Analysis: How Telkom is the analogue of Eskom

If SAA doesn’t work, use another airline; if the roads fall into disrepair, drive more slowly or get a 4X4; if the post does not get delivered, use e-mail or a courier company. But Eskom has a firm grip around our collective throats. If it fails, it drags the rest of us down with it. As far as State-Owned Enterprises around the world are concerned, Eskom must be amongst the poorest performers in a group that shares a terrible record for value destruction. This much is clear from the release of Eskom’s interim results on 25 November.

Telkom was somewhat like that. Prior to 1994, if you wanted to use a telephone, Telkom was the only option. It is hard to imagine now, but Vodacom’s pre-launch business model was based on achieving subscriber base of less than 500,000, about 10% of Telkom’s fixed line subscriber base at the time.

Those old enough might still recall how owning a cellphone was a status symbol. Today, South Africa’s fixed-line penetration rate is still under 8%, where it always was, while cellphone penetration is said to be around 80% of all adult South Africans.

Telkom’s market cap is around R35 billion (recently spiking) compared to Vodacom’s R189 billion. MTN, which now only derives 30% of its total revenues from South Africa, has a market cap of R419 billion. Add in Cell C, which is not listed, and you can say that the old telephone monopoly represents comfortably less than 10% of the value of South Africa’s telecommunications providers. This is so despite Telkom’s physical network infrastructure being at least 10 times larger than that of any of the other providers.

The reason for the success of cellphones was not just Telkom’s infamous poor service and expense, although that played a part. Rather, it was also the dramatic changes in wireless technology and a global adoption of the GSM standard within a highly competitive global market. The result was tumbling prices of network gear, handsets and all other costs associated with providing wireless connectivity. While the GSM standard was often imposed by regulation from above, another wireless standard, WiFi (or the IEEE 802.11) using shared frequencies set aside for microwave ovens and remotes, emerged spontaneously without specific regulation but resulted in a similar dramatic result. Huge numbers of people in different parts of the world have either un-tethered themselves from ponderous state-owned telephone companies or have access to telephony for the first time.

Consider then the position of renewable energy today. It has been easy to dismiss renewable technologies as a solution on two main grounds: They are expensive compared to traditional sources and they are intermittent and so can’t provide base-load power. The introduction of renewable energy into our grid, the argument goes, can only happen if heavily subsidised. The first leg of the argument is falling away and has done so very quickly. In South Africa’s most recent renewable bidding rounds in 2013, the average price achieved for onshore wind was 74c/kWh (from R1.14/kWh in 2011) and for solar PV, 99c/kWh (from R2,76/kWh in 2011). Wind is now at the same level as Eskom’s average selling price. Eskom does not provide figures on a per generator basis, but the levelised (all in) cost of electricity from Eskom’s Medupi is probably going to be over R1,50/kWh and Kusile will be even higher.

For the most part, renewables have been introduced to Eskom’s electricity grid via large projects. A typical size of a renewable power plant in South Africa has been in the region of 50MW, many even larger than that. The average price of PV modules have fallen to just 10% of what they cost in 2000 and the trajectory continues. Swanson’s Law, the PV’s sector equivalent of Moore’s law in semi-conductors predicts that “the cost of the photovoltaic cells needed to generate solar power falls by 20% with each doubling of global manufacturing capacity”.

But this is not where a technology like solar PV is likely to be most disruptive. Increasingly, it has become viable to look at PV installations as a viable alternative at homes and businesses.

This leads us to the second argument against renewables: They are intermittent sources of energy. For larger scale delivery into the grid, this is no longer true because the fall in the costs of generating renewable energy can be backed-up by stand-by gas turbines and still be price competitive. However, energy storage is also moving ahead quickly on several fronts using different battery technology. Storage costs are falling by 7% per year based on current learning curves and based on batteries capable of 5,000 recharge cycles, the cost of stored electricity from Lithium Ion batteries (similar to those in laptops and cellphone) could fall from the current rate, based on 5,000 recharges, of US$0.25c/kWh to just US$0.06 by 2030. If Elon Musk’s Gigafactory takes off, this could change things even faster. Other technologies which are heavier and bulkier could see that rate reached by 2020.

We can expect that the upper end of South Africa’s households and increasing parts of the service economy will look to generate their own electricity. It is already happening in businesses where reliable electricity supply is essential. Netcare, the hospital group will be spending R500 million to mitigate ongoing power interruptions and utility costs employing renewable energy and energy efficiency measures, and it expects cumulative savings of R1 billion over the next ten years for this investment – a very good return. How much longer before this becomes commonplace?

We know something of Eskom’s deep crisis. Chris Yelland, an energy expert, referring to high executive churn at Eskom, summed things up in a tweet:

“I guess #Eskom’s execs have been jumping ship because they know Eskom is operationally, financially & environmentally unsustainable.”

The extent of the crisis was made plain for all to see at Eskom’s interim financial results presentation held on 25 November. In the words of Eskom’s newly installed CEO, Tshediso Matona, “There are very serious challenges to our operational sustainability, reliability and predictability for our customers.” The new-build programme is a catastrophe in every sense, the existing plant availability is well below acceptable levels and a continued fall in sales is barely covered by increased tariffs. Peaking stations such as diesel-fired power stations and pumped storage are being used as base-load generators at unsustainable cost. Municipalities, having added as much as a 100% mark-up on electricity sales, are both not paying their electricity bills or properly maintaining their distribution reticulation.

Eskom’s debt/equity ratio is already too high and it is hard to see how Treasury’s financial recovery plan, a R23bn equity injection and support for R250 billion in even more debt is going to solve anything. One noteworthy feature, hidden by the rapid increases in the tariffs, is the drop-off in sales. It is hard to say with any certainty whether these have been due to measures imposed by Eskom on its users or a market response to increased tariffs. Recent figures show South Africa’s economy is now using less electricity than it did in 2007 before the first load shedding crisis hit us, and the movement is to use even less in the future. In some ways, the recent price increases have been a good thing – the current round of black-outs would have been much worse had demand for electricity continued to rise. As expected, South Africa is becoming less electricity intense as electricity prices increase.

As we know, Eskom has since changed its load shedding strategy – it will load-shed residential users first instead of industrial customers to save the economy, but residential customers pay far more per kWh than industrial customers, so the revenue side of Eskom deteriorates. Residential and the services sectors, due to their relatively low levels of electricity consumption, are best placed to self provision in the way that Netcare is already doing. What happens then is that the best, most profitable customers leave first, and Eskom’s problem becomes, very squarely, the problem of the government and the energy-intensive users.

Moves to allow self-provisioning are in the works. Nersa, the regulator, has a policy providing for Net Metering (where excess capacity from small privately owned generators (under 100kW) can be sold back to the municipal grid) without requiring a licence as a generator in terms of the Electricity Regulation Act.

How will Eskom and its sole shareholder, the government, respond if this really takes off? If the experience of Telkom is a guide, it will not be a welcoming one. Telkom has spent the better part of the last 20 years defending its monopoly even as the tide of the cellphone networks washed it aside. As Eskom’s prices continue to rise, municipalities will be able to start their own electricity procurement processes from non-Eskom sources and the more far-sighted Metros may well even have commenced detailed planning around this. Those Metros who are not doing anything should urgently do so.

In other parts of the world, utilities are waking up to the threat of solar self provisioning and are launching counter offences to the growing threat, fearing their business model is becoming irrelevant. One way of dealing with the threat is to up the “line charge” or the cost of being able to connect to the grid. This can only go so far, make grid connections too expensive and it soon makes sense to go off-grid using ever-cheaper storage. Look out for tighter regulation of self-provisioning in the future.

Blocking progress will be hard. The world is turning its back on coal in an effort to arrest climate change. Carbon-dioxide caps, now largely agreed on by our biggest trading partners will oblige us to do the same or impose their own tariffs on our exported products. Certainly, getting additional funding outside the bond markets for a coal fired utility will become increasingly tough.

There are some downsides to leaving Eskom. Only those who can afford it will be able to do so and it becomes another reason why solidarity amongst South Africans gets to be reduced even further. Electricity could well go the way of health and education, where the top end of the market privatises and secures its own quality supply while the bottom end has to make do with what the state can provide.

We have known that Eskom stands squarely on the wrong side of history as far as its organisational, operational and ownership structures are concerned. We will be dealing with those consequences for a least another five years. What is new is that Eskom is also on the wrong side of the technology that is set to sweep through the global electricity sector. Getting Eskom back to health should be a priority, but the government and the governing party appear not to understand the extent of the problem and in any event, seem to have no idea on how do things differently so as to have at least a chance at a different outcome. Where one might expect an assured and focused hand, we are confronted instead with a ludicrous pie-in-the-sky nuclear build programme. DM

Long Term Prediction (speculation): Most of Eskom’s old generating plant will eventually become a Joint Venture between the government and the Intensive Energy Users’ Group with its own pricing regime. The rest of us will be using other non-Eskom sources of energy and renewables will be a big part of that solution.

Photo: A family eating their dinner under candle light during a planned power outage the middle class suburb of Parkhurst, Johannesburg, South Africa, 03 April 2008. EPA/KIM LUDBROOK