It’s time to enable independent power producers

At first, it seemed too good to be true, but Eskom seems to have finally turned a corner; for the better part of 2024 the utility managed to keep the lights on. This, writes Nicholas Woode-Smith, follows a torrid few years of repeated rolling blackouts that destroyed industry and stifled economic growth.

While it was cynically theorised that the improved performance of Eskom was due to the run-up to the election (a view I admittedly shared), it seems that for now, at least, it has managed to fix many of its issues.

It has been reported by electricity and energy minister Kgosientsho Ramokgopa that former Eskom CEO Andre De Ruyter’s tenure at the state-owned enterprise was unproductive due to constant accusations of internal sabotage and the demoralisation of staff at the parastatal. This is not exactly true, however, especially considering that Eskom has been faltering since 2007, long before De Ruyter was in charge.

Rather, Eskom’s newfound competence has been due to its relative de-politicisation. Ideological and political meddling has been weakened, allowing Eskom staff and management to seek out pragmatic and rational solutions to its problems.

Notably, Eskom has removed BEE requirements in its procurement process and has been allowed to bypass the costly and corruption-laden tendering process to source materials straight from the manufacturer.

We aren’t out of the woods yet, though. Eskom is still a government entity, vulnerable to corruption and future meddling. All it takes is for the minister or another powerful politician to decide that Eskom is not “transformed” enough and the parastatal will once again face problems. Couple this with the fact that Eskom still faces incredible debt and the need for politically intolerable price hikes, and things are still not rosy.

This is why it is critical that independent power producers be given increased leeway and support to enter the market. Already, the private sector has helped alleviate much of the stress for Eskom by providing a sizable chunk of electricity to the grid. This is not to mention the uptake of solar panels by households and businesses, which has further lessened demand from the grid. Independent power producers also have a positive influence in lowering electricity prices through increased supply, further allowing rates to drop and positively influencing economic growth as a result.

The private sector as a whole has a distinct advantage over Eskom: it is shielded from many of the inherent problems of being a parastatal. It is not directly controlled by political interests and can thus focus on the task of producing electricity. Its members are also more trusted by many investors and can raise sustainable capital that Eskom itself may struggle to gain.

The International Finance Corporation (IFC) has expressed its eagerness to fund private sector participation in the electricity industry – something that will be drastically needed, as Eskom has expressed its need for the private sector to help foot the bill for a R200-billion overhaul of electricity infrastructure.

R200 billion is a big ask for a single entity to raise, but spread over hundreds – if not thousands – of power producers, it may not be that difficult. This is especially true if large corporations with existing positive cash flow decide to enter the market.

The private sector also has another distinct advantage over Eskom, which needs to be leveraged by the National Transmission Company of South Africa (NTCSA). While Eskom struggles to get municipalities to pay its overdue bills, unable to force the issue due to the government’s fear of losing votes, the private sector is not compelled by votes and can therefore force the issue of payment. But this is only if the NTCSA can guarantee its independence from Eskom.

While technically a part of Eskom holdings (and still a government entity), the NTCSA has paid lip service to being an independent entity, existing to create electricity transmission infrastructure that will form an open playing field for Eskom and private producers. If this can be achieved and all producers are treated equally, then this fair free market will only benefit South Africans.

Unfortunately, even if the NTCSA is independent, Eskom is still at an advantage, as it can leverage political capital, tax money, and unsustainable government-backed debt to undercut private producers. Hopefully, this does not occur again, after Eskom utilised its unfair advantages in the 1990s to undercut potential private sector investment – a factor which contributed to all of our current problems.

Ideally, Eskom should be unbundled and its assets sold to responsible private sector companies that can use their incentive as profit-making ventures to drive forward sustainable and positive change, free of political interruption. But even without full privatisation, more must be done to deregulate the sector to allow even more private producers to enter the market.

There should be increased tax incentives for companies building generation capacity to not only go off grid, but to feed into the grid. Attempts to tax and disincentivise solar power for households and businesses should be halted. We should be encouraging electricity to become as cheap as possible. Additionally, the private sector shouldn’t only be encouraged to invest in green energy; coal and other forms of traditional power generation are more reliable, and suitable for South Africa’s resources.

Coal mining companies should be incentivised themselves to build their own coal plants and enter into the market. This will help their profit margins and South Africa as a whole. Cheap, plentiful electricity is a necessity for a growing economy. A growing economy leads to job creation, and the end of unemployment and poverty. It is of tantamount importance that legislators and regulators make it as easy as possible for the private sector to contribute towards electricity generation and transmission. By embracing a free market in electricity, we will see this country prosper.

* The original version of this article was first published by BizNews on 31 October 2024.