Eskom kissing monopoly goodbye

EE Business Intelligence head and reputed energy expert Chris Yelland believes that Eskom should abandon its electricity generation and distribution businesses and focus solely on transmission.

In the coming years, the power utility will face significantly tougher generation competition from independent power producers (IPPs) and consumer self-generation.

The changes brought about by the amendments to the Electricity Regulation Act will see Eskom’s monopoly on generation and dominance in distribution upended, with the private sector playing a much larger role in power provision.

The government also strongly supports derisking the country’s exposure to a single power utility like Eskom, which caused severe damage to the country’s economy.

Although some of the policy changes were driven by the power utility’s many years of load-shedding, Yelland explained that other factors helped drive the diversification of electricity supply on a global level.

In addition to having security of supply from multiple companies, it has become more economical to use renewables due to declining costs in the construction of wind and solar power stations.

In addition, there is a lot of momentum in reducing carbon emissions and producing energy more sustainably.

Yelland said that these factors were driving a “fundamental disruption,” but Eskom appeared to be disconnected from the reality that its monopoly in generation would evaporate as a result.

The power utility has seen its electricity sales plunge in recent years, in part due to increased uptake of private solar among households and businesses.

Instead of making its product more attractive than the private competition, Eskom has applied for substantial electricity tariff hikes over the next few years to try and arrest its revenue decline.

In 2025, it wants to increase tariffs to direct customers by 36.15%.

This adjustment should raise eyebrows as renewable IPPs are now able to generate and sell electricity at a far lower cost than Eskom.

With the reforms in the electricity supply industry, including Eskom transmission operating more independently, IPPs will also be able to easily go directly to customers rather than sell through Eskom or other distributors.

Yelland said the cost of IPP solar electricity was already well below R0.60 per kWh in the latest bid windows for the government’s renewable procurement programme.

Eskom’s cost to generate a kWh stood at over R1.50 in its 2023 financial year, and its requested tariff hikes will take its average electricity price well over double that figure.

Even if IPPs were to sell their electricity with a 100% profit markup, their prices would be less than half of Eskom’s tariffs.

The IPPs have significantly cheaper input costs and much smaller workforces than Eskom, which significantly reduces long-term operating expenditures.

Death spiral of hikes and lost sales

Yelland said that Eskom’s status quo approach to generation and vision would only accelerate its death spiral — an unsustainable, alternating pattern of price hikes and reduced electricity sales.

“Putting up the price will come back to haunt you because it’s going to make the business case for the alternatives better and better,” Yelland said.

“It is also going to cause increased theft and non-payment of electricity. Ultimately, if people cannot afford to pay, they won’t pay.”

Yelland also said that distribution was a “lousy business” because municipalities were among Eskom’s biggest customers, and many were simply not paying for what the power utility was delivering.

All these factors will continue to increase Eskom’s debt, leading to higher debt servicing costs.

In turn, Eskom would have to increase tariffs exponentially to try and offset the impact on its revenues. That again exacerbates the issues above, resulting in further tariff hikes.

Yelland warned that the power utility was “sowing the seeds of its own destruction” by going along with the death spiral.

He said that Eskom should sell or at least significantly reduce its shareholding in its current generating fleet.

“In my view, Eskom should morph to become only the national transmission company and should play a much smaller role in generation and distribution, even potentially get out of those businesses,” Yelland said.

“We need a diversified generation sector, not a monopoly,” he said.

Eskom’s transmission division was recently spun off into its own company — the National Transmission Company of South Africa (NTCSA).

Yelland said the NTSCA was performing pretty well and was a key part of the industry.

Its unbundling from the other two Eskom entities will enable the company to secure funding through the bond market to expand its electricity network.

The NTSCA is aiming to spend R112 billion over the next five years to expand South Africa’s transmission capacity and enable the critical addition of more generation from the private sector.