VUSLAT BAYOGLU: Let private players build nuke and coal power

South Africa’s energy crisis is older than the logistics crisis, but the latter is being resolved more quickly. Eskom’s cracks began to show nearly 20 years ago, while Transnet’s failures became apparent just over a decade later.

Both have been devastating, giving rise to what we might call negative multiplier crises across various industries: declining competitiveness, deindustrialisation and increasing unemployment.

But there is a glimmer of hope. On logistics, Barbara Creecy, the minister of transport, has announced that private sector companies have been allocated slots by the Transnet Infrastructure Manager (TRIM) to operate on the rail network. They will now be part of a solution instead of complaining from the sidelines.

If properly implemented alongside management’s turnaround efforts, the reforms will produce a win-win for stakeholders. The economy’s export competitiveness will return. Transnet will earn revenue from underutilised infrastructure and could reinvest it to avoid the unpopular taxpayer bailouts. The private sector operators will invest in new rolling stock or refurbish existing wagons, thereby adding to economic activity. And TRIM will collaborate with the private operators to fix and safeguard the rail infrastructure to enable optimal use.

Without a policy or implementation mishap along the way, there is a good reason to believe that the logistics reforms will bear fruit more quickly than the reforms in the energy sector. While Eskom’s statement this month assuring the public that load-shedding belongs to the past is excellent news, the public is none the wiser on how the company plans to transition from being fixated on load-shedding to being more focused on increasing baseload capacity, reducing the cost of electricity, enabling the economy to expand and raising the global competitiveness of exporting industries.

Eskom says the National Transmission Co of South Africa (NTCSA), recently established from the power utility’s unbundling process, will unlock 56,000MW of new capacity in the next decade. This sounds good on paper.

Yet nothing has been said of how soon part of this new capacity could be installed and how much of it could be made available in baseload form to enable reindustrialisation and meet additional demand driven by the expected boom in data centres. It is estimated that more than 100 data centres are due to be built in South Africa in the next few years to boost South Africa’s digital economy — all requiring constant energy supply that only baseload power can provide to minimise the risk of shutdowns.

The creation of Eskom’s NTCSA was designed to encourage competition in energy generation by bringing in more private sector players. In theory, Transnet’s TRIM has similar role as it facilitates onboarding of private sector rail operators.

So far, Eskom has retained its monopoly over coal-fired and nuclear generation

There is a difference, though — a big one. Private sector players in energy generation are mostly limited to wind and solar. So far, Eskom has retained its monopoly over coal-fired and nuclear generation.

Eskom’s generation division is meanwhile creating “Eskom Green” to compete with private players in the wind and solar space. If policymakers won’t allow private players to invest in new coal and nuclear capacity, then Eskom should focus on expanding its nuclear and coal fleet capacity as speedily as possible.

Eskom’s success matrix must change. For a long time, it has been about how it could minimise load-shedding. It has since added load reduction in the mix. It has also been about the energy availability factor on existing power plants and synchronising the generation units of the much-delayed Medupi and Kusile power plants.

But the fact that construction of the two plants was done poorly and completion was delayed does not mean that the country’s power needs have paused. The population grew. Residential areas expanded. New health, education and sport facilities were built. And now, data centres must be built. All need power.

Eskom has for a long time put the brakes on business expansion, as it often required consumption of its product — electricity — to be highly restricted, to preserve grid stability. This has been the single largest pace determinant to economic growth.

To recalibrate its success matrix, Eskom must go back to its foundation. It was established to provide cheap and abundant electricity to power industrialisation.

Upon realising how Eskom’s electricity prices have contributed to the shutting down of smelters that were rendered globally uncompetitive, electricity minister Kgosientsho Ramokgopa promised to revise the price methodology used by the National Electricity Regulator of South Africa. He plans to publish a new methodology paper next year.

For his part, Eskom CEO Dan Marokane has disclosed that the company’s board has mandated that the next applications to Nersa for price increases be limited to a single digit.

Both initiatives are welcome. But policymakers should be careful not to target the symptoms and leave the cause unattended. The biggest cost drivers have been Eskom’s inefficiencies and the onboarding of expensive variable capacity from independent power producers.

A cost-reflective price methodology will, as the name suggests, inevitably reflect underlying inefficiencies without solving them. The solution would be to improve efficiencies and simultaneously embark on a new baseload-build programme, having regard to the terrible lessons from Kusile and Medupi.

If Eskom is unable to fund a new baseload-build programme for nuclear and clean coal, it must do what Transnet is doing: tap the pockets of willing private players.

• Bayoglu is MD of Menar, a private investment company with interests in coal mining and ferromanganese production. It is one of the private companies that have gained provisional access to the rail network.