SA will pay high price for Eskom’s growth

In the five years to May 2016, SA’s electricity use fell 6%, leaving a substantial and growing hole in Eskom’s budget. Eskom’s response has been to try to suppress new competitors and encourage big new customers. In a single week in July, it announced:

• It was negotiating with aluminium smelters to increase electricity use. Aluminium smelting in SA is predicated on access to cheap, (but dirty) energy;

• It would not accept further independent renewable producers after the current round of tenders because of the potential effect on its revenue. The share of private renewable energy in national demand rose from 4% in 2011, to 8% in 2016;

• It was trying to expand exports to the region in light of slow domestic demand.

The first two strategies will entrench commodity dependence and promote energy intensity. Instead of fostering growth in new industries and emerging enterprises, they will reinforce Eskom’s effective partnership with huge metal refineries.

Eskom’s dilemma is rooted in the end of the commodity boom, combined with a pricing strategy that is delinked from national goals around diversification and development. The recent commodity boom was an outlier. Yet SA’s electricity investment and pricing systems built in an assumption that metal prices would defy gravity for decades.

From 2008 to 2015, huge new coal-fuelled plants were initiated, while electricity tariffs in constant rand more than doubled. Below the radar, there’s a widely held belief that Eskom’s tariff hikes mostly reflected inefficiency and corruption. That view ignores both the cost of Eskom’s new investments and the soaring price of coal during the commodity boom.

This is not to deny inefficiency at Eskom. For instance:

• Eskom links the price of electricity for the smelters to the aluminium price, so it has in effect given them about tens of billions in rebates since the commodity boom ended;

• From 2008 to 2014, while its sales fell, Eskom’s employment climbed from 35,000 to 47,000;

• From 2014-15 to 2015-16, the remuneration of Eskom directors and group executives climbed from R50m to R75m.

Eskom’s model of increasing electricity supply and tariffs together clashed with global metal prices. Today, Eskom is in the midst of investments of more than R100bn in Medupi and Kusile even as the energy-intensive industries are downsizing.

Consider the steel industry. From 2007 to 2015, SA’s steel production fell about 30%. Virtually the entire decline resulted from the closure of electric furnaces, where production dropped by about half. Climbing electricity costs encourage a shift away from energy-intensive production even as Eskom races to increase its output.

Two factors shape Eskom’s response to its new realities.

First, it seems to know only how to build big plants, whether coal or nuclear. In 2013, the update report on the Integrated Resource Plan for electricity proposed a simple answer to managing uncertain demand: look to smaller plants that would enable more flexible responses. Instead, Eskom has forged ahead with giant projects, then sought to manage demand, alternating rationing and subsidies for the refineries.

Second, Eskom faces sometimes contradictory socioeconomic demands conjoined with a single hard financial requirement: it is required by law to remain self-sufficient and creditworthy. It is also expected to get electricity to poor communities; stabilise the supply to industry; provide a market and transmission for renewable energy projects in remote areas; and drive the construction of base load plants. Meanwhile, its prices are regulated through a complex, rigid and slow process without visible strategic aims.

In these circumstances, Eskom has tended to externalise costs wherever it can and to pursue socioeconomic imperatives only when they won’t damage cash flow. It’s hard to manage Eskom. The company knows far more about electricity than anyone in the government or civil society. Faced with a policy that it doesn’t want, it can argue that the result will be a blackout. Moreover, it habitually blames regulators or government officials when things go wrong.

But SA will pay a high price if we let Eskom respond to the looming oversupply by pumping out more energy for smelters and cutting support for renewables and energy efficiency.

If SA is serious about clean development and industrialisation, it should insist that any excess supply is used to encourage new industries, not to expand existing refineries, and that future electricity investment is small, decentralised and clean.

By Dr Neva Makgetla for
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