Eskom is operating on a century-old business model that is out of date and out of time, according to the University of the Free State (UFS) analyst JP Landman, who says that despite a concerted push back against plans to split the company, the only way to go is forward.
Landman this week penned an opinion piece on the Eskom crisis, exploring the history of the company – the conditions under which its current business model was developed – and how it failed to change with the times.
According to the analyst, Eskom’s current model of national monopoly of South Africa’s energy generation served the country well during its early years of booming mining and industrial development, but as the country’s population grew, and maintenance was neglected, the cracks became evident.
Load shedding due to lack of capacity, and constant price hikes combined with rising debt levels have pushed Eskom into a utility death spiral – and Landman argues that this was always on the cards, irrespective of the massive corruption that pushed it faster along the path.
“It’s more than just the looting and the stealing,” Landman said. “Eskom can no longer cover its cost of capital and is heavily reliant on state subsidies (R23 billion a year for the next ten years). Even if every cent at Eskom is spent wisely and prudently, it cannot escape the utility death spiral.”
Landman said that the move to split Eskom into three companies – generation, transmission and distribution – is not only the right move, but practically the only option left.
“Clearly something has to give, and what is giving is the monopoly supplier model. The decision to split Eskom in three is the beginning of the end of this model,” he said.
Under the split:
- Generation: All Eskom’s power plants will likely go into a generation company. Generation will likely draw private investment for new renewable energy plants, but will first have to deal with the debt tied to the Kusile and Medupi coal stations.
- Transmission: The power generated will be then likely sold to a second company, which will house Eskom’s transmission infrastructure. Transmission would be able to source power from other sources, which would put competitive pressure on Generation.
- Distribution: A third company will house Eskom’s retail distribution network which connects households and businesses to the national grid. This part of Eskom’s business has been neglected by Eskom and municipalities and will need a lot of help. It’s also where non-payment issues arise, which will need government attention.
Of the three companies, the transmission company stands the best chance of being profitable, Landman said, with the other two needing government support (via bailouts).
Even though there has been political and social opposition to the plan to split Eskom – most notably from unions and factional elements within government – Landman says that there is nowhere to go but forward.
“It is unlikely that they will derail the process of change. The Eskom crisis is now so profound that the only way out is to go forward,” he said.
“The Eskom model served SA well, but it is about two decades past its sell-by date.”