Time to Flip the Switch for South Africa's Utility, Eskom?
A power crisis in South Africa leaves policymakers scrambling for solutions, and stakeholders believe allowing competition to take on the monopoly of utility company Eskom, will be a game-changer. For now, legal and regulatory obstacles look stiff and Eskom hangs on tight, but recent government statements suggest a commitment to change.
Situation Report
South Africa’s Minister of Mines Gwede Mantashe told investors at the Mining Indaba conference in Cape Town last month that the government is preparing to revise the Electricity Regulation Act (ERA) 2006. The purpose is to allow large power consumers to generate their own power without licensing. Mining firms, which buy 15% of Eskom output, have been urging the government to relax the restrictions in the wake of the ongoing Eskom crisis, so this was welcome news for them.
Severe load-shedding by Eskom in December forced mines to cut production, and the new Eskom CEO André de Ruyter has said that outages will persist for at least a year while the utility tries to reorganize itself. The utility can only manage to produce about two-thirds of its 45,000MW capacity. This leaves mines and other large firms significantly exposed to operational risk in the interim, and some are already seizing the initiative to minimize their reliance on Eskom’s monopoly. For example, mining firms Sibanye and Gold Fields have been working on 150MW and 40MW solar plants respectively. Even municipalities such as Cape Town want to be able to bypass Eskom and get some supply directly from independent power producers (IPP).[1]
However, thus far, legal and regulatory obstacles have obstructed those mitigation moves. One of these obstacles lies in Schedule 2 of the ERA[2], which prohibits businesses from generating more than 1MW of power without getting a license- a complicated process involving multiple authorities . The National Energy Regulator of South Africa (NERSA) is also not licensing IPPs, based on its interpretation of Section 34 of the ERA, that the mining minister must first approve any new generation capacity. This means firms and municipalities cannot get alternative supply from IPPs without ministerial approval. The Cape Town government, controlled by opposition party Democratic Alliance, is challenging that last provision in an ongoing suit from 2017.[3]
Outlook
The Cyril Ramaphosa administration has soundly emphasized the need to reform Eskom and encourage competition in the power industry. Eskom owes creditors more than USD30 billion and is struggling to maintain facilities but there are vested interests which could impede the much-needed reform. First, powerful unions such as National Union of Metalworkers of South Africa oppose job cuts, so displeasing this constituency will have ramifications for the government’s support base. Second, Eskom’s coal supply contracts are tied to the ruling African National Congress’ black empowerment programme, and some of these contracts (e.g. with Zuma family-linked firm Tegeta) have even been subjects of an ongoing state capture probe for alleged corruption. To threaten this status quo could also be problematic for the government.
That said, government may be forced to go against the tide and institute reforms, particularly in light of four key developments which are likely to impact the future of the utility and the regulatory landscape for large power consumers in the near to medium term:
· The Cape Town government’s suit against NERSA scheduled to resume in May. The municipal government wants the court to judge whether it requires ministerial approval to buy energy from other sources beside Eskom and whether the relevant ERA provision is constitutional. The court’s verdict will set the tone for Pretoria to act.
· The proposed creation of a new transmission subsidiary from Eskom this month. It’s meant to be a step toward reorganizing the utility into three units, namely generation, transmission and distribution while still under state control. This restructuring was first put forward as policy 20 years ago but previous governments couldn’t muster enough political will to execute. Carving out the transmission subsidiary will demonstrate that the current government is prepared to do the rest of the tough work.
· The proposed amendment of ERA Section 2. Revising the electricity law in parliament will test the degree of political backing for the proposed reforms.
· The Ramaphosa government’s response to recent flight cuts at South African Airways. The government put the flagging airline in business rescue in December, and last month the rescue managers pruned domestic flights to three and closed eight international routes. President Ramaphosa has questioned the changes saying it may jeopardize the airline’s long-term future. The level of direct government interference with that business rescue process will be indicative of the depth of reforms that will be allowed at Eskom, another state-owned entity.
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[1]https://www.news24.com/SouthAfrica/News/city-of-cape-town-seeks-court-permission-to-buy-electricity-directly-from-ipps-as-energy-crisis-reaches-new-peak-20191210
[2]https://www.mineralscouncil.org.za/industry-news/media-releases/2019/send/50-2019/857-minerals-council-calls-for-urgent-interventions-to-enable-greater-private-electricity-generation-for-own-use
[3]https://www.fin24.com/Economy/Eskom/cape-town-takes-govt-to-court-in-bid-to-buy-electricity-from-ipps-20170807