These graphs show why Eskom can say goodbye to its monopoly

Data from the Department of Mineral Resources and Energy (DMRE) shows that Independent Power Producers (IPP) have slashed their energy selling prices far below what it costs Eskom to produce electricity in the past few years.

This trend should be a major warning for the power utility as South Africa’s electricity market becomes more competitive in the coming years.

The department’s IPP procurement office recently published statistics that summarised the impact of the government’s power-purchasing programme.

Despite significant government-driven delays, the initiative added 7,361MW of capacity from 95 projects to South Africa’s grid between 2013 and 2024.

6,356MW of the capacity comes from solar and wind plants, while 1,005MW was procured from two IPP peaking power stations, which burn diesel to run open-cycle gas turbines.

A further 19 renewable power projects, totalling 2,077MW, are currently under construction, while 973MW from another seven projects are preparing to reach commercial and financial close.

The DMRE has run nine bid windows in which IPPs could bid to sell the power they can generate from privately operated plants.

When the government started procuring electricity from IPPs in Bid Window 1 in 2011, the average cost per kilowatt-hour (kWh) of their electricity was R3.87.

Analysis by Daily Investor showed that it cost Eskom about R400,000 to generate a gigawatt-hour of electricity in 2011, or roughly R0.40 per kWh.

Eskom blamed parts of many of its tariff increases in years past on the cost of procuring more expensive electricity from IPPs, primarily renewables.

However, over time, the cost of solar and wind power became cheaper as global demand for cleaner energy grew.

The increased economies of scale and intensified manufacturing competition pushed down the prices of utility-scale solar and wind plants.

As a result, IPPs were able to put in bids to sell electricity to the grid for much cheaper than in the past in more recent bid windows.

The IPP office’s data showed the average bidding price from solar power producers had decreased from R4.66 in Bid Window 1 to R0.56 per kWh in Bid Window 6, a drop of 88%.

The average bidding price of wind energy producers also reduced by 70% from R1.93 to R0.58 between Bid Window 1 and Bid Window 5.

Across all IPP projects — including the two peaking stations — the average price per kWh had dropped 85% from R3.87 in Bid Window 1 to R0.56 in Bid Window 6.

In contrast, Eskom’s cost to produce electricity has surged, resulting in above-inflation tariff hikes for nearly two decades.

In Eskom’s latest financial year of 2023, it revealed it had spent over R1.5 million to generate one GWh of electricity, working out to roughly R1.50 per kWh.

Therefore, procuring electricity from IPPs is about 63% cheaper than what it costs Eskom to generate a kWh of electricity.

The graphs below show how the prices of IPP electricity procured by the government have reduced and how Eskom’s cost to generate electricity has increased.

IPP electricity procurement prices (in kWh)

Eskom electricity generation costs (in GWh)

Cost surge caused by corruption and bloated workforce

Daily Investor’s analysis also found that it should have cost Eskom R380,819 to generate a GWh of electricity in 2023 if the increase had correlated with inflation from 2006.

That works out to a price-per-kWh of R0.38 per kWh, which would have been 32% lower than the average selling price of IPP-sourced electricity.

Eskom’s costs have surged well beyond inflation due to severe corruption and mismanagement, which have pushed its debt and debt servicing costs to unsustainable levels.

A World Bank policy research paper also found that Eskom was about 66% overstaffed in 2014, when it had 41,787 employees.

By 2023, Eskom’s headcount had reduced to 39,601, but that is still much higher than necessary.

With IPPs able to offer far better pricing and the electricity market opening up to more private participation in the coming years, Eskom’s generation could become increasingly irrelevant.

If it increases tariffs and is allowed to adjust fixed costs as it wishes, the utility will push more households with the means to buy more solar panels and batteries to go completely off-grid and cut Eskom out of their lives.

The new Electricity Regulation Act will also see a greater electricity market liberalisation, enabling entire cities, towns, and communities to tap into IPP generation instead of just individual households, complexes, estates, and businesses.

With the National Transmission Company of South Africa (NTSCA) spun off and operating independently, it should treat IPP generators the same as Eskom’s generation division when transporting electricity.

Even if the cost of transmission, distribution, and reasonable profits for the NTSCA and power distributors double IPPs’ prices by the time their electricity reaches the end-user, theirs will still cost around a third of Eskom’s.

Households in areas that don’t switch to IPPs and cannot afford Eskom’s high electricity tariffs or self-generation could resort to more desperate measures by bypassing their connections and stealing electricity — as many have already done.

With Eskom’s paying customer base shrinking, it will be forced to further increase prices to improve its average revenue per user sufficiently to keep up with out-of-control costs.

Eskom won’t be able to call itself innocent in this outcome, as several energy experts and former Eskom CEO André de Ruyter have warned about this potential eventuality, informally dubbed the “death spiral.”