Let’s future-proof our electricity supply together – Nedbank CEO

Creating an Independent Transmission System and Market Operator (ITSMO) is critical to Eskom’s restructuring, as it will secure the reliable, abundant and competitively priced power needed to drive South Africa’s economy in the years ahead.

Speakers at a webinar on the planned Independent Transmission System and Market Operator (ITSMO) in South Africa said that the entity would be essential in securing the private investment required to generate enough electricity to address the country’s widening power gap and expand its transmission grid.

It would also enable green finance from multilateral institutions to fund the massive deployment of wind and solar energy required, and reassure private investors that there would be no bias in terms of grid and market access, dispatch instructions and procurement decisions.

The webinar, which took place on 15 October 2020, was hosted by Nedbank, the Johannesburg Centre of Software Engineering (JCSE) at Wits University, and EE Business Intelligence.

South Africa’s economic future is closely linked to the structural reforms which will bring about reliable and affordable electricity supply, said Nedbank Group CEO Mike Brown.

Globally, the energy sector is undergoing massive change and transition. South Africa had to respond by taking its own circumstances and competitive advantages into account, as well as facing the challenges of energy security and power at Eskom, he said.

The investment made by the private sector through the Independent Power Producer programmes was absolutely critical to the country’s long-term energy solution, which will enable higher levels of confidence, economic growth and job creation.

He indicated that Nedbank supports the call to all South Africans and energy users to play their role alongside government to ensure an end to load shedding and the country’s transition to a decarbonised and more sustainable future world of energy generation.

“Let’s future proof our electricity supply together – our economy requires all of us to work together towards a low-cost carbon economy and a just transition for our energy landscape”, added Nedbank CEO Mike Brown.

In his opening keynote address, Minister of Public Enterprises Pravin Gordhan said that Government recognized that in order to attract investment South Africa needed an abundant, reliable supply of electricity with prices which excluded the cost of state capture.

Restructuring the utility and creating an independent transmission entity and market operator was critical for the future. Ultimately government was committed to the ITSMO or its equivalent, to ensure that there was both adequate competition and fair access for anyone who wanted to sell power into the system.

“There is no question about where we want to go, the only question is how to get Eskom from where it is to where it needs to get to”, he said.

Scepticism was understandable and there would be conflicts of interest, but South Africans had to start developing higher levels of trust in order to contribute to the marketplace which was necessary, he added.

Gordhan pointed out that SA’s transition from coal to clean technology, particularly in renewables, which would impact thousands of workers and community members over the next 10 to 15 years.

“The broader energy community needed to focus a lot more on what a just transition actually meant in the current context and how investors and others could create the required conditions and resources for this to take place”.

Eskom CEO Andre De Ruyter said that creating an ITSMO was essential to unlock the investment in private generation which would rapidly bring more capacity onto the grid and close the significant power gap which South Africa will otherwise face by 2030.

To close the gap a massive deployment of wind and solar generation was needed, as the projects could be built within 18 to 24 months, compared with 10 to 12 years in the case of coal, and 12 to 15 years for a new nuclear plant, he said.

In addition, R100-billion was required over the coming decade to refurbish, strengthen and expand its transmission grid, with 8 000 km of new lines needed to connect new sources of mainly renewable energy to existing power stations.

Independence in transmission and market operation is essential to dispel private investor concerns that there would be bias in terms of grid and market access, dispatch instructions and procurement decisions.

“This is the fundamental rationale for the restructuring and separation of the transmission entity in particular, as a wholly owned but separately governed legal subsidiary of Eskom”, he said.

The ITSMO would have to be functionally separated from Eskom’s generation and distribution units by the end of March 2021, with full legal separation planned for December 2021. But an independently governed transmission and system operator would only be in place by December 2022.

De Ruyter pointed out that South Africa’s energy transition opened the doors to green financing, and several major global development institutions had already approached Eskom and committed in writing to their willingness to support the decarbonisation of South Africa’s electricity industry.

“We anticipate that we will be able to access this green financing to enable the expansion of our transmission grid to take place as required. It is still going to be a challenge to execute but the money appears to be readily available”, he said.

With a collaborative approach between Eskom and the private sector, South Africa could attract both local and international investment to mitigate the risks which an unreliable power system posed to the economy.

“It is unlikely that we will ever stop evolving – I expect our journey to continue long beyond what we’ve discussed”.

Establishing an ITSMO would be the most profound step in the reform of Eskom and the power sector since the utility was created nearly 100 years ago, said Anton Eberhardt, Emeritus Professor at the UCT graduate school of business.

Eskom’s vertically integrated, dominant structure was outdated and posed huge costs to the economy, with the absence of competition leading to inefficiencies, rent-seeking and corruption. At the same time there was inadequate oversight, and lack of transparency and accountability, which imposed huge costs on the economy.

South Africa was lagging behind global reform of the power sector reform which was initiated in the 1980s, and included unbundling, private sector participation, and the introduction of competition. To date 106 countries had taken those steps, including all the other BRICS countries — Brazil, China, India and Russia.

Load shedding in the year to date was already the worst on record, and by 2030 South Africa needed to generate 27 000 MW of new power – nearly equivalent to the utility’s reliable supply at present. This required a huge amount of new investment, which had to come from the private sector as it was unaffordable by government.

An ITSMO was critical for creating the institutional setup which would accelerate and enable new investment for power, and would also assist in debt relief and financing for the utility as the new entity would return to investment grade and be able to access lower cost capital markets.

Eberhard emphasized that the ITSMO needed its own board to oversee its governance and operations, as this would give investors greater comfort and drive its business. The Eskom Road Map drawn up by the Department of Public Enterprises a year ago enabled transition entity to be taken out of Eskom as a separate state-owned company, with responsibility for power planning, procurement and contracting as well as system operation.

In his opinion it would be unwise to define exactly what the future would look like as the global sector was in an extraordinary innovation, with the introduction of new technologies which were incremental and would allow consumers to also become producers of electricity.

It was reasonable to expect that by December 2021 the ITSMO subsidiary of Eskom would be fully in place but this required strong leadership from the Department of Public Enterprises, the Minister of Mineral Resources and Energy, and the utility itself.

The process should not be held back by trying to ensure that every last ‘i’ is dotted and ‘t’ is crossed as some of the issues of restructuring, including around the utility’s debt reallocation, would take time.

National Planning Commissioner Dr Miriam Altman said that her experience as strategy head of Telkom had demonstrated that, in reality, monopolies weren’t known to willingly break themselves up. A ruling from the Competition Commission had forced the state-owned company to start separating and commercialising the business, which at the time was “haemorrhaging” new customers.

“If I was honest, which I wouldn’t like to admit – but will – I don’t think we would have done it, even though we were a new team brought in, a new board, new leadership. I don’t know that we would have succeeded in doing it had we not had a stick over us – we got away from the stick and then really took hold of it”, she said.

The timetable which Eskom CEO Andre De Ruyter had presented was very ambitious, but market regulations and reforms needed to follow suit and that was not the normal way that the state functions, she pointed out. Fixing Eskom was a lifetime project and although the first step was always important, so was sticking to the path – no one must think that there was any quick fix.

Amith Singh, head of Energy Finance at Nedbank Corporate and Investment Banking, said that it was essential to create an ITSMO with a proper balance sheet and strong credit ratings, so that it could raise finance at a discounted rate.

Initially, it would have to be capitalised through government and Eskom, but as the entity developed its own track record and credibility, this could diminish. Multilateral agencies would be very keen to provide some form of credit support, which would reduce the burden of government guarantees for IPPs.

“With the current state of Eskom’s finances, this is the most efficient way to facilitate the procurement of the new generation capacity that the government needs”, he said, while adding that ringfencing the renewable energy book would be very beneficial.

Another important role for the ITSMO would be its ability to wheel power from embedded generation projects in the private sector through the grid to where it was needed. “The ability to wheel and have open market rules with clear tariffs is quite critical to unlock this side of it”, he said.

He also pointed out that talk in the market showed there was confusion about whether the ITSMO was a privatisation scheme, which was, in fact, not the government’s policy. There had to be much improvement in communications to make clear that the government would still own the ITSMO, which was mainly the case throughout the world.

Now read: Here is Eskom’s load-shedding forecast for 2021

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Let’s future-proof our electricity supply together – Nedbank CEO