Achieving a Just Energy Transition for South Africa
The Alternative Information and Development Centre (AIDC), Trade Unions for Energy Democracy (TUED) and the Transnational Institute (TNI), are working with NUMSA and NUM – key unions at ESKOM – as well as several other union formations in developing a road map to establish a new public electricity system. To this end, we have formed a Reference Group made up of representatives of these organisations.
Formed in September 2018, following a three-day working meeting on energy democracy in Johannesburg, the Reference Group is examining both the origins and structural features of the current crisis of Eskom and how to address them. The Reference Group is currently engaged in a comprehensive analysis of South Africa’s electricity sector and is attempting to map a bold approach to the required energy transition.
A full report of the Reference Group’s findings, provisionally titled Our Power: Achieving a Just Energy Transition for South Africa, will be released later in the year. The report will contain proposals for an extensive transformation of the entire electricity sector, and the crucial role, particularly in relation to renewable energy, that a radically reformed public utility will need to play. It will draw extensively on the experience of the labour movement and specifically the knowledge and insights of NUMSA and NUM members and leaders.
The forthcoming document Our Power: Achieving a Just Energy Transition for South Africa will be constructed around three core commitments:
1. Build a 'New Eskom': Fully Public and Serving the People
2. Secure a Democratic and Just Energy Transition
3. Fulfil the Promise of Socially Owned Renewable Energy
Eskom’s Crisis is South Africa’s Crisis
It is clear that Eskom is in crisis. ‘State capture’ and board-level mismanagement have pushed Eskom to the brink of collapse. The cost over-runs in building Kusile and Medupi, and the design errors in new build units, have imposed an enormous burden on everyone. The governance of Eskom must be completely transformed and this must serve as a precursor to a major policy review of the whole sector.
However, important features of Eskom’s crisis are the result of government policy, and not the result of decisions made by Eskom in isolation. The government’s decision to convert Eskom into a publicly traded company in 2001 marks an important turning point in that it set the stage for neoliberal marketisation. With corporatisation, Eskom was required to generate a surplus, pay taxes, and issue dividends to investors.
In the years preceding the embrace of “the market”, the government’s electrification program successfully connected 2.5 million people to the grid. At the end of 1993, just 36% of the population and only 12% of rural dwellers had access to grid electricity. By 1999, Eskom and local authorities had together increased overall electrification to around 66%. Private markets could never have accomplished this level of electrification.
But electrification on its own could not overcome the impacts of extreme poverty. The poorest 50% of South Africans continue to receive only 3.3% of the national income and 45% are considered poor or very poor. Poorer urban homes in SA spend between 12% and 20% of household income on energy. In terms of Eskom’s finances, these levels of poverty meant that only a fraction of the costs of electrification (roughly SAR 9 billion in total) was recovered through electricity payments by users. Introducing pre-paid meters did not significantly raise payment levels, and were obviously regressive.
Despite the fact that Eskom’s electrification program contributed to significant improvements in quality of life and economic opportunity, it remains the case that almost 16% of South Africans still do not have access the electricity and many more can barely cover their electricity bills. As Eskom sought to close the gap between revenues and costs, tariffs have been raised by more than 400% in real terms in just 10 years. Any commitment to full electrification will need to acknowledge that this will incur further costs. These costs, however, will need to be distributed across the entire system of government finances. They should not be purely the responsibility of Eskom.
While the poor are struggling to pay their electricity bill, large energy consumers have not been required to pay their fair share of the total cost of providing a universal public electricity service. The mining and industrial sectors together consume 60% of Eskom’s generation, whereas residential users consume just 20%. Mining companies alone consume more than 40% of Eskom’s power but contribute just 34% to revenues. Large private interests are therefore being subsidised by public electricity, with additional costs being borne by Eskom.
Eskom is also subsidising municipal authorities. Struggling to provide or sustain basic services, many municipalities sell electricity at a price considerably higher than Eskom’s prices. Many of these same municipalities then fail to pay their bills to Eskom. This also contributes to Eskom’s financial worries. The combined municipal debt to Eskom currently stands at R17 bn and Soweto, which gets its electricity directly from Eskom owes an equivalent amount (R17 bn).
Rising coal costs have also made matters worse for Eskom. Average coal costs are now close to R400 per ton, up from R190 per ton in 2011. This is because rising coal use in India, China and elsewhere have inflated the global price of coal. Exports are more lucrative than the provision of coal to Eskom. Coal producer costs have not significantly increased, but the prices charged to Eskom by these same producers have more than doubled in just a few years. Eskom’s operating budget is currently R190 billion, of which roughly R50 billion is taken up by purchasing coal.
All of these factors suggest that many of Eskom’s problems are not internal to the utility itself. Rather, Eskom’s problems are in many respects a reflection of South Africa’s problems. Solving them will require a reappraisal of the role of energy today and the role it might play in future. It is essential that these problems be viewed with an eye on how the energy system can become more socially and ecologically sustainable.
Reform and Reorganisation of Eskom
Union bodies and key allies have already stated their clear and unequivocal opposition to the proposed unbundling of Eskom. Unbundling is a World Bank policy and a precursor to predatory ‘partnerships’ with private corporations keen to seize and control national assets and public property and to raise electricity prices. Breaking up the public utility will not generate a single rand in additional investment. It will not resolve its debt crisis, and it will not address Eskom’s death spiral. The death spiral refers to a situation where the amount of electricity that Eskom is able to sell declines for a range of reasons including higher tariffs and increased use of renewable energy. As its income stream gets less, Eskom is driven to increase its tariff even more to make up the difference, which results in more people opting for renewable energy. As revenue and profits continue to fall, the electricity infrastructure decays and the situation worsens. But unbundling will not solve this problem. If implemented, unbundling will undermine the potential for much-needed cooperation and effective energy planning across the entire electricity sector.
The Reference Group takes the view that electricity must remain a fully public service and the utility’s present and future infrastructure should remain in public hands. Nevertheless, the utility must be reformed from top to bottom, with transparent and effective governance structures introduced that give decision making powers to workers, middle management, and representatives of communities and municipalities. The Reference Group is currently developing proposals along these lines.
The 2001 corporatisation of Eskom in 2001, which we believe is a major contributor to the crisis that Eskom finds itself in today, must be reversed. This must form the basis for changes in governance as well as organisational changes at the level of operations and management. The ‘New Eskom’ will need to transition towards a model of generation, distribution, transmission and conservation that, while remaining fully public and integrated, can incorporate the progressive development of distributed renewable power into the energy mix. This must be done in ways that, for the foreseeable future, can efficiently balance base-load power with variable renewable energy. To achieve this goal, Eskom must be allowed space and support to develop renewable energy along the lines of a utility-owned generation (UOG) model, which gives content to our demand for the expansion of a socially owned renewable energy system.
Renewables will need to play an increasingly important role in the future energy system. South Africa has enormous potential to develop renewable energy in a way that is mindful of the need to fulfil our country’s obligations to control and then reduce emissions and create jobs at the same time. Protecting the climate, our water, and the integrity of our ecosystems is a working class issue of central importance.
It is nevertheless important to recognise that coal will have an important role to play for years to come. Coal currently generates roughly 90% of South Africa’s electricity. The country’s current coal-based power generation system could be (and should be) much more efficient. The loss of efficiency of the current coal-fired fleet is not only about the age of the individual generating units, but is also a reflection of the fact that for the last few decades there has been a neglect of proactive maintenance. Refurbishments of power stations at their mid-life (30 years) point have been routinely postponed, and we are now paying the consequences.
Under the guidance and leadership of a reformed public utility, communities and municipalities will play a larger role in energy decision-making and management than is currently the case., However, these entities will function as partners in the fully public system, and not as agents of private interests positioned to undermine Eskom as a fully public provider This is the best way to keep the entire system viable, to create jobs, and to improve quality of life.
All South African citizens and commercial entities should have access to the public grid and all must help sustain the entire system as a universal service. Going “off grid” is currently the privilege of very rich individuals. But these same individuals feel they can then come back onto the grid as and when they need to. This means the costs of sustaining the system are borne by the working class. This is neither equitable or sustainable.
The energy transition must proceed in a manner that is fully open and democratic, with effective just transition policies put in place for mining communities and for those who work in energy-intensive sectors across the economy. Displaced workers must be guaranteed employment or a grant equal to their current salary/wage. Energy choices must be liberated from profit-maximisation, rent-seeking and political patronage. A reformed public utility can lead the effort to explore the most equitable and efficient means of decarbonising supply in a planned and transparent manner.
Energy Transition: Renewable Energy and the Failures of the IPP Approach
The partners in this project, including NUM and NUMSA, are not opposed to renewable energy, and acknowledge the huge threat posed by climate change. But we oppose the REI4P programme because it serves a privatisation agenda, imposes costs on the public electricity system, and will ultimately raise prices and increase energy poverty. The REI4P programme is to serve the interests of investors. Rather than help South Africa meet its climate targets, the REI4P program will turn the South African people against renewable energy.
The government’s current approach to developing renewable energy has long been influenced by the ‘policy colonialism’ of the World Bank and the International Monetary Fund (IMF). For decades these institutions have pushed notorious structural adjustment programmes (SAPs) that demolished public services and social protections in dozens of countries across the Global South.
The IPP system for renewables is consistent with this failed and anti-people approach. IMF and World Bank policy insists on turning public energy systems into battlegrounds where different energy interests trample all over each other to preserve or expand their market share. Drawing on the international experience of investor-focused renewable energy deployment, our report will explain why the IPP approach erects obstacles to deploying renewable energy at the speed and scale required. Despite the lavish praise heaped on the REI4P programme from the World Bank and private investors, the programme is not the best way to develop South Africa’s renewable energy potential. The current approach to the expansion of the renewables sector puts renewables in an antagonistic relationship with Eskom, which, in turn, adds to the fiscal crisis of the utility and threatens jobs. A truly just transition from fossil fuels to renewable energy must be part of a project to modernise the economy in ways that can create employment alternatives for those who will lose their jobs, as well as create employment opportunities for those who either do not have steady work or whose work is in every respect precarious.
Meanwhile, the IPPs do not – as some have claimed – subject Eskom to market competition. On the contrary, the IPPs currently enjoy ‘out of market’ protections and, unlike Eskom, are guaranteed revenues and profits. Eskom has also been ordered to sign expensive 20-year power purchase agreements (PPAs) with the IPPs. The IPPs were granted R15 billion in the fiscal years 2016 and 2017, compared to the R3 billion it would have cost Eskom to produce the same amount of electricity.
As a result, Eskom has attempted to obstruct the IPPs at every turn. It has delayed signing contracts and dragged its feet when connecting IPP power to the grid. The proposed Independent System Market Operator (ISMO) is the government’s attempt to discipline Eskom and to expedite the deployment of renewables, but it will merely add to Eskom’s fiscal crisis. Eskom currently produces electricity far more cheaply than for-profit IPPs. According to neoliberal logic, the fact that Eskom is a public system built up over decades, and much of the infrastructure costs have been fully paid for, amounts to an ‘unfair advantage’. Therefore the ISMO’s job is to ‘level the playing field’ by giving IPPs preferential treatment and guaranteed access to the grid. Clearly, this is not introducing ‘competition.’ It amounts, instead, to the suspension of competition in the service of private interests and profit-making.
Social Ownership of Renewables
The report of the Reference Group will show that an alternative approach to energy transition is both viable and necessary. It will allow us to consider development options and industrial strategies that are built around economy-wide decarbonisation, job creation, and diversification. It will explain the essential role of a reformed public utility in coordinating and driving an energy transition to a low-carbon and truly sustainable future. It will also explore ways to develop a domestic and socially owned renewable energy sector with a significant manufacturing base and the formation of local supply chains. This will create jobs at the community level, something the REI4P has failed to do.
As in other parts of the world, renewables cannot yet compete with existing coal, gas and nuclear capacity. Therefore public money—in the form of tax breaks, Feed-in tariffs and concessionary financing, etc—is being used to support private renewable projects, and multinationals and investors take their cut. Profits, high interests rates demanded by investors, and the costs of competition all inflate the price of renewables. This is why the power purchase agreements (PPAs) signed with IPPs are above the market price – – and not because renewable energy is intrinsically more expensive than any other form of energy. Social ownership will remove these additional payments, making the actual cost of renewables much cheaper than other forms of energy. And this is before the health and safety costs of fossil fuel and nuclear energy are quantified. But at the present time, the higher direct price currently paid for IPP-generated renewables either gets passed on to users in the form of increased tariffs, or it becomes part of the utilities' debt.
With social ownership, renewables could be developed as a public good and be deployed in a manner that, in contrast to the IPP approach, does not undermine the entire public service model of electricity provision. Tariffs can be linked to the real cost of sustaining the entire public system, with everyone contributing their fair share. Cost is important, but it cannot be the main consideration because, for the foreseeable future, coal and renewables will co-exist alongside each other. This co-existence is technically unavoidable and may last for two or three decades. The 'price war' therefore serves no purpose and must be brought to an end. The IPP system must be abolished. A cooperative relationship between different forms of energy is essential and will allow South Africa to plan its transition based on social and ecological need. Only a socially owned system can ensure a just energy transition.
A public utility or a national government can borrow capital at lower rates, as the cost of capital is the largest single contributor to the cost of delivering renewable energy. It can procure technologies from established producers as needed, and progressively develop wind and solar supply chains ‘in-house’. With planned increases in deployment, and with no fuel costs, socially owned renewable energy will be less expensive both economically and ecologically.
Socially owned renewable energy will allow South Africa to bring renewables to scale in a planned and equitable way. In this scenario, the creation of a domestic wind and solar industry is feasible. With the IPP model, it is all but ruled out completely. Social ownership will deliver renewable energy faster, cheaper and fairer.
A New Eskom would first reduce the costs of renewable energy and then arrive at a ‘levelised’ cost based on mixing renewables with coal-fired generation. It will first reduce the costs of renewable energy and then levelise those costs by mixing renewables with coal-fired generation.
Our road map towards charting a new public electricity system will be based on extensive research in understanding the current crisis of ESKOM, going beyond the narrow narrative of state capture and corruption. It will be based on international experience of grappling with the phenomena of the death spiral of public utilities and of the social and environmental failures of the liberalisation of the energy/electricity sector.
Tasks of the Reference Group
The forthcoming Reference Group report, provisionally titled Our Power: Achieving a Just Energy Transition for South Africa, will explain why the current approach to energy policy cannot deliver the energy transition South Africa needs and it will not be able to prevent workers being the ones who pay the highest price.
The major component of the research work will focus on what a transformed vertically-integrated fully public Eskom will look like, working in partnership with municipalities and communities to give effect to our commitment to a socially-owned renewable energy sector.
The Reference Group will also examine the role of coal exports and the long-term prospects of supplying carbon to generate energy in countries like India. The quality of the coal exported, and the poor quality of coal burned by Eskom, also needs to be thoroughly investigated and understood.
The Reference Group report will consider options for reconfiguring tariffs in ways that can promote equality and fight poverty. Our goal is to make visible the true costs of providing electricity and the role tariffs can play in recovering these costs. The current approach favours the large industrial and mining interests and slows the transition to less energy-intensive economic activity. NERSA’s role has been to first depress prices to assist the minerals-energy complex, only to raise tariffs dramatically to narrow the distance between actual costs and revenues. This ‘zigzag pricing’ fails to provide a balance between the degree to which tariffs can recover actual costs and the need for reliable and affordable energy as a public good.
The report will be offered in order to encourage an in-depth discussion on energy transition options and an energy mix that moves the country towards a low carbon future. Once the IPP system has been dismantled, socially owned renewables will be able to play a big part in South Africa’s new energy system.