Let’s get aggressive with Eskom
Eskom remains in the news with continued load shedding and increasing talk of a partial privatisation. Recent developments surrounding BHP Billiton’s South32 demerger also offers an opportunity. There are three steps that should be taken surrounding Eskom, namely that Eskom should do a Telkom (form a private sector JV to house its new generation businesses), Eskom (or government) should buy the aluminium smelters from South32 and mothball them (or Nersa should allow contracts to be renegotiated) and government should promote private electricity generation. It is time to get aggressive with Eskom.
Eskom should do a Telkom
Over recent weeks commentators throughout SA have been discussing the possibility that Eskom becomes at least partially privatised. Government and the ANC have sent mixed messages with Gwede Mantashe stating that privatisation is not on the cards, while admitting that government may consider selling parts of Eskom (or listing a minority stake in the company). Lungisa Fuzile and Enoch Godongwana on the other hand mentioned that the “war room” had decided to consider allowing the private sector to take up to a 30% stake in Eskom’s power generating assets. It sounds like semantics to me and it certainly appears as if this possibility is being considered.
In my view, a listing of a minority stake in Eskom is not an attractive option. Although it will allow the parastatal to raise capital, it would not address the skills and capacity shortage within Eskom. It is also unlikely that Eskom will be an attractive asset for private investors considering its current financial and operational woes.
A better option would be to sell off some of Eskom’s generation capacity. This would bring in new capital as well as skills and technology. In a previous blog, I suggested a derivative of this strategy to deal with our electricity problems, namely that Eskom should do a Telkom. Eskom should form a 50:50 joint venture (JV) with a private sector company to house its new generation projects, including Medupi and Kusile. In the medium-term, this JV could also assist in the routine maintenance of existing power stations to reduce the current capacity constraints on Eskom. Over the long-term, the JV should be tasked with rolling out state-of-the-art generation capacity, with an emphasis on renewable energy. This would allow Eskom to effectively deal with its current problems, while at the same time retaining a stake in new electricity generation. This could provide it with healthy upside, similar to what Telkom experienced with its Vodacom JV.
Mothball aluminium smelters
It was recently announced that BHP Billiton’s demerger of its South32 company has been completed. South32 is in the process of being unbundled, which will mean that BHP Billiton’s shareholders will become the direct owners of this business. South32 owns aluminium, coal, manganese and other businesses in Australia, Southern Africa and Brazil. Of particular interest to electricity consumers in SA are its aluminium smelters in Kwazulu Natal and Mozambique.
In a previous blog, I highlighted the very unfavourable contracts that these smelters have with Eskom and the unnecessary burden it is placing on our electricity grid. These smelters, which use more than 5% of our electricity are currently able to buy their electricity from Eskom at well below what it costs to produce (less than 10% of what it costs to run diesel power plants). These contracts will run until 2028! I suggest one of two options, namely that Eskom or government buys these smelters and mothballs them (closes them down) or that Nersa (National Energy Regulator) allows these contracts to be renegotiated, which will likely also lead to a closure of the smelters.
The latter option might be difficult to effect as it will have a very detrimental impact on South32 shareholders, but it would have a very positive impact on South Africans and would be financially most attractive to Eskom. The former, would require a capital outlay from Eskom or government, but would still make financial sense and would be very positive for our country. The closure of these smelters would immediately free up electricity supply. The money that Eskom would save on diesel generation as well as the money that would be freed up on its balance sheet (Eskom currently carries a liability of R9.3bn to account for the future cost of these contracts) could allow it to pay off the cost of such a deal in a fairly short time.
Now that South32 is being unbundled, the chances of positive developments on this front must be increasing. I wait with baited breath.
Encourage more private generation
The third step that I suggest may take a bit longer to deliver, but is ultimately very important and in line with developments internationally. That is to encourage and facilitate the private generation of electricity as I detailed in a previous blog. It is a stated goal of Eskom to promote Independent Power Producers (IPPs), but the process has been extremely slow over recent years. There are two main problems, namely that the process is fraught with red tape and needs to be accelerated and that IPPs can only sell their electricity to Eskom, which further adds bureaucracy.
In my opinion, regulations should be changed to allow IPPs to sell directly to consumers, whether this would be municipalities, industry or individuals. This would free up the opportunity for a great deal of solar generation in urban areas (maybe a Solar City for SA), a quicker roll-out of wind farms and the building of small-scale power plants. The private sector is ready to step in, but it must be made easier for them to get involved.
When we first experienced load shedding in 2008, there were some reasons to excuse Eskom. The most important reason was that our economy grew very strongly over the preceding years and demand for electricity rose aggressively. So Eskom was caught unawares. However, they immediately started with steps to remedy the situation, including building new power plants and increasing the cost of electricity. This time round, there is very little excuse. Eskom has had 8 years to sort out its problems and it is charging us much more for our electricity. This time round, we cannot give Eskom the benefit of the doubt. We cannot reasonably believe that Eskom will be able to solve its problems on its own. The track record shows us that Eskom is struggling and that it needs help. It is time to stop with the excuses. It is time to get aggressive with Eskom.
We need positive steps and we need it now. We need private sector involvement on a small scale (promoting IPPs) and on a large scale (private sector JVs). We also need to get rid of the consumers that are using our electricity without paying enough for it (aluminium smelters). There is an expression that “Americans will always do the right thing – after exhausting all the alternatives”. Government and Eskom, please do the right thing!
What do you think of my suggestions of dealing with Eskom’s problems? Do you think more private sector involvement is needed and will help? Do you think that aluminium smelters should be mothballed? Do you think that government and Eskom is ready to do the right thing? I would love to see your feedback.
In the mean time, keep your talking straight!