Privatisation a catalyst to unlock Eskom's true value potential

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Feb 11, 2019, 03:14 ET

CAPE TOWN, South Africa, Feb. 11, 2019 /PRNewswire/ -- The unbundling of South Africa's only power utility could soon be a reality. This is following President Cyril Ramaphosa's announcement at the World Economic Forum (WEF) in Davos in January, pertaining to an unveiling of a turnaround strategy for Eskom.

"Privatisation will be the catalyst needed to unlock Eskom's true value potential," says Neeraj Sanjay Mense, Senior Industry Analyst at Frost & Sullivan in response to the suggestion of the power utility splitting into three state owned enterprises (SOE's) responsible for generation, distribution and transmission.

Eskom's currently structured to manage the entire value chain for power in the country, across generation, transmission and distribution. By retaining ownership of the transmission infrastructure, with the existing structure, Eskom is potentially losing out on efficiencies that can be attained from free market generation economics, as well as cost and energy efficiencies that private players would bring in.

"This is a serious barrier to entry for any private generation solutions that could possibly feed into the grid. With all the different sources of power which are coming into play such as wind and solar and the cost of alternate energy generation reduced below that of coal, buying from private players such as the IPPs within the Renewable Energy Independent Power Producer Procurement programme (REIPPP) could potentially result in a shutdown of some of Eskom's existing plants. This is as a result of Eskom not gearing up to the change that is happening in the electricity industry," says Mense.

The current system at Eskom is seen to differ significantly from some of the highly successful business models that Utilities globally have embraced. Aspects like digitalization, customer as a supplier, microgrids, and demand side management are some of the aspects that one can expect Eskom to successfully attain once the privatization and unbundling take effect.

This will also benefit customers, since the unbundling could eventually encourage free market plays in what has otherwise been a restricted sector.

The independent operator will decide where to buy electricity, as well as the structure of the independent transmission body that is associated with procuring and purchasing electricity from the different sources. The first mandate that the resultant organization could reflect, is to source electricity from the cheapest source first, which may be a hydro plant, a coal plant or a wind or solar plant - subject to complying with the requirements/ mandates/ regulations in effect in the country.

The challenges that have plagued Eskom in the past four years, like blackouts and high electricity tariffs, have caused an opportunity loss of sorts to South Africa, resulting in a reduction in industry and mining operations. This is a major challenge that contradicts the development plans that have been envisaged for the South African economy. Eskom has the financial capabilities to set up wind and solar farms and should relook at investing coal which countries are moving away from in the hopes to seek cheaper sources of power while also anticipating future electricity demand on a regular basis.

An independent operator procuring and selling electricity at a competitive price compared to global benchmarks, would act as an incentive for various industries moving to South Africa, especially where electricity is a significant operating cost

South Africa can also expect Eskom to start focusing on sustainability as a central theme, moving ahead, which bears well for the South African economy.

Privatising a once sole government utility into separate generation, transmission and distribution entities would directly benefit the end users and the economy. Considering past precedent from similar cases globally, we can expect a higher economic growth if electricity prices are brought under control. This could also encourage innovation within the South African electricity industry.

"Opening the market through power being procured from various power sources would also invite companies to South Africa to look at distributed generation and electric mobility which is already being looked at in many other countries," says Mense. "South Africa could also see companies moving into the country to manufacture batteries as we have the needed natural resources and energy storage is an essential element in the wind and solar grid.

"One needs to be very clear that although the privatisation of Eskom into three units will not solve its financial and operations crisis in entirety or in the short term, it is a step in the right direction and could potentially reduce the current operational inefficiencies and revenue losses, through streamlined processes, and adoption of alternate energy and energy efficiency across the entire generation, transmission and distribution spectrum," concludes Mense.

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SOURCE Frost & Sullivan