February 14, 2022


Eskom, Unbundling, and Decarbonization

The history of South Africa’s state utility and the future of the energy transition

South Africa has one of the most carbon-intensive economies in the world. It is also in a staggering and protracted unemployment crisis—the real unemployment rate, including discouraged work-seekers, is near 50 percent. But there remain tens of thousands of workers employed in South Africa’s coal mining and power sector. The combination marks South Africa as a country desperately in need of the ever-elusive “just transition.”

The announcement at COP26 of an international climate finance deal of $8.5 billion to fund a transition away from coal has been understandably welcomed across the political spectrum. Under the proposed deal, Eskom, South Africa’s state-owned utility, will receive funding to ease the decarbonization process and the transformation to a renewables-based power sector. But this renewable energy will come overwhelmingly from private firms, continuing the path set in motion by decades of policymaking to liberalize and privatize electricity generation.

The COP26 deal was announced weeks before Eskom chief executive André de Ruyter announced the separation of its transmission wing. The announcement marks the success of the long-term government policy of restructuring or “unbundling” Eskom. Proposed in the post-apartheid era, unbundling would separate the transmission, generation, and distribution functions of the public utility. In the context of the energy transition, it sets South Africa on a path of leaving major investment decisions to the market, with Eskom increasingly relegated to a supporting role in managing the country’s grid.

In its current form, Eskom is unquestionably an impediment to decarbonization. But as the global market-led transition away from fossil energy continues to flounder, it remains in many ways the only entity plausibly capable of delivering a transition—in particular a just one—for this coal-intensive, highly unequal economy.

A totalizing energy crisis

Eskom has been mired in an extraordinary financial and operational crisis for over a decade. The utility is R392 billion (US $24.2 billion) in debt—close to 8 percent of South Africa’s GDP—and is directly cited by ratings agencies to justify poor investment grades, while the government provides regular bailouts on top of servicing its own debt. This burgeoning debt has been used to justify a range of austerity measures, increasing in intensity under the current government of Cyril Ramaphosa, who replaced Jacob Zuma in 2018.

Zuma resigned prematurely, under insurmountable public pressure. His tenure was marked by what is now called state capture—the “unprecedented ransacking and infiltration of public finances”—throughout the South African state, from its intelligence networks, to its tax collection authority and National Prosecuting Authority, to state-owned companies like Eskom. 

Eskom was, and remains, a prime target of those networks of state capture, particularly over procurement. The former executives and board of Eskom oversaw activities that ranged from giving contracts to family members to forcing, and then paying for, the sale of a coal mine to a politically connected family. Such corruption often abuses procurement policies intended to support industrialization and black ownership. In their failings, these policies often succeed only in supporting black minority equity owners in large, often foreign firms; the sub-contracting of woefully unqualified companies; or, in the case of Eskom, creating new players in the coal-mining sector, to its own detriment.

Ramaphosa’s bid for the presidency coincided with the appointment of a new Minister of Public Enterprises and a new board for Eskom, which together appointed Andre de Ruyter as CEO in January 2020. De Ruyter and his largely new group of executives have made Eskom’s debt one of their top priorities and have shrunk it by R91.7 billion (US $6 billion). Critically, money has been recuperated from a few of the litany of corrupt contracts, but much of the overall reduction was driven by the strength of the rand. In line with the utility’s “full-cost recovery” model, it has aggressively sought to recover money from indebted municipalities and the public through increased tariffs.

For South Africans, even more than the tariffs, it is the rolling blackouts that most strongly characterize the crisis at Eskom. Since 2008, Eskom has increasingly had to turn off the lights—locally referred to as “load-shedding.” Last year saw 1,136 hours of outages, amounting to as much as 15 percent of people’s time, with power interruptions as frequent as three times a day. The roots of this problem lie in the significant delay in bringing the infamous Medupi and Kusile power stations online. Prior failed plans for privatization delayed Eskom’s ability to build new capacity. But after the two projects were cleared, the plants suffered a series of further setbacks, many linked to corruption. The Kusile station was meant to be completed in 2014; it is now slated to be fully running in 2025. In the meantime, Eskom’s aging coal fleet is rapidly breaking down due to negligence of essential lifetime maintenance, which built up under the previous corrupt executive.

Load-shedding will likely be worse in 2022. South Africa’s only nuclear power plant is set to undergo long-term renovations, and a unit of the Medupi power plant exploded last August. The current executive could not have predicted the latter, but their promises of reduced load-shedding are now backfiring, leading to calls for the firing of De Ruyter by his predecessors and those aligned with them. But De Ruyter’s leadership and the Ramaphosa presidency undoubtedly represent a desperately needed pivot toward good governance. (That Eskom under De Ruyter is being actively sabotaged illustrates the significance of this shift.) But these changes are not enough to bring organized labor—who locate De Ruyter firmly within the government’s long-standing plan to restructure Eskom—on side. Whichever way one views the unbundling—as necessary step or prelude to disaster—De Ruyter is explicitly there to carry it out, and he has seemingly completed the job.

A changing Eskom

In 1948, Eskom’s mission statement read as follows: “The South African Electricity Supply Commission sees its task as to render, by the provision of power without profit, a worthy and ever-increasing contribution to the development of South Africa and the welfare of her peoples.” By 2006, the narrative had changed dramatically: “Eskom will grow shareholder value by exceeding the needs of local and foreign customers with energy and related services.”

With the above juxtaposition, in a 2002 book chapter, former trade unionist Leonard Gentle uses Eskom “as an index of the changing character of the [South African] state.” From 1923, Eskom had primarily acted as a regulator of the large privately owned Victoria Falls and Transvaal Power Company (VFTPC) and other such entities, until its transformation in 1948 toward a consciously progressive and developmental utility. But 1948 is also regarded as the founding of grand apartheid (although formal racial segregation had come decades earlier). Eskom was committed to supplying electricity to the white minority, and guaranteeing super-profits for gold-mining companies in particular. With the expansion of exceptionally cheap electricity, based on the brutal exploitation of black workers, mining profits would thrive. Eskom’s developmental ambitions, then, were rooted in a coalition between mining capital and the racist South African state. This coalition would eventually be shaken.

The restructuring of Eskom is not explicit privatization, although that has been historically on the table. The increasing power of the anti-apartheid movement, in large part led by now-organized mine workers, heaped immense pressure on the late-apartheid government, which became increasingly reliant on increasingly unsupportive foreign direct investment. South Africa joined the global neoliberal turn, including a raft of reforms at Eskom in 1987 that scrapped its public interest mandate, introduced profit-making, and formed a new capital-friendly regulator.

In 1990, the privatization and deregulation of Eskom was proposed, but the recently unbanned African National Congress (ANC) and its powerful trade union allies put such proposals to bed. However, as soon as 1998, ANC government policy was to unbundle Eskom, prevent it from building additional capacity, and instruct it to sell off generation assets to ensure 30 percent private ownership by 2004. The historical coalition had remained largely intact, but now had a democratic government. The super-exploitation of mine workers would continue.

The policy of unbundling originated in the World Bank, which has had cause to seriously reassess its power-sector policies—“full-cost recovery” in particular. Rather than direct privatization, the objective of unbundling is primarily to separate out generation and transmission in order to realize the Independent Transmission System and Market Operator, or “ITSMO.” A central aim of creating such an independententity is to nullify the risk that Eskom would favor its own generation over private producers. But in the 2000s, under pressure from its allies in organized labor, the ANC reconsidered its position. The middle of that decade saw a slew of measures that further corporatized Eskom, but plans for unbundling and partial privatization were shelved. Instead, the private sector, as independent power producers (IPPs), would enter the market by providing new capacity as demand grew. Today, IPPs account for around 11 percent of all capacity. Eskom’s continued crises and the push toward climate policy have provided impetus for the further entry of the private sector. Solar and wind account for 83 percent of IPP capacity; Eskom’s makeup is the polar opposite, with 85 percent of its capacity in coal.

Faced with a utility enmeshed in coal networks and in a totalizing crisis, unbundling Eskom to pursue a future of private clean energy appeals far beyond the business press. South Africa’s progressive civil society and parts of the left see this as a necessary compromise in favor of reliable power and a clean energy transition. But this is hardly guaranteed to be the case.

The reality of renewables

The global rise of variable renewables like wind and solar has been impressive. The last decade saw a 310 percent increase in renewable power generation, and renewable energy accounted for 82 percent of all capacity add-ons in 2020. Still, renewables (excluding hydropower) account for just 5.7 percent of all energy consumed. Of greater concern is the trend in renewables investment. While installed capacity continued to rise, levels of investment in solar and wind have stalled and occasionally dipped over the same period. The International Energy Agency estimates a tripling of current investment levels is required to limit warming to 1.5 degrees Celsius.

The renewables boom was built on the back of subsidies. When they are removed, as has happened in some cases in Europe, the transition stalls. Now, renewable energy firms have to compete with each other in reverse auctions, driving down prices, which simultaneously erodes profitability. Brett Christophers’s research on BP, Royal Dutch Shell, and Total confirm that—despite their ability to generate profitability compared to the wider sector, and their much publicized net-zero announcements—the big three overwhelmingly choose profitable hydrocarbon activities. The regions where renewables fortunes remain optimistic are increasingly limited to the low-cost environment of the Global South.

The cheap land and labor of South Africa, coupled with its unmatched solar and wind potential, no doubt make it an attractive site for investment. But this still might not be enough to buck the global trend. Ensuring decarbonization is profitable enough for the market will remain a fundamental challenge. De Ruyter himself has already indicated that the era of twenty-year power-purchase agreements (PPA) is over, and that “the private investor will have to take more business risk.” Another concern in the South African context is precisely this availability of cheap land and labor. Renewable energy projects have already faced contestations from indigenous populations elsewhere. And current Eskom employees who would need to be redeployed into this sector will hardly be willing to give up relatively high wages to join a sector hostile to organized labor.

Finally, it is not certain that an increase in renewables will solve the energy-supply crisis in South Africa. It may provide some relief when plants need to be shut down for repairs, but peak solar potential does not correlate with peak demand; and Eskom’s current storage capacities (just 244 MWh) and future plans remain limited. Rather, Eskom is set to add 4GW of capacity from gas, a global trend that accompanies power systems with increased penetration of renewables. The plan appears to be Eskom’s generation division taking on the more costly role of providing backup to private renewables through new gas and its existing coal fleet, but giving way to private clean power when it’s available. How this will be economically viable is a mystery, but the slow demise of Eskom’s generation division is a desirable outcome for business interests who have been long intent on replacing it. South Africa needs renewable energy and a just transition, but the complexities require a revitalized public system, integrated with resource planning and state regulators that determine which energy resources are invested in and where, and are accountable to broader democratic politics. The Eskom of today is a far cry from this, but the prospects of such a vision are incompatible with privatization.

The deal

The COP26 climate deal is likely to reinforce this preexisting policy trajectory toward the development of a disaggregated energy market, with Eskom in the role of backing up and managing the grid. De Ruyter has consistently spoken of the promise of such a deal for decarbonization, and the South African Presidency’s statement on the deal highlights the intent to “repurpose or repower … coal fired power-stations”; but when comparing the deal’s projected five-year period with Eskom’s plans for capacity additions, its utility-scale renewable energy ambitions are negligible. Further, it is estimated that Eskom will need R180 billion ($11.7 billion) to upgrade its grid to accommodate the planned 30GW of private renewables. Such costs are perennially excluded from analyses of renewables. The first year of the deal remains in a planning stage, and the delivery of the promised funds will almost certainly require the energy sector to continue its liberalization to receive financing that is struggling to find adequate returns on renewables elsewhere.

If Eskom’s financial crisis is alleviated, as its highest executive and the South African government continue to promise, then it can and must be pressured to build out its own renewable energy. Recent developments suggest that this pressure may come, in part, from organized labor. An analysis by the Alternative Information and Development Centre (AIDC) suggesting public-pension funds can be mobilized toward financing a just transition has been taken up by COASTU, South Africa’s largest trade union federation. The strategy is thus: if Eskom can build out its own renewables, it can continue to be a viable generator. Under favorable political conditions and by retaining a central generation role, a future reconstitution of the utility is more likely. This reconstitution must take place to deploy the future public investment required for decarbonization. The full-cost recovery model has to go. Eskom, like so many other utilities, can never provide reliable power and cover its costs, without drastically increasing fees on a population largely unable to pay current prices. But in powering reindustrialization toward decarbonization—with the production of green hydrogen and electric vehicles, as the preliminary text of the COP26 deal indicates—the future government can draw significant revenues to subsidize Eskom.

Of course Eskom’s crises extend far beyond its finances. The same corrupt networks that once ran Eskom want it back. Last year saw an attempted insurrection, with nobody held responsible and seeming acceptance of “violence as a weapon to make permanent and inviolable the criminalization of vast chunks of the state.”

There are no easy solutions. Much of labor was both a victim and active participant in state capture, but any pathway towards decarbonization must involve engaging a cautious and demoralized trade union movement. Rooting out the corruption at Eskom and building the constituency necessary to ensure Eskom’s transformation and survival requires organized labor. As the struggle over the fraught legacy of the transition to democracy and the era of state capture continues, and when multilateral institutions and finance increasingly turn their eyes to the energy transition globally, a transformed Eskom will need to play a central role facilitating anything like a just transition.

This year’s Conference of the Parties (COP), opening October 31, is hosted by the United Kingdom, whose agenda-setting privilege as host has made private finance a central focus of the…

Read the full article

Contrary to common beliefs on fiscal fundamentals, the current debt crisis in the global periphery demonstrates that the solvency of sovereign states is determined by their monetary power. Crucially, liquidity…

Read the full article

In 2003, led by the government of Néstor Kirchner (2003–2007), Argentina’s developmental agenda regained momentum. From the ashes of privatization, deregulation, and liberalization emerged a consensus agenda that put the…

Read the full article