Does South Africa really need a second Eskom?
Following President Cyril Ramaphosa’s visit to Tutuka on Saturday July 16, 2022, talks of a second electric utility – a second Eskom if you will – to compete with the parastatal legacy have intensified. The Sunday Times’ July 17 edition conducted an interview in which Gwede Mantashe confirmed that this idea was indeed still being discussed in government circles and that the President was getting closer to it.
Mantashe wanted a new structure that would focus on new construction projects and report directly to him, i.e. the Department of Mineral Resources and Energy (DMRE). He told the Sunday time that: “It will be a production company because the transmission will be an independent company that does haulage and a market place for energy.”
Although the idea of a second Eskom has been dismissed out of hand by many talking heads who see it as just another conduit for prebends, patronage, rent-seeking and all that, I think we need to take a deep breath and examine this idea on its merits.
Last year, Eskom CEO Andre de Ruyter announced the formation of the National Transmission Company South Africa SOC Limited (NTCSA) along with a R39.9 billion loan to help transmission get started. Now something has to be done to give this vehicle enough product to carry. The current iterations of the Integrated Resource Plan – and those soon to be updated – show that the government is trying to secure new construction projects from a multitude of sources rather than a single location.
The idea of new electric utilities competing with each other is not new. In fact, it has become one of Minister Mantashe’s favorite topics as the government grapples with challenges from Eskom. In 2020, Mantashe was interviewed by Chris Yelland of EE Business Intelligenceduring which he said the following on the restructuring of the electricity supply:
“I’ve taken the time over the past two months to look at a few drivetrain designs. I was drawn to the Dutch and Chinese models, which are both quite similar. The Dutch model emphasizes the central role of the transmission network, which is the market and transporter of energy from producer to consumer. I discovered that the Chinese had completely liberalized production and distribution, but tightened control over transmission. They generate all over the country, but everything goes through transmission, which is state-owned.
During the interview, he also said the following about the municipalities: “Cape Town, Johannesburg, Bloemfontein and other municipalities had their own power stations. So when we refine rules and regulations, it’s not from a blank slate. There is a precedent.
About customers, he said: “But let me say very clearly: we see customers as part of the solution. The government’s mission is not to protect Eskom. This is to guarantee the security of energy supply to society.
Mantashe has since repeated similar posts on over a dozen forums and so it’s a bit surprising that some really big news outlets are only picking it up now.
What I believe is that we should take a closer look at the following issues, among others.
First of all, is it a good idea to have companies competing with each other in the same industry? The idea is not necessarily bad. Not quite the same situation here but in the water sector, we already have something similar with the water offices: Rand Water, Umgeni Water, Sedibeng Water, Overberg Water etc.
Imagine municipalities and private entities producing their own electricity. More power plants will ensure stability and the fact that the system cannot collapse entirely at the same time; unions going on strike in a factory will not cripple the whole system (although it is of course possible that cross-company coordination will occur) and much more job training and practical learning will take place, whatever something the country cries for.
Second, how do you get the labor and start-up capital to make these new businesses work? This is really the tricky part and I can tell you that it is not going to be easy in a difficult post-Covid context, post-Russian invasion of Ukraine. Power plants are being built absolutely everywhere. Germany is working around the clock to set up LNG terminals for stocks; new nuclear projects are planned in Egypt, the United Arab Emirates, Turkey, the Netherlands, etc.
To illustrate the skills challenge, Eskom’s nuclear director, Riedewaan Bakardien, resigned to join a Canadian nuclear company. Everyone is after the same thing and it will take a lot of ingenuity to navigate that.
Third, will the “new Eskoms” soon help us get energy? Large power plants are not cheap – and they take years to complete.
Take for example the Thabametsi and Khanyisa coal power projects, selected under the first tender window of the IPP coal procurement program. UCT Energy Research Center (ERC) calculated that the two plants would cost South Africa an additional R19.68 billion in present value over their lifetime. We are talking about 630MW for Thabametsi and between 300MW and 600MW for Khanyisa. Then you need to look at skilled workers, input costs, environmental impact studies, etc.
If you extrapolate these costs, you will understand why many companies have not yet tried to set up 100MW companies after the recent publication in the Official Gazette of amendments to Schedule 2 of the Electricity Regulation Act. There is a lot of heavy work to do, which often only makes sense to the sovereign, i.e. the state, because of the mandate to provide affordable, good quality and uninterrupted electricity to all South Africans, of course.
Renewable power plants are also expensive, but less so. Let’s take some examples: The 100 MW Kathu solar park cost around R12 billion, SolarReserve’s 96 MW Jasper plant cost R2.3 billion while Solar Capital’s 175 MW De Aar 1 and 2 cost R6.8 billion in today’s rand.
Renewable power plants also take relatively little time to set up: Kathu, De Aar 1 & 2 and Jasper all took less than four years to build. Take for example the Jasper project. They have this to say about their website regarding the time it took them to settle: “The notice to proceed was issued on June 17, 2013, and construction began immediately thereafter. After a 16-month construction period and two months of anticipated commissioning, the project began operations on December 17, 2014.”
It’s incredibly fast! Jasper created 40 permanent jobs and the revenue generated in 2020 was R485,966,690 million.
This brings us back to where we started. The idea of having multiple power companies isn’t bad in and of itself — if those entities aren’t all consolidated in the end. It is towards a constellation of dispersed production units that we are already heading and in fact the government must play a role here in order to prevent poor communities from being thrown adrift. What is important is to clearly define where the money will come from and how long it will take to bring these new projects into the system.
Minister Mantashe probably prefers fossil-based production due to its ability to absorb many workers and structure entire cities around a major locomotive. However, South Africa needs energy today.
Instead of trying to convince Minister Mantashe that we can bring in more energy faster and faster, we just need more people and entities to keep going: apartment complexes, cooperatives, municipalities, stokvels, etc farmers are getting into agrivoltaics, letting municipalities put solar panels on traffic lights, letting more people consider the idea of banding together and setting up their own small-scale systems, and so on.
Small IPPs, families and businesses have shown us that we can power past fossils and power outages in a short time. There are logistical issues with renewables because countries like China struggle with capacity. Again, if the state declares some sort of emergency, it can do what it did with IPPs: send its own staff to source from manufacturers wherever they are on the planet.
In fact, let’s do better: let’s accelerate the pace of production of our own solar power components here in Africa.
This is my Mandela Day wish for 2022. Forget technical debates and focus on what is possible now, today! DM