Urgent reforms needed to solve SA's electricity crisis

26 March 2015 

The DA today releases a position paper on solving South Africa's electricity crisis, and fundamentally reforming Eskom's role in the electricity sector. 

We are doing so in a week where South Africans are witnessing unprecedented turmoil unfold within Eskom. 

The turmoil began with the suspension of top executives and the announcement of an inquiry into Eskom's affairs by Board Chairperson Zola Tsotsi. 

Today it emerged that no less than President Jacob Zuma himself instructed Mr Tsotsi to launch this inquiry which was used as a basis to suspend the executives (see BDLive report).

The President's personal intervention begs the question: what could his motives have been? 

Perhaps the answer lies in the fact that the suspensions followed shortly after the Eskom executive's attempts to appoint an audit committee to oversee procurement processes for major contracts. 

Industry insiders believe this move by the executive may have upset political interests benefitting from lucrative diesel and coal supply deals.

President Zuma must explain to South Africa exactly who's interests he was protecting by intervening at Eskom. 

In the midst of this political disruption at Eskom and a second credit downgrade to "junk" status, the opportunity cost to South Africa is immense. It is estimated that load-shedding costs the economy R20 billion a month. 

South Africans are now bearing the brunt of a preventable crisis caused by poor policy decisions from the ANC in government spanning 17 years. 

As far back as 1998, the White Paper on Energy Policy made the case for breaking the Eskom monopoly to encourage private sector investment in electricity generation. This was ignored by the ANC despite warnings in the policy that blackouts would follow if reforms were not made. 

For five years starting from 2000, no new investment in electricity generation took place. This caused the country's electricity reserve margins to deplete to dangerous levels. Power plants were run hard to avoid blackouts, and maintenance schedules were neglected. 

All the while, executives raked in bonuses based on targets to avoid load-shedding, generate profits, and meet BBBEE targets. This goal displacement resulted in massive payouts to executives without them needing to meet crucial electricity generation or maintenance targets.

The ANC's refusal to end the state monopoly on electricity supply was based on maintaining a closed enrichment scheme. Through their front company Chancellor House and its shares in Hitachi, the ANC made hundreds of millions from boiler contracts at Medupi and Kusile. 

In contrast to the ANC's approach of state monopoly and self-enrichment, the DA's approach seeks to open Eskom up to private sector competition, create policy certainty, and set the country on an energy path capable of solving the electricity crisis. 

To this end, the DA's position paper outlines several urgent policy interventions:

End the Eskom monopoly 

As it stands, Eskom is responsible for 95% of the country's electricity supply. It also owns and operates the national electricity grid. Eskom's monopoly over buying, selling and generating electricity means it will continue to act in its own interest and against meaningful contributions from Independent Power Producers (IPPs). 

The DA believes the management of the grid needs to be taken away from Eskom and placed under an independent state-owned entity. This will enable IPPs to compete with Eskom on a level playing for supply of electricity to the grid. A necessary first step in this process is the passing of the Independent System Market Operator (ISMO) Bill. Passing the ISMO Bill relocate the management of the grid under a separate entity, which the DA would argue should include the assets of the grid as well in a phased approach.

Release IRP 2015

In the midst of an electricity crisis, government is operating from an Integrated Resource Plan (IRP) that is 5 years out of date. Updating the IRP is vital for strategic decision-making on what energy sources best suit the country's immediate power needs. 

Publish the Gas Utilization Master Plan (GUMP)

There is immense potential for gas turbines to be brought on stream within a few years. Policy certainty is urgently needed, however, through the publishing of GUMP, which will provide clarity to the market on South Africa's contemplated investments in the gas sector over a 30 year period. 

Urgent reforms are also needed to the Mineral and Petroleum Resources Development Amendment (MPRDA) Bill to align it with the Constitution. The Bill currently allows government to expropriate an unspecified stake in a gas project at an "agreed price". The Bill further allows for extensive government interest in all new exploration and production rights for gas and oil.

Incentivise embedded generation

To reduce pressure on the national grid, the DA proposes a 3 year national subsidy scheme to incentivise businesses and households to install solar panels on rooftops. We believe a subsidy of R1.10 per kWh could see as much as 500MW of power being installed in a year.

Fast-track the completion of Medupi and Kusile

The completion of these projects is a national priority and must be backed by a similar approach to the 2010 World Cup infrastructure needs. 

Investigate the procurement of diesel and coal

Last week Parliament heard that Eskom has overspent its diesel budget by R8 billion in the last financial year. This massive over-spending is driven in part by the use of middle-men to procure diesel without due process. The Sunday Times recently reported for instance that Eskom had placed orders with a beautician and a dentist for diesel supply without the proper credentials or contractual procedures in place.

It has also emerged that Eskom is in the process of buying R3.7 billion worth of coal that is of an incorrect quality for use at power stations. These examples present a worrying picture of poor decision-making and financial indiscretion at Eskom. An independent inquiry into diesel and coal contracts is required along with rigid and transparent systems to prevent abuse.

Publish accurate maintenance reports for power plants

Eskom needs to demonstrate accountability for the state of our power plants. Accurate maintenance reports need to be published and clear targets set for each plant. 

Link Eskom salaries and bonuses to performance

All salaries and bonuses at Eskom should be directly linked to performance, with a distinct focus on rewarding engineers for meeting targets. Despite pervasive management of the utility, Eskom executives earned R11 million in bonuses in 2014, according to a parliamentary reply by Minister Lynne Brown. 

Link tariff increases to efficiency at Eskom

The National Energy Regulator (NERSA) needs to ensure that any electricity tariff increases granted to Eskom are based on stringent efficiency requirements to protect South Africans from bank-rolling mismanagement at the utility. Eskom's reported intentions to apply for a 25.3% tariff hike should be rejected outright by the Finance Minister and NERSA.

In addition to these urgent interventions, the DA position paper proposes several short to long term initiatives aimed at solving the country's electricity crisis. These include:

The purchase of open-cycle gas turbines to reduce dependency on diesel

Rapidly increasing generation capacity in the next 2 - 3 years through energy projects undertaken by IPPs

Upscaling of investment in larger renewable energy plants 

Commissioning new coal and natural gas projects

Abandon the R1 trillion nuclear deal in favour of smaller more affordable builds.

The DA believes it is possible to solve South Africa's electricity crisis. This will require, however, bold leadership, policy certainty and a commitment to reforming the electricity sector. Maintaining the Eskom monopoly will only serve to deepen the crisis our country faces. 

Statement issued by DA leader, Helen Zille, March 26 2015

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