Restoring good governance at Eskom is undoubtedly the most pressing priority for the State-owned utility and arguably among the top five current priorities for government itself. Absent an extraordinary recovery in the group’s credibility, the prevailing trust deficit between Eskom and society will not be breached. It will also undermine all efforts to convince citizens that the latest request for a 19.9% tariff hike has any merit.
Sadly, given the current standoff within the governing African National Congress, decisive action to address the utility’s integrity problem is unlikely, leaving Eskom’s long-term sustainability in jeopardy. Already the alarm bells are ringing, with Goldman Sachs recently describing Eskom as the economy’s “biggest risk”, while Business Unity South Africa has suggested that the utility is approaching a sustainability tipping point.
The problem for Eskom and government is that, even without the scourge of mismanagement and corruption, Eskom’s business model would be coming under pressure. As tariffs rise, Eskom is selling less electricity. By 2017/18, Eskom would have been expecting sales of more than 244 000 GWh, while, in reality, they will be closer to 211 000 GWh. However, while tariffs rise, so do costs, which results in even steeper increases and even less consumption – the so-called utility death spiral.
The short-term remedies for addressing this spiral are far from clear. To manage the problem, policymakers and utility executives have to become more proactive. For starters, policymakers need to clear up exactly what it is they want from the electricity sector. If the goal is the lowest-cost and most stable electricity supply possible, crafting policy will surely become easier. From there, a transition to sustainability can be chartered.
Given Eskom’s financial and governance predicaments, it is fairly safe to say that a sustainable industry can no longer be premised on a vertically integrated monopoly. If it were, policymakers would not only be ignoring Eskom’s plight, but would be closing their eyes to the disruption taking shape across the globe. This disruption is being driven primarily by the sharp fall in wind and solar photo- voltaic costs, but also by the imminent rise of new technologies, such as battery storage and the electric vehicle.
Without question, South Africa has among the best combined solar and wind resources globally and should, thus, be seeking to shape its electricity policy around taking full advantage of this comparative advantage. To do so will require change. For one, the unbundling of Eskom Generation from Eskom Transmission System Operator (TSO) is important not only to level the playing field for private entrants but also to liberate Eskom itself.
By so doing, Eskom Generation will be free to aggressively pursue renewable energy at home and abroad, while still facilitating sector transformation and ensuring a just, or socially cushioned, transition away from coal. Eskom TSO, meanwhile, could set its sights on becoming Africa’s electricity infrastructure company of choice – even the continent’s ‘super grid’ company.
What is required now, though, is not hand ringing or a clinging to past notions of grandeur. Instead, South Africa needs leadership with integrity and vision and a management cadre with the ability to execute a chosen strategy.