Eskom should shift focus to grid expansion, says André de Ruyter

Eskom should not be spending billions of rand on retrofitting old, tired coal-fired plants to become environmentally compliant but rather use the funds to upgrade the country’s constrained transmission grid so that more private-sector electricity generation capacity can come online. This is according to André de Ruyter, former Eskom CEO.

He was in discussion with financial journalist Alishia Seckam on the first day of the PSG Financial Services Annual Conference held in Johannesburg about South Africa’s electricity crisis and its impact on the economy.

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De Ruyter, who is currently a senior fellow at the Yale Jackson School of Global Affairs in the United States, was asked if South Africa will reach a point where Eskom is entirely replaced by the private sector, with new legislation that allows for an electricity market.

He is of the view that Eskom should no longer be the only off-taker for power purchase agreements.

It should instead should use the “limited room” to address other national priorities, such as expanding the transmission grid.

“The idea of bureaucrats making investment decisions when they have the moral hazard of cheap finance guaranteed by the government who competes with willing and able private capital strikes me as a completely perverse outcome,” De Ruyter said.

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“There are better and smarter ways of doing it.”

Plug on investment

De Ruyter said grid capacity is a big constraint and “is holding back investment”.

“We can solve that by refocusing what Eskom does and directing the money to assets that will serve the country for 60 years by extending the transmission grid. This is a far better return on investment.”

Limited grid capacity was the main reason only solar power with a combined capacity of 1 000MW could be added to the grid last year through Bid Window 6 of the government’s Renewable Energy Independent Power Producer Procurement (Reippp) programme.

There was no remaining capacity for wind projects.

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De Ruyter, who left the power utility in February 2023, predicts that when the electricity market eventually takes off, there will be more bilateral power purchase agreements.

“We will see situations where large corporates will want to decarbonise, like a retailer who will want to be seen as green and responsible with a corporate balance sheet that is in much better shape than that of the state.

“They will have the resources to underpin the power purchase agreements and if this can be unlocked, significantly more money will be made available than having to wait for Eskom to issue new bid rounds.”

Eskom crisis: Forward steps and backward steps

Asked if he has a sense that South Africa is turning the tide with its electricity woes, De Ruyter said it is indeed so that some obstacles have been removed, such as onerous regulations in procurement areas that created enormous difficulties.

However, the latest “incarnation” of the Integrated Resource Plan (IRP) is demonstrative of “a regressive policy environment” in a country that needs to address its power issues.

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The latest version of the IRP was published in January. It has been criticised by economists and analysts for being out of touch with reality. Among other things, the shutdown of coal-fired power stations is being delayed and the plan is considerably limiting the amount of renewable power generation projects that can come online.

“In the plan it seems we are doubling down on coal reliance and that is going to cost South Africa dearly from an export and manufacturing point of view,” De Ruyter said.

He was referring to the European Union’s carbon border adjustment mechanism (CBAM), which applies a carbon tax to exporters into the EU which use carbon-intensive energy to manufacture goods.

“With our carbon intensity … we are uniquely susceptible,” he said.

Besides the penalties of a CBAM adjustment, coal-fired power stations go against the ‘least cost’ principle: “In the plan, the cost of fossil fuels seems to have been underestimated. There has been a technical revolution when it comes to renewable energy. The cost of solar has come down by 89% and the learning curve is immense.

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“All the while, the cost of coal has gone up due to increased environmentally compliance costs. In the IRP 2023 renewables is put down as more expensive, but from what I could see there was an assumption that concentrated solar power would form the bulk [of renewable energy] and that’s the most expensive form.

“This is more a case of assumptions that were made to yield a politically accepted answer.”

This article was republished from Moneyweb. Read the original here