice to install their own solar power combined with battery storage, making them grid-independent.

In the past, utilities could install long term generation assets on debt in the firm belief that consumers would have no choice but to buy from them for decades into the future. This paradigm has changed fundamentally, meaning that the grid has to provide consumers with better service than an own, off-grid solution would provide – otherwise the grid defection would become an exodus and Eskom would irrevocably enter the utility death spiral. This phenomenon occurs when lower revenue leads to higher prices which lead to grid defection and in turn, higher prices, until insolvency and collapse occur.

Source: Google images “Utility death spiral”

11. How will this application affect the electricity price?

This application is aimed at ensuring the lowest possible electricity price path for the country. The difference between the Eskom nuclear path and the so-called “unconstrained scenario” modelled on request of the Ministerial Advisory Commission on Energy (“MACE”) is approximately ZAR 90 billion per annum for each calendar year up to 2050.

12. How will this application affect grid stability and prevent black-outs?

A “Gridco” that has been unbundled from Eskom would ensure that money dedicated to grid maintenance and grid upgrades is spent on such and not on paying for cost over-runs on new power power stations occasioned by incompetence, recklessness or corruption.

Moreover, such an independent “GridCo” would buy the cheapest power – not just Eskom power at any price to ensure that inefficiently generated power gets sold by a monopoly (this can presently occur).

Grid stability would improve and black outs would be avoided.

Additionally, financial distress in Eskom generation would no longer affect the grid operator directly and the risk profile of the country on generation would be spread over Eskom and Independent Power Producers.

13. Will this open the grid for other suppliers?

In terms of Eskom’s Transmission Licence, they are already obliged to provide grid access to the opposition – but are not doing so. This application will permanently remove Eskom’s conflict of interest, meaning that decisions in future can be made objectively, fairly and rationally.

14. Is Government in support of the proposed change?

Indeed, in broad terms, Government is. The Independent System and Market Operator (“ISMO”) Bill aimed at unbundling Eskom and was passed by Parliament but was allowed to lapse in November 2013. The result was that the status quo persisted. At the time the Minster of Energy also acknowledged the inherent conflict and said that “Eskom could not be player, referee and linesman”. (Refer to: https://www.bdlive.co.za/business/energy/2014/02/19/eskom-no-longer-player-referee-and-linesman-if-new-plan-is-approved). The said Minister promised that renewed efforts would be made to fast-track the proposed legislation to ‘level the playing field’ between Eskom (as the monopolistic utility) and IPPs. This however has not happened.

15. Will I have to change anything as a municipal electricity user?

Municipal/residential electricity users will not be directly affected by the proposed change, other than as described above.

16. Will this improve efficiency/competitiveness?

17. What is OUTA’s view on Eskom’s nuclear ambitions?

OUTA thinks that these plans are misconceived, out of touch with reality and have the potential to cripple our economy for decades. OUTA’s point of view can be seen here.

18. What would the impact of a nuclear accident be?

The Fukushima damage spend was about USD 105 billion. That is a bit more than our annual, national budget. Thus, a single such accident could mean that for an entire year, there will be no police, no public hospitals, no welfare payments and no salaries for government employees.

19. How does Eskom’s recent performance compare with its historical performance?

20. Why is OUTA not asking for privatisation as part of the unbundling?

It is OUTA’s belief that the matter is very urgent and occurs at a time when privatisation is a highly charged and politicised topic. For this reason the interests of the country are deemed to require a speedy route that avoids unnecessary contestation.

21. What structural and strategic planning measures are in place to secure a sustainable future for power in South Africa?

The Integrated Resource Plan or “IRP” is an excellent planning tool meant to determine the long term electricity blueprint for the country. It requires correct data to give a good output. It further requires objective assessment rather than reverse engineering aimed at legitimising a desired outcome (like the nuclear fleet). If the unadulterated plan is followed, South Africa will build very large amounts of renewable energy and this will gradually improve the country’s emissions path.

22. What would it take for Eskom to relinquish their monopoly?

It is OUTA’s belief that State Capture has paralyzed the political momentum towards unbundling Eskom and only legal action and/or public pressure will untangle the impasse.

23. Why is the public not consulted on issues of public energy policy and security?

The substance and ethos of our constitutional democracy suggest that the public have a right to be consulted on important matters relating to energy policy and energy security. This is sometimes respected in public hearings by NERSA and in invitations for public comment by the Department of Energy. However, very often these rights are neglected and important documents get published late with comment periods being shrunk to ridiculously short return dates. Moreover, documents are often published late in December when the public is less able to respond. OUTA works ceaselessly to remedy the situation.

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