Eskom Green has been cleared to enter the race, which, on the face of it, is good news.
For now, Eskom is carrying excess capacity, but South Africa still needs tens of gigawatts of new generation. Eskom owns land, grid connections, engineering skills and power station sites that will have to be repurposed as the coal fleet retires. A separately funded renewable energy subsidiary, using project finance structures and private capital, could accelerate investment while limiting the risks carried by taxpayers.
Eskom Green is targeting up to 32GW of utility-scale renewable energy by 2040 — roughly a third of the renewable capacity envisaged in the 2025 Integrated Resource Plan.
Group CEO Dan Marokane has stressed that this still leaves more than two-thirds of the opportunity to the private sector.
However, that reassurance doesn’t assuage growing concerns about whether Eskom can become one of the country’s largest renewable energy developers while companies in the same group remain connected to the transmission network, the electricity market, customer information and the allocation of scarce grid capacity.
Eskom Green should be allowed to race. But its competitors are entitled to ask whether the Eskom group will also control the lanes.
This is why Marokane’s recent defence of electricity market reform carried in Business Day made for illuminating reading.
His argument is technically informed and, in several important respects, correct. South Africa cannot create a competitive electricity market simply by licensing a few traders and inviting private generators to sign contracts with large customers.
Electricity isn’t an ordinary commodity. Supply and demand must be balanced continuously. Transmission infrastructure must be maintained and expanded. Reserve capacity must be available when generators fail or the sun doesn’t shine. Market participants need rules governing dispatch, balancing, collateral, settlement and counterparty failure.
Someone also has to pay for the obligations at present embedded in the tariff.
Marokane is therefore right to warn against what economists call uneconomic bypass. Put plainly, it occurs if Eskom’s largest and most creditworthy customers depart first, taking their revenue with them but not their share of legitimate system costs, and prices rise for everyone who remains. More customers then leave, shrinking the tariff base further. That is the utility death spiral that many energy experts have been warning about for years now.
Nonbypassable charges — costs that customers continue to pay even when buying electricity from another supplier — therefore have a legitimate place in the emerging market.
Eskom was entitled to raise these concerns when trading licences began to be issued before the full regulatory framework had been settled.
But Marokane’s defence then moves too easily from “these costs must be recovered” to “Eskom is acting to protect South Africans”, as though Eskom’s commercial interests and the public interest are necessarily the same thing — which they clearly aren’t.
Eskom may have been protecting vulnerable consumers. It was also protecting Eskom’s revenues, balance sheet, customer base and legacy assets.
I’m hardly shocked that a company acts in its own financial interests. That doesn’t make its argument illegitimate. The problem arises when a dominant incumbent presents those interests as a neutral expression of national welfare, particularly while launching a subsidiary intended to compete aggressively for the same customers and investment capital as independent producers.
The real dispute is which costs qualify, who calculates them, who independently verifies them and how long they remain payable.
A properly designed nonbypassable charge could fund transmission networks, balancing services and clearly defined social obligations.
A badly designed one could become a capacious suitcase into which stranded coal assets, inefficient contracts, municipal failures and decades of poor decisions are stuffed before being handed to future customers.
Without rigorous independent oversight, “protecting the system” can become indistinguishable from protecting the incumbent from competition. This is why the independence of the transmission system operator matters so much.
The presidency’s own explanation is unequivocal. Most countries that establish competitive electricity markets separate transmission and system operation from the incumbent generator precisely to remove both real and perceived conflicts of interest.
Think about it.
We wouldn’t allow the largest bank to control the payments system while deciding which rival banks may connect to it. We wouldn’t ask the dominant stockbroker to run the JSE, see everyone’s orders and assure smaller brokers that strong regulation prevents favouritism.
Yet Eskom is simultaneously a generator, distributor, prospective electricity trader and developer of Eskom Green.
Eskom says the subsidiary will not assume policymaking, regulatory or market operation functions. That is welcome but insufficient because the problem is the broader institutional relationship between the competitor and the entities controlling the market’s essential infrastructure.
Competition policy has long recognised the danger of a dominant company controlling an essential facility while competing in businesses that depend on access to that facility.
The transmission grid is the ultimate essential facility.
Eskom Green’s rivals will need grid connections. They will need access to transmission capacity information. They may need wheeling arrangements and timely decisions about where and when their projects can connect.
Grid capacity is already scarce in several of South Africa’s most attractive renewable-energy regions. A connection approval can determine whether a project reaches financial close or dies in development.
Marokane assures us that the National Energy Regulator of South Africa’s strong regulation does not allow Eskom to prioritise itself. That is less comforting than he appears to believe.
A prohibition against discrimination is not the same as an institutional structure that makes discrimination difficult.
The real questions are far more practical. Who can see the grid connection queue? Who controls commercially valuable customer information? Who determines whether capacity is genuinely unavailable? How quickly can a private generator challenge an adverse allocation? What firewalls separate Eskom’s market-facing businesses from information held elsewhere in the group?
Marokane is correct that careless liberalisation could privatise profitable customers while socialising historic costs.
His critics are correct that managed liberalisation could leave Eskom’s formal monopoly diminished while preserving much of its practical power.
Rules matter, but I suspect incentives matter more.