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South African Eskom: Changing landscape by restructuring utility [free access]

November 11, 2019

South Africa’s monopolistic power structure has led to operational inefficiencies, underinvestment and poor governance in the sector. In hindsight, unbundling of the vertically integrated, state-owned power utility, Eskom Holdings SOC Limited (Eskom), was inevitable to overcome the bottlenecks in the sector.

 

Although Eskom’s vertically integrated structure served well for over 90 years since its inception; looking at the country’s current power sector scenario, Eskom’s arrangement is no longer viable to meet the power demands.

 

For this purpose, the South African government has published a roadmap, which details the full vertical unbundling of Eskom in order to reform the electricity supply system in the country and transform it into a reliable, competitive and transparent one.

 

The roadmap discusses — Eskom’s current financial crisis, key steps in transforming the electricity supply system, measures to restore Eskom’s finances, measures to reduce its cost structure to enable the provision of affordable electricity, and the process of restructuring the utility.

 

The restructuring process will segregate Eskom into three segments — generation, transmission and distribution. As per the restructuring timeline, the first step is the formulation of a separate Transmission Entity (TE) by March 2020, to cultivate a competitive market and further encourage the use of diverse sources of energy.

 

Post the formation of a TE, the government will proceed with the establishment of two or more generation utilities so as to create competition in the sector and increase private sector participation. Finally, under the distribution segment, a separate distribution entity will be formulated. All the utilities will be directly under Eskom Holdings. The restructuring process is expected to be fully completed by 2021.

 

South Africa’s industry structure

South Africa’s electricity sector is dominated by Eskom. It operates 88 per cent of the country’s installed generation capacity and also holds a monopoly over the transmission, distribution and trade of electricity.

 

The Department of Energy (DoE) is responsible for policymaking, while the National Energy Regulator of South Africa (NERSA) is responsible for regulating the energy sector and granting licences.

 

To promote private participation in generation, NERSA developed Renewable Energy Feed-In Tariffs in 2009. In 2011, the DoE replaced these with a competitive bidding process for renewable energy — Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), consisting mostly of solar and wind power generation technology. Independent power producers (IPPs) were, therefore, introduced into South Africa’s Electricity Supply Industry (ESI) through the highly successful REIPPPP.

 

Figure 1: South African Electricity Supply Industry

Source: Roadmap for Eskom in a Reformed Electricity Supply Industry

 

Eskom’s present asset base

As of March 2019, Eskom had an installed capacity of about 44 GW, which increased at a compound annual growth rate (CAGR) of only 1.2 per cent from 2015 to 2019.

 

Of the total, 88 per cent is thermal-based, 7.5 per cent is hydro-based, 4.2 per cent is nuclear-based and the remaining 0.2 per cent is renewable energy-based.

 

Figure 2: Growth in Eskom’s installed capacity (MW)

 

Source: Eskom’s Integrated Report, March 2019

 

As of March 2019, South Africa’s transmission network comprised 32,802 km of line length, 167 substations and 152,135 MVA of transformer capacity.

 

The majority of South Africa’s high voltage network is at 400 kV and based on alternating current (AC) technology, with the exception of the 1,032-km-long, 533 kV high voltage direct current (HVDC) monopolar line that links the Cahora Bassa hydroelectric power plant (HPP) in Mozambique to Johannesburg.

 

South Africa’s electricity network is interconnected with the grids of Botswana, Mozambique, Namibia, Zimbabwe, Lesotho, Swaziland and Zambia.

 

Figure 3: Trend in Eskom’s transmission line network (km)

 

Source: Eskom’s Integrated Report, March 2019

 

Currently, the power utility owns about 48,805 km of distribution lines, 296,188 km of reticulation power lines and 7,499 km of underground cables in South Africa. Eskom Distribution provides power to 45 per cent of the end-users in South Africa, including bulk supply to municipalities.

 

Eskom’s shortcomings

With the changing power market dynamics, Eskom has struggled to keep pace with the rest of the world, which has led to the need to restructure the utility. Some of the shortcomings are as follows:

 

Financial: As of March 2019, Eskom’s long‐term debt stood at ZAR441 billion, up from ZAR255 billion in 2014. It has been estimated that over the next five years, the power utility will have interest payments of approximately ZAR148 billion and debt repayments of ZAR180 billion. In addition, the borrowing costs are also increasing, which will further augment its debt obligations. Furthermore, the increase in tariff was less than expected, i.e. 5.23 per cent, and there was also a decline in sales volumes and cost pressures, which contributed to these losses. One of the other major financial hindrances for Eskom is the continuous non‐payment by the municipalities. As of June 2019, the municipalities and individual users owe Eskom over ZARR36.5 billion.

 

Operational: The power utility’s operational performance has deteriorated, leading to expensive load‐shedding periods; significant deterioration of plant availability; record levels of unplanned outages that lead to cumulative capacity of power stations (excluding the newly-built stations) declining to the lowest levels; and since the last decade, Eskom has stopped investing in cost-plus mines and is procuring coal on expensive short-term contracts that also increase the transportation costs.

 

Structural: Eskom’current structure is redundant and unsustainable. Its business lacks transparency, agility, operational excellence due to lack of accountability, and consequence management. The lack of transparency on cost and allocation of resources further makes it difficult to understand its own competitive advantages.

 

Climate Change Commitments: Over 80 per cent of emissions in the country are from the energy sector. Keeping aside the commitments to reduce greenhouse gases, the 2010 Minimum Emission Standards mandate Eskom to undertake initiatives to reduce emissions of sulphates, nitrates and particulate matter.

 

New business model

The restructuring into separate subsidiaries (under Eskom Holdings) aims to improve efficiency, create greater transparency around performance, provide greater protection against corruption and provide confidence to capital providers, resulting in more investment comfort.

 

The reformed business model will adopt best practices to enhance energy security across the country; improve utility’s financial position; meet the legislative requirements of a lower carbon trajectory; and develop a pipeline of new products, based on the latest research and development (R&D).

 

Figure 4: Planned restructuring model

 

Note: GX – generation; TX – transmission; DX – distribution; DPE – Department of Public Enterprises

Source: Roadmap for Eskom in a Reformed Electricity Supply Industry

 

Transmission segment: The first step under the new model is to establish a TE, which will act as an unbiased electricity market broker in order to promote capital investment within the industry, and further conduce energy efficiency and cost sustainability. The main role of the TE as a Systems Sperator will be management of supply and demand balances in real time through a range of least-cost options. As a Market Operator, it will contract with suppliers and distributors (including Eskom Distribution). In order to fast-track the TE establishment, several processes will be undertaken in parallel, as the separation and creation of the TE is dependent on the entire legal process being completed.

 

Figure 5: Key functions of the transmission entity

 

 

Generation segment: A separate subsidiary will be formed for generation comprising of mainly of the current power plant base, which will be separated into a number of feasible smaller generation units. Establishment of two or more generation subsidiaries is also being considered in order to introduce inter‐company competition and enhance efficiencies in the generation sector. Each power station will have its own Power Purchase Agreement (PPA) with predefined and guaranteed tariffs for energy, with the TE. Eventually, the generation market will become more competitive and decentralised with new public, private and other generators entering the market.

 

Distribution segment: Lastly, a separate distribution entity will also be formed under Eskom Holdings, which will be authorised to buy from the TE, licenced municipal generators and embedded generation (small‐scale residential and business generators). This will allow the separated distribution business to manage the changing demand market more efficiently. Further, to make the distribution sector more efficient, the government will try to reduce the dependence of municipalities on revenue from electricity tariffs; and develop roof‐top solar and similar local embedded generation. To this end, the policymakers are required to formulate relevant policy parameters on an urgent basis.

 

Eskom’s future goals

In parallel to the restructuring plan Eskom has various long term goals — to provide adequate power supply, fully utilise the existing resources and further integrate new sustainable energy options, for which the utility requires more sophisticated and intelligent network capabilities.

 

Transmission Development Plan (TDP), 2020-29:

Recently, Eskom shared its new Transmission Development Plan (TDP) 2019-29, with different stakeholders. The plan includes the addition of approximately 4,800 km of extra high voltage (EHV) transmission lines and 35,000 MVA of transformer capacity over the next 10 years. The TDP is part of Eskom’s transmission licence requirements issued by NERSA, which mandates Eskom to publish a TDP every year. From the previous year’s TDP, some alterations have been made in regard to the re-phasing of capital investment in transmission projects, to align with the project execution timelines associated with servitude acquisitions and current available funding.

 

Renewable Energy (RE) Targets:

The power utility plans to increase the share of RE resources in its generation mix by 26 per cent of the total capacity by installing 14 GW of renewable capacity by 2030. With the introduction of RE, IPPs and distributed points of generation, the complexity of the power network will increase.

 

Reducing Carbon Emissions:

Reducing carbon emissions is under the country’s commitments and domestic legislation. In addition, the focus is also on reducing emissions of sulphates, nitrates and particulate matter. Eskom has invested in technology to reduce particulate matter and nitrogen oxides in the majority of its coal-fired power stations. To this extent, the utility plans to invest ZAR46 billion to achieve environmental compliance.

 

Smart Grid Vision 2030:

South Africa’s electricity infrastructure is aged and requires renovation and expansion in order to meet its growing electricity demands. In order to respond to increasing energy demand in an efficient manner, the South African National Energy Development Institute (SANEDI) drafted the Smart Grid Vision 2030 as part of the South African Smart Grid Initiative (SASGI) in 2013. The objective of the Vision is to bring together all parties involved in the smart grid industry in order to build a focused, integrated, optimal smart grid network across the country. Hence, it is crucial for Eskom to meets its target under the TDP 2020-29, as the ambitious smart grid plan must be backed by an efficient and reliable transmission system.

 

Conclusion

Eskom has formulated ambitious plans for expanding its infrastructure facilities. However, the lack of funds, deteriorated operational performance and inefficient industry structure, has further delayed the completion of the planned projects under these ambitious plans. With the unbundling of Eskom, the power sector in the country is expected to become more transparent and  efficient. Further, with the formation of independent separate entities, the responsibilities will be clearly defined; hence outlining a clearer picture in terms of goal and targets to be achieved individually by each utility.