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Inclusion of strategic partner in grid company ‘not privatisation’

21st February 2019

By: Terence Creamer

Creamer Media Editor

     

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Finance Minister Tito Mboweni insists that the inclusion of a strategic equity partner in the national grid company to be formed in mid-2019 as a result of the unbundling of Eskom into three separate State-owned entities does not amount to privatisation.

The proposal is, nevertheless, likely to reinforce the argument of some trade unions that the unbundling is a precursor to privatisation. It is also noteworthy in that it aims to include a private participant in an area of the electricity supply sector that is expected to remain a monopoly, even after unbundling.

Mboweni said this week that splitting Eskom would “logically” result in greater competition in generation, multiple participants in distribution, but indicated that the national grid would remain a “monopoly”.

“One must be open to that dynamic reality. It’s not privatisation, but it's the participation, in generation and distribution, of many players,” he said during a Budget media conference.

“Let me put it this way, the Public Investment Corporation is a huge and significant lender to Eskom and if they were willing to swap their debt for equity, that would still be a State-owned enterprise. That’s fine with me. As long as I don’t need to put more money there, it’s fine with me.”

South Africans, he argued, should support the introduction of multiple participants in generation, as it would ensure alternative sources of supply in the event that Eskom was unable to generate. “So this thing of having dependence on one generator of power will become an issue of the past. But it’s not privatisation.”

One energy specialist who spoke on condition of anonymity told Engineering News Online that the creation of an independent grid company was an overwhelmingly positive development.

Nevertheless, the decision to include a strategic equity partner in the transmission business was surprising; as such a private partner could require higher returns to meet the higher cost of private equity relative to government equity. This, in turn, could translate into the grid company pursuing a larger asset base than required.

The National Treasury indicated that the decision to prioritise the creation of the transmission company was informed by an analysis showing that South Africa was lagging developments in the global electricity system.

In an annexure to the Budget Review, the National Treasury stated that the nature of an efficient electricity system and grid was changing. “Systems no longer resemble Eskom’s vertically integrated monopoly model, with central power stations distributing power via grids to consumers. Instead, they have become increasingly decentralised, with electricity flowing from the centre to the periphery and vice versa.”

The unbundling process would, in government’s view, bolster accountability and transparency and enable the managers of the different entities to pay focused attention to turning around the different parts of the business. The reorganisaiton should also crowd-in private finance and allow lenders to more accurately assess and reflect the risks of the underlying businesses when funding them.

The National Treasury said an independent board would be appointed by mid-2019 and that the company would remain a subsidiary of Eskom Holdings.

The grid company would incorporate Eskom’s existing transmission network assets, including power lines and substations, as well as all transmission-related servitudes and property rights currently held by Eskom.

It will also house the national control centre, the system-operator assets, as well as Eskom’s peaker stations, which currently include the pumped-storage hydro plants and the utility’s open-cycle gas turbines.

The transmission licence will be amended to allow for the buying and selling of electricity and transferred to the transmission company. “Likewise, supply agreements with existing clients would need to be migrated to the transmission company and supply contracts concluded between the transmission and distribution companies.”

The transfer of employees to the new subsidiary, as well as the generation and distribution entities that will be created, will be finalised in line with the Labour Relations Act and will follow on from consultation and a new agreement with labour unions.

Edited by Creamer Media Reporter

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