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Wood for the trees

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Wood for the trees

14th December 2018

By: Terence Creamer
Creamer Media Editor

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With so many urgent problems to deal with at Eskom, it has become difficult to see wood for the trees. As is to be expected in a crisis, the focus is very much on the short-term remedies. Besides the possible debt bail-out, it’s about shoring up immediate coal stocks, fixing badly maintained plant and ensuring that there is enough diesel available to close the gaps arising as a result of breakdowns and/or inadequate primary energy supplies, where possible. When those levers fail, the growth-sapping lever of load-shedding is pulled.

This natural obsession with ‘keeping the lights on’ risks distracting from Eskom’s fundamental problem, however. The reality is that the utility is not only broke financially but also broken operationally largely because it has a business model that makes it impossible to adapt to the disruption unfolding around it. Of course, the situation is amplified by inefficiency and corruption, but even without those elements Eskom would still be facing existential threats.

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It is also painfully clear that Eskom’s sustainability will not be restored through the interventions currently on the table. The nine-point plan to return the company to an operational even keel is important, as is the financial recovery plan, which could include another near-term bail-out and tariff hikes, but neither intervention will truly address Eskom’s viability conundrum. Its long-term sustainability rests on some decisive and clear-eyed political and policy decisions, informed by evidence rather than sentiment. In this regard, South Africa’s energy policymakers could do far worse than to take time to read a recently published report, entitled ‘Powering down coal – navigating the economic and financial risks in the last years of coal power’.

Published by the Carbon Tracker Initiative (CTI), the report is particularly germane to South Africa, given its heavy reliance on coal – the country has the world’s seventh-largest coal fleet, theoretically standing at 42 GW of operating coal capacity.

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A key take-away is that the so-called utility ‘death spiral’ is not a uniquely South African problem. In fact, the report’s authors estimate that 42% of the global operating coal fleet is currently unprofitable and that, by 2040, the figure will climb to over 70%, even in the absence of further climate or air-pollution policy tightening. They also describe the notion of cheap coal as a “myth”, calculating that 35% of coal capacity is already more costly to run than building new renewables – the figure is forecast to climb to 96% by 2030.

The report also points to a serious risk of stranded assets, amid what they describe as three economic inflection points: when new renewables and gas outcompete new coal; when new renewables and gas outcompete operating existing coal; and when new firm renewables and gas outcompete operating existing coal. They forecast that, by 2025, the first inflection point would have been reached in all markets and a useful interactive tool on the CTI website shows that renewables are already cheaper than new coal in South Africa.

The authors argue that the global narrative is changing from how much to invest in new coal capacity to how to shut down existing capacity in a way that minimises losses. It is surely vital for South African policymakers to sit up and take note.

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