ESKOM FUNDING

1. ESKOM FUNDING Philip Lloyd, CPUT Rob Jeffrey, Econometrix

2. Basic messages • Eskom must grow if our economy is to grow • Many decisions about Eskom’s operations in recent years have been political rather than commercial • Because of the structure of Eskom, it has proved very difficult to see the cost impact of these decisions • It is therefore most desirable to advance restructuring so the costs of decisions can be better identified Parliament, June 2015

3. Eskom needs to grow • Shortage of capacity is disastrous to the economy • Every kWh demanded but not supplied costs the economy about R85 (2015R) • The idea that the energy intensity of our economy has fallen in recent years is misleading • Energy intensity is the ratio kWh per unit of GDP • If kWh are essentially constant and GDP increases, intensity MUST fall • We need about 4TWh additional energy every year • Equivalent to about 500MW of base load capacity • Just to cope with our growing population Parliament, June 2015

4. SA is an industrializing country Output from manufacturing Parliament, June 2015

5. Political vs commercial decisions • Examples: • Delay in the construction of the new power station called for in the 1998 White Paper • Free basic electricity against recommendations of research • Below-inflation electricity price increases in the early 2000’s • Renewable energy programme by DoE rather than Eskom/DPE • Coal purchases from small Black-owned coal mines • Ballooning debt from municipalities Parliament, June 2015

6. The cost of these decisions • The delay in building the new power station not only led to the present power crisis, but it result in the loss of the construction expertise that had completed Majuba on time • This included major foreign firms employing hundreds of engineers • Provision of free basic electricity led to a culture of non-payment • And was seen as unfair by those who had no electricity Parliament, June 2015

7. The cost of these decisions • Below-inflation increases have led to above inflation increases today • Separation of the renewable energy programme has meant unexpected costs of connection for Eskom • One large project has not been connected for over a year • And the future costs for renewable energy have been fixed contractually – no competition • Coal from small mines is costing far more than that from large mines • And causing both quality and transport problems Parliament, June 2015

8. Impact of policies CUMULATIVE REDUCTIONS BY 2030 • Impact of Renewables • GDP growth: -6.2% R300 billion • Employment: -1.5 millions • Impact on Fixed Investment • GDP growth: -10.0 % -R500 billion • Employment: -2.5 million • Total impact on GDP and employment • GDP growth: –R800 billion • Employment: -4million Parliament, June 2015

9. Structural problems • Eskom as presently structured has been able to mask the costs • For instance, the very volume of its sales have given it a nominal cash flow that has allowed it to be highly geared • The impact of non-payment on that cash flow has now fed through into questions about gearing • Similarly, transmission costs have long been hidden in a controlled tariff • So connection costs for renewables and other independent power producers are not readily identifiable Parliament, June 2015

10. Restructuring • This was foreseen in the 1998 White Paper • There have been several attempts to carry it out • For instance, the stalled Independent System and Market Operator Bill • The present proposals for restructuring the finances of Eskom should call for a commitment to restructure the business • And to do so in a way that would make the cost of future political decisions more readily visible Parliament, June 2015

11. Restructuring • In considering how to restructure, we note the three overall functions of Eskom • Generation, which is now in competition with renewables and other independent generators • Transmission, which creates a national highway for electrons, and which has no competition • Distribution, with Eskom responsible for about half the electricity supply and municipalities for the other half Parliament, June 2015

12. Restructuring • This suggests a structure: • Esco, an Electricity Supply Company, supplying electricity in open competition with other suppliers • Etcom, the Electricity Transmission Commission, a national resource purchasing electricity from suppliers and shipping it in bulk to distributors and bulk users • Edco, an Electricity Distribution Company, buying electricity from Etcom and distributing it to users in open competition with other distributors Parliament, June 2015

13. Restructuring • Esco and Edco would be expected to make a profit in order to fund their operations • They would then contract with the State to undertake politically desirable projects such as the further roll-out of electrification • Etcom, however, as a national resource, would be a cost-plus operation • Its capital expenditure would be a direct charge against the fiscus, much as national roads have been Parliament, June 2015

14. Restructuring • This would change the nature of NERSA • In the restructured world, it would regulate: • Prices for generated power • The cost of transmission • The cost of distribution • This should significantly improve State oversight of the industry Parliament, June 2015

15. Recommendations • Divide Eskom: base power generation; transmission, market and control operator; and distribution. • Fund each according to business requirements. Partially privatise generation and distribution • Expand independent power producers and foster equal competition • Practicebest commercial business procedures • Independent management and board appointments • All tenders awarded on strictly arms-length business • Maximise security of supply of electricity generation transmission and distribution • Ensure sustainable and efficient operations at the lowest possible cost • Prime objective reduce the cost of doing business in SA Parliament, June 2015