Eskom has failed

Independent energy analyst Roger Lilley said Eskom was always believed to be too big to fail. However, the utility has already failed, he said.

Lilley told the SAfm Market Update with Moneyweb that Eskom is too big to manage, so it became necessary to unbundle the utility into three separate divisions.

His comments come after Public Enterprises Minister Pravin Gordhan sent Eskom chairman Mpho Makwana a letter instructing the utility to transfer the company’s distribution assets to a new state-owned company.

“In a very brief description, Eskom generates electricity at extremely high voltages and sends that electricity on these big power lines, which we call the transmission system, at hundreds of thousands of volts,” he said.

“It then goes down from there to the distribution network where it finds its way down to the factories, to the shops, to the shopping centres and ultimately to our homes.”

It is this last leg – that distribution leg – that Eskom is now working on selling off.

This is good news, as it will allow “wheeling”, i.e., people producing power in smaller quantities will be able to sell electricity within the distribution grid without affecting Eskom.

“It’s really necessary because Eskom has been said to be too big to fail. Well, the truth is it has failed. It is too big to manage,” he said.

“And that’s why people cleverer than most of us have decided that it should be broken up into three smaller entities, each of which is easier to manage because they are more focused on the particular service that they offer.”

However, Lilley said there is still a long way to go before this process is completed.

A large part of the work that still needs to be done relates to how the business model of the distribution and other entities will function.

Lilley suspects that some of the country’s large metros will purchase some of Eskom’s distribution equipment “because it’s in their best interests to have more access and control over the distribution system at the moment”. 

“The metros, by and large, do distribute electricity, but they’re acting as a reseller on behalf of Eskom’s distribution division.”

“Now, they’ll be able to buy portions of that distribution that affects them directly. It changes the model a little bit from being a reseller to being more in control.”

In addition, he predicts that South Africa could see large business entities getting involved by managing electricity distribution for a handful of their customers. In particular, he believes the mining and manufacturing sectors could be interested in this option.

Another point of interest with this unbundling is what will be sold.

“Here we’re talking about substations that are currently owned by Eskom and not by the municipalities,” said Lilley.

“In most of our suburbs, you’ll find the little mini-subs, as they’re called, are owned by the local municipality. But, many of them aren’t, and they are owned by Eskom in other areas where Eskom serves customers directly.” 

“So those are the sorts of things that will have to be sold. And I think municipalities would want to snap those up.”