Dial up modems in an online world

• I note that the Government has come up with a potential solution to the energy supply problem. 

• Eskom 2.0 loading………….[insert spinning dots here]

• My first reaction was …..”WHAT???”

• My second reaction was to check that it was not the 1st of April.

• I also had to check if this was not perhaps “fake” news, designed to embarrass the current administration.

• My third reaction was ….hold on a sec, let’s give this idea a little “light’ and see if there is any rational reason why thoughts one and two may be prematurely judgemental.

• After a weekend of contemplation I have come to the conclusion that thought one was overly optimistic.  Thought four is NSFW.

• And here’s why!!

• For ease of understanding I will refer to current Eskom as Oldco and Eskom 2.0 as Newco in the following 

• There is no doubt that South Africa requires new generation capacity. That much has been evident for the past 15 years and more. 

• Oldco has an aging decrepit fleet that is unable to meet SA’s energy demands. Oldco has spent my and your children’s and grandchildren’s  inheritance in trying to bring on new capacity. Design faults, mismanagement and corruption has rendered this new capacity incapable of fixing the problem. As a consequence,  Oldco has a bloated balance sheet, a bloated staff compliment and a business model that is about as useful  as a dial up modem in a modern online  world.

• Oldco also enjoys a monopoly as the bulk of  its customers have very few alternate options.

• So at this point Gwede (and the President)  and I agree …..SA requires new generation capacity (quickly) and Eskom, if it is to survive, requires modernisation and a complete overhaul.

• And here is where Gwede and my solution recipes begin to diverge. 

• I have to concede that I am no Energy expert. My understanding of AC/DC Is limited to rock music, but I do think I understand business 101. If you can produce something for 1 rand, and there is enough demand to sell it at 1.01 or higher, you have a successful business plan.

• Let’s try to understand our governments thinking here.

• Oldco is 100% owned by Government, but the problem is that Oldco is unable to meet current demand. Oldco is effectively bankrupt, and unable to raise the capital required for new generation at attractive pricing, because lenders are demanding a massive premium to compensate for default risk. So Oldco is stuck.

• So Government wants to open Newco, also 100% owned by the same shareholder,  which will have to raise new capital, hopefully at competitive prices, to build new plants (which in the South African context will take years to come on line), who will produce energy at a profit and thus solve SA’s demand crisis.

• Let’s for arguments sake say that Newco is successful. Let’s assume that they magically find the skills (probably by raiding Oldco’s HR closet) to run the new entity. Let’s assume that Newco is not plagued by corruption and that its new plants come online seamlessly, and let’s assume that they can fill the current capacity/demand gap. Yes, I know that these are weighty assumptions …but let’s try to give them the benefit of the doubt.

• This means that Government now owns two Energy supply companies. One that is profitable with a brand new fleet operating optimally, and one that is increasingly dysfunctional, whose fleet is dying a traumatic death even as its good engineers have jumped ship to join Newco. This means that the current baseload (Oldco) is in an even worse position and unable to provide its current generation capacity. Newco, will be unable to replace lost capacity fast enough and the grid will remain unstable.

• Eventually Oldco will collapse and the Government will have to assume all of Oldco’s balance sheet, which means that SA’s budget deficit will sky rocket and Oldco’s risk premium will simply transfer to the National Fiscus. All while Newco is trying to fill the gap left by Oldco.

• You may well ask then, what is the solution????

• And again I stress, I am not an expert ….but it seems to me that there is a simpler solution.

• Oldco, being a monopoly,  is currently the custodian of the entire infrastructure for SA’s electricity grid.

• What would happen if you opened the market to private, expert, energy suppliers to come on stream? Eskom could simply provide a base price that they would pay the new suppliers, knowing that they could sell this new supply at a premium to its existing clients, thus generating enough cash flow to service the aging current fleet and begin to pay down its enormous debt. There is little debate that SA’s energy costs are now well above international prices. Renewable  products can produce energy at a fraction of the cost of traditional methods. 

• The problem here is one of ideology. The current Government is so hell bent and controlling everything, that it seems incapable of thinking outside the box. Gwede has come out publically to say that private generation capacity is not the answer. But, in my opinion, the ONLY viable solution is to open the market. Anyone that can produce energy at cheaper than Oldco’s base price should be welcomed onto the grid, and quickly. Obviously this will all need to take place within the  environmental rules. 

• The financial risks from this endeavour won’t fall onto the tax payer, Oldco will be able to generate Positive cash flows, and the Countries energy demand will begin to be met as new suppliers join the grid fairly quickly. New suppliers will create much needed employment and skills generation.

• It seems to me that an Eskom 2.0 eventually leads to a bigger crisis and that Government will soon have 2 companies that are bloated and dysfunctional.

• Ideology is standing in the way of lasting solutions.

• Until we have a change of ideological direction we remain stuck in the dial up era. 

• Beep, grrr, beep zeeee, beep. 

• For the younger readers, you may need to google Dial up internet, along with Yahoo, Hotmail and Myspace.