In this article, Mark Pickering argues that the short answer to the current impasse between Eskom and renewables generators is to instruct Eskom to comply with the law and sign the agreements. The longer answer, however, will involve a more complex restructuring of the utility.

Public Enterprises Minister Lynne Brown has been noticeably absent from the very public debate between Eskom and the renewable power industry over Eskom’s refusal to sign power purchase agreements arising from the fourth round of government’s much-lauded renewables programme. Finally breaking her silence at an Eskom briefing last week she reiterated Eskom’s view regarding the supposed “high cost” of renewables and supported the utility’s stance. What underlies her position and what interests should she serve?

In our view Brown’s position is misplaced in several respects. Legal opinion is very clear that Eskom has no discretion in the matter. In fact, Eskom signed the first three rounds of renewables at much higher tariffs than the disputed fourth round without raising a peep. So, why now the fuss?

The cost of the early rounds is sunk and has no bearing on signing the fourth round. In fact, renewables are indisputably the cheapest form of generation available to the country, being 40% cheaper, according to a Council for Scientific and Industrial Research study, than new coal bids and around half the cost of unproven nuclear estimates. It is also the only generation technology whose costs are falling and, therefore, deserves ongoing support.

So why has Brown provided Eskom with executive cover to defy government’s most successful public-private partnership ever? In part the answer lies in Eskom’s own structure and its resulting conflicts of interest. On the one hand, Eskom runs the national grid, which includes the single buyer and the system operator – call it GridCo. On the other hand, Eskom generates lots of energy, is busy building some very large and expensive coal plants to generate even more energy, and is keen on building a fleet of even larger and more expensive nuclear plants to generate yet more energy – call it GenCo.

All this energy needs somewhere to go, and someone to pay for it. GenCo also dwarfs GridCo in just about every respect, barring the revenues which must pass through GridCo to keep GenCo afloat. Needless to say Eskom’s corporate governance is far more concerned with the future of GenCo than stepsister GridCo. As government’s independent power producer programme grows it takes a slice of revenues away at GridCo level, leaving less for GenCo to feed on. Hence the conflict.

After nearly 100 years of almost continuous growth in production, sales and revenues the last decade has, to Eskom’s consternation, witnessed a complete stagnation in demand. To meet GenCo’s voracious cash requirements to fund its new build programme the energy regulator has allowed tariffs to soar – prompting consumers to seek alternatives and pushing demand down ever-further in an increasingly vicious circle.

The conflict of interest between GenCo’s growth objectives and GridCo’s national service mandate are exacerbated by the stagnant market and the growth of IPPs. A rational GridCo should choose the lowest cost generation mix without fear or favour. A self-interested GenCo can be expected to pull whatever levers of power it can access to keep competitors out and to retain as large a slice of GridCo’s revenues as possible – in order to finance its’ ambitious megaprojects. Eskom is consequently abusing its governance of GridCo.

This conflict is repeated in government, where the Minister of Public Enterprises sees her job as representing the ‘shareholder’ interest in the utility (read GenCo, rather than GridCo), whilst the Minister of Energy promotes the ‘national’ interest through the rational Integrated Resource Plan process to achieve greater diversity of suppliers and technologies in the energy mix.

The governing party has recognised the unhealthy nature of Eskom’s conflict of interest on several occasions. As far back as 1998 the White Paper on Energy resolved to split Eskom into separate entities in order to address the conflict. The 2011 Independnent System and Market Operator (ISMO) Bill saw the first serious legislative attempt to enact this policy. Eskom used its political clout to kill the ISMO, as it has done for many similar initiatives.

Protected from any real competitive pressure or consequences, Eskom’s new build programmes have incurred massive time and cost overruns, all of which ultimately fall to the consumer to bear. The damage to the economy is incalculable and is routinely cited by government and investors alike as the primary constraint to growth. Eskom’s willful sabotage of the successful renewables programme is just another chapter in a long story of GenCo’s interests triumphing over the national interest.

Eskom took on average 12 months to sign agreements with the first three rounds of renewable producers in what had become a routine procedure. Fourth round preferred bidders have now been waiting 22 months, effectively holding up R58-billion of much needed investment and over 13 000 construction jobs. Whose interests are served by this action?

We take heart that Brown has finally conceded to a meeting between herself, the Minister of Energy and Finance and Eskom in mid-February to ‘seek answers’ to the impasse. As she well knows the short and correct answer is for her to simply instruct Eskom to comply with the law and sign the agreements. The longer answer is more complex and requires a re-opening of the knotty issue of how to separate GridCo from GenCo’s selfish interests.

- Pickering is an independent power producer executive. He writes in his capacity as chairperson of the South African Wind Energy Association and board member of the South African Renewable Energy Council