Fixing “the Eskom problem” is going to require a serious restructure
Forward-thinking investors and entrepreneurs in the African energy sector will deliver significant downstream benefits for the continent in the coming years.
While there has been much focus on the Emergency Power Programme in South Africa recently, we need to ensure that the narrative is not around quick, short-term fixes to solve “the Eskom problem” but rather about ensuring that the energy sector is a strategic sector both locally and across the continent.
Consider for a moment that there are 600 million people across Africa who do not have access to electricity. Yet at the same time, we have an abundance of alternative energy sources including gas, solar, wind, biomass and water. We need to identify a way to harness these resources rapidly and to create an enabling environment for these projects to come online to drive economic activity.
In South Africa, the Eskom challenge and the impact this has on economic activity is well documented. The challenge we as a country face is an ideological one around the role of the state versus the private sector when it comes to the supply, purchase and distribution of electricity.
The reality is that Eskom has become a multi-headed hydra holding back economic growth in the country on a number of fronts. On one hand, we need to continue funding ageing infrastructure at the utility and its network to ensure we keep the lights on and sustain the economic activity we are currently delivering.
On the other, we need to invest in additional supply that will ultimately come in cheaper, more technologically advanced & efficient and potentially cannibalise its operations through lower-cost producers.
A further interesting dynamic playing out is the environmental issues that are likely to become increasingly more topical around the Eskom energy mix. We are well aware that there have been hundreds of millions of Rands in cost over-runs at both Medupi and Kusile and despite 15 years under construction, the Deputy President confirmed in June 2020 that it expects Medupi to be finalised this year, while Kusile will only be completed by 2023.
At the same time, financiers are coming under pressure to withdraw funding for coal-fired power projects and rather deploy their resources toward cleaner energy sources. The World Bank and its affiliates are major funders for infrastructure projects, and they are well aware of the health and environmental risks associated with the Eskom coal-fired power plants. As part of the World Bank lending requirements, Eskom was expected to invest in technology to reduce the environmental impact on surrounding communities – technology they now only expect to be able to implement in 2030 – at a cost of R30bn. Money the utility and South Africa simply doesn’t have.
Something significant must be done to resolve the Eskom challenge, and throwing good money after bad, is not the right answer in the long run. Eskom needs to be restructured by potentially instituting the following:
• How about plant optimization technologies to get more ‘life’ out of existing plants
• Better maintenance regime
• Embrace more lower-cost & cleaner Renewable Energy technologies, including storage technologies
• Distributed generation at specific load centres eliminating the need for long transmission losses due to power being transmitted from the coal centres in SA over long distances
• Unbundle Eskom into separate Transmission, Distribution & Generation divisions whilst encouraging greater private sector participation
• Create a separate ISO (Independent Systems Operator). Eskom should not be ‘player & referee’ at the same time.
Reconfiguring some if its coal or OGCT power plants from diesel to gas potentially
• Staffing: The World Bank has stated that Eskom is overstaffed and not as productive when compared to its peer utilities globally.
• Possibly bundling & selling off plants (wholly or partly) to IPPs. This becomes somewhat of a challenge when a large portion of the fleet is coal-fired generation (and interest for this technology is dwindling globally) and with an average age of the fleet > 25 years old.
• Looking at private sector involvement in the transmission grid. Clearly, Eskom has strained finances and private sector involvement to drive expansion & modernization of the grid would surely be welcomed.
It is encouraging to note that Eskom is evaluating some of these thought processes.
What is encouraging is the changing tone around Public Private Partnerships (PPP) and the role they will play going forward. 2020 and the COVID-19 pandemic has been a game-changer for governments around the world as tax revenues have come under pressure, Foreign Direct Investment (FDI) has been constrained and the ability to meet the infrastructure investment commitments for transport, electricity and water projects has been curtailed.
Suddenly we are seeing traditional ideological positions being softened as all parties are recognising the importance of rebuilding economic activity through collaboration. The private sector has the ability to deliver projects efficiently, on-time and to budget – a lesson we see with the REIPPP program in SA. Sadly, Eskom has had a poor track record on all of Ingula pumped storage, Medupi & Kusile. Governments around the world do not have unlimited finances. The private sector should be tapped into to deliver projects efficiently. Government should play the role of ‘Referee’ creating the enabling environment to encourage investment by the private sector. In this regard, we can deliver modern infrastructure for power, water, roads, social infrastructure, healthcare using PPPs. SA has already had a track-record with this. More needs to be done to catalyze this.
The Independent Power Producer (IPP) Programme in South Africa has been a remarkable success and with more than 120 IPPs either online or coming online shortly, it proves that public and private sector interests can align for economic benefit.
It is important to remember that the average infrastructure project in Africa takes about 8 years to move from ideation to coming online. This means that you need visionary partners at all levels who are prepared to invest for the long-haul and this is one of the areas where we have enjoyed some real successes in the Utilities and Infrastructure sector over the last couple of years as we have positioned ourselves as a leading Pan-African banking group.
Collectively we have brought online 33 infrastructure projects with debt commitments exceeding R70bn over the last decade and we expect to be able to use our human and financial capital to fund more deals as the continent matures.
Our deep understanding of the energy space has meant we have been able to fund or co-fund a variety of projects across the spectrum including Gas and Solar powered power plants, and LNG facilities.
While questions around governance and legal frameworks do still occasionally enter discussions, Africa as a whole presents a compelling investment case.
On a risk-adjusted return basis, projects on the continent boast better returns than many other jurisdictions. This is highlighted by the quality of the energy projects that are being delivered in places like Mozambique, Ghana, Senegal, Egypt and Morocco – there are great deals being done on the continent.
Renewable Energy infrastructure projects represent low-hanging fruit for finance partners and as the discussion moves between tackling short-term problems and moving to longer-term investments, higher quality projects will be brought online.
Africa is a continent with an abundance of natural resources to drive energy production. If we can create an enabling environment for innovators and entrepreneurs to enhance our energy supply mix, the economic multiplier effect will be massive and create returns for both the private sector and governments. A win-win indeed.
Countries who rise to this challenge will reap the benefits for years to come and we look forward to partnering with teams who recognise this opportunity. There is no shortage of access to capital for the right projects.
Written by Bhavtik Vallabhjee, Head of Power Utilities and Infrastructure at Absa Corporate and Investment Banking. Bhavtik joins Bruce Whitfield for an Absa Insights online event dealing with pan-African developments in Natural Resources and Energy.
Click here to register for the Absa Insights: Power, Utilities and Infrastructure webinar taking place on 17 February, from 14.00 – 15.00.
This article first appeared on 702 : Fixing “the Eskom problem” is going to require a serious restructure