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Hello and welcome to the So What podcast, in which political economic analyst JP Lantman

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discusses the issues uppermost in the minds of South Africans.

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You can find a written version of this content on JP's website, jplantman.co.za.

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I am Ruda Lantman and I am your host.

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These first few recordings were done at our dining room table, but we will soon be moving

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into a studio.

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Hello and welcome to the second recording, the second part of this recording, which goes

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with JP's newsletter of the 1st of August 2022, Electricity Green is the New Gold.

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It is so packed with information and almost double the usual length.

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So we've broken it up, please listen to the first part as well.

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And now we're coming to what we've called frequently asked questions about this.

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What about ESCOM debt?

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What's going to happen with that?

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Yep, it looks fairly certain that about 200 billion of the 400 billion that ESCOM owes

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will be transferred from the ESCOM balance sheet to the Treasury, the National Treasury,

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in other words, the South Africa as a country's balance sheet.

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Now that sounds very intimidating, but it's not really.

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Of that 400 billion debt that ESCOM has, more than 300 billion has been guaranteed by the

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government anyway.

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So government or the taxpayer is liable to pay for it if ESCOM can't pay.

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So whether it sits on the ESCOM balance sheet or sits on the Treasury balance sheet, it's

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really very much the same thing.

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How do outsiders like the rating agencies see this?

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The rating agencies, as a general rule, add these guaranteed debt, what is called contingent

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liabilities.

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They add it onto the nominal debt that the government has and they then calculate what

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the debt is as a percentage of GDP and how that affects the ability of the country to

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repay.

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So the economist that has been rated once again as the best economist on the JSE, Elna

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Moorman, has calculated that if 200 billion of the 400 billion is transferred to Treasury,

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it will lift the South African debt profile from about 75% of GDP to 78% of GDP.

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And in her opinion, that is not a game changer.

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It's not an event that will trigger a rerating of where we are.

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In fact, it will probably, as it has already done, trigger a rerating of ESCOM's debt,

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making it easier for ESCOM to borrow, not making much difference on the South African

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side.

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So that's likely the way that it will play out.

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Now, Rudolf, what we must not forget is that since 2018 or 2019, Treasury has been allocating

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many billions of rands every year to ESCOM as a kind of a direct subsidy to enable ESCOM

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to survive.

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I think it's a much better arrangement to just take the debt on.

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ESCOM can get rid of that interest payments and you've got a much healthier situation.

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We don't have details yet of precisely what that transfer of debt will look like.

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We'll get that in October at the time of the so-called mini budget.

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But we know from reports that have been leaked that Treasury is pushing that after the transfer

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of debt has taken place, there must be certain follow-up steps that ESCOM has also taken

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to improve their own balance sheet and own liquidity position.

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And maybe that includes that they offer to sell Madhupi or Kusila.

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Once Madhupi or Kusila is up and running properly and has been sorted out, it'll be a fantastic

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investment.

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You won't pay what it costs.

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That you won't do.

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You will pay it at a much discounted price.

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But at the right price, Bauer Station is a lovely investment for a pension fund.

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We've got income for the next 30 years and it's consistent income.

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So it must be possible to do deals like that.

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And we will get those details in October.

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ESCOM is talking about building battery energy storage systems base.

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Battery energy storage systems base.

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It's a wonderful, wonderful name.

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And planning to take on debt, extra new debt for that.

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Should one be worried?

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No, I wouldn't be worried because relatively speaking, the amounts are small.

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The debt is a loan from the World Bank, which André Deraiter has negotiated.

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It's for 11 billion rand, which will go into the base project, energy battery storage system.

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Now, if you think about it, 11 billion rand is less than 3% of ESCOM's debt.

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Whether it's there or not, I think it's not really material.

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We know ESCOM can't pay the interest and they can't pay the debt.

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That's why treasury will come in.

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So in the treasury standing behind this kind of deal.

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But what 11 billion rand does, it's beginning the process of building a storage infrastructure,

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energy storage infrastructure in South Africa.

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We did exactly the same thing at the beginning of renewables.

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The first renewable contracts were signed at, just hold on to your chair, 4 and 50 kilowatt

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hour at the stage when ESCOM was selling power for less than around a kilowatt hour.

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On top of that, it carried a government guarantee.

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So we've really sweetened the deal a hell of a lot for those first renewable producers

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to get the wheel rolling.

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And today, of course, we have the benefits.

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The price have dropped from 4 and 50 per kilowatt hour to 47 cents.

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You know, it's a fantastic drop in price and you were able to start a whole new industry,

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which we couldn't do before that.

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So I think it's a good investment.

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If it opens the door to battery storage, it opens the door to battery manufacturing in

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sub Africa with a big vanadium producer, with the biggest vanadium producer in the world.

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You use vanadium in manufacturing batteries.

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So the potential is huge that can all flow.

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But you need, as you pointed out earlier, you need a client, you need a customer, and

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that customer will be battery storage systems.

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And that's why I think it's a good thing that ESCOM has taken the initiative here, although

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it is still very expensive.

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Hopefully over time, it will come down.

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The second question, of course, that everyone asks is, yeah, well, it's all fine.

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But will it ever happen because this government doesn't seem to be able to implement any of

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its own plans, I'm quoting.

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What is your answer to that?

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Well, I think one must distinguish, you know, there's government and here we've got government

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but ESCOM.

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And as the president said in his television address, ESCOM now has a very competent management

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team and has huge confidence in them.

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And I think it's right to have confidence.

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So yes, it will be implemented.

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And in fact, ESCOM is already of that 11 billion rand loan from the World Bank.

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They've already made a 4.4 billion rand contract with two companies, a South Korean company

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and a Chinese company to come and build best systems, battery storage systems here in

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South Africa with technology developed and tested and used in South Korea and China.

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So yes, it will happen.

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And how will it affect us?

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I must read to you the names of a few places where we're going to see that.

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We're going to see these best systems, in other words, battery storage systems installed

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at Skaapvlei, Paleishevel, Graa Water, Pongola, Elanskop and Hexerfeef.

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These are all rural names.

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These are all Prattland names where you currently have bigger or smaller solar or wind farms.

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You put batteries down there when the sun is shining or the wind is blowing, the batteries

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can be loaded.

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And tonight when the sun is not shining, you can draw from batteries and feed the grid.

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That's why ESCOM is doing it.

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I think it's a very strong development.

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And to answer your question, it's already happening.

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Not it will happen.

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There are the towns with the names where the systems will be installed.

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So yes, it will happen.

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And the criticism that the contracts are going to not only foreign companies, but companies

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from the East who are renowned for bringing in their own workers and using no one locally?

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Well, they will certainly have to train local people.

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Otherwise, do you understand Graa Water forever?

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I don't think so.

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Now, I'm not too concerned about that.

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The fact is we don't have the technology.

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We probably don't have the expertise to build it.

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And that's part of the thing.

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You must have your people here trained so that future best storage systems can be built

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by them.

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And that's the way that I think it will play out.

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So what has happened to the IRP from 2019?

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Is that now has that been ditched or what?

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No, on the contrary, the IRP of 2019 is being implemented ahead of schedule.

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I quote some numbers in the in the written text, but essentially the IRP runs up to 2030.

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And by 2025, by 2025, we were supposed to have procured 9400 megawatts of new solar

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and wind power in terms of the in terms of the IRP.

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We are already sitting at 7800 and this is now 2022.

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So we will easily beat that 2025 target.

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If you then add to the fact that a lot of the activity has shifted to the private sector

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with the president's announcement around private sector participation and on the storage side,

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a lot of the activity has shifted to ESCON, then I think we'll easily beat the IRP targets.

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As a nation, we will easily beat them because solar plants will be built outside of the

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IRP and batteries will be put up, battery storage systems will be put up outside the

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IRP.

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So in a sense, the IRP thing is academic, but we certainly will beat the numbers, which

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is an IRP.

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No question about that.

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What about what shall I call it?

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murmurings about a second ESCON?

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I think it's exactly that murmurings.

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Yeah, a second ESCON doesn't fit into the long term picture, which we've been discussing

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here today.

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Absolutely not.

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And, you know, you must always see things in context.

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I watched the speech that the president made in which he made this comment about the second

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ESCON at the South African Communist Party summit or meeting.

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It was one hour and seven minutes.

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It was really, if you watch the whole thing, it was really a throwaway comment.

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The throwaway comment was then picked up by the media and taken further and so on and

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so forth.

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But it was really a throwaway comment.

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I would be very surprised if that becomes part of ANC policy and then even more surprised

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if it becomes part of government policy.

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There's a hell of a difference between talking at the SSCP conference, having an official

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ANC policy and then having government policy.

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Those are three very different positions.

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So now I don't think we'll see it.

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What we I think we'll see is a gas company, a government owned gas company to build the

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infrastructure that we need to use gas in the country.

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We don't really have a gas infrastructure, only in a very small and limited way.

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If we want to reach a point of having 3000 or 6000 megawatts of gas supply available

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to the economy, we will have to put a few pipes in the ground.

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To put it that way, we'll have to build infrastructure.

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That could possibly be done by a government company, a state owned enterprise.

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So in that sense, there could be, but that's a second ESCON, but let's be very clear, a

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gas company is not a second ESCON.

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It's like saying a zebra is the same as a kudu.

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No, no, no, no, no.

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That's not the case at all.

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I first want to see in any case who's going to finance it.

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I don't think there's money in the budget for it.

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And I very much doubt whether private financiers would be willing to step in unless their government

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guarantees and so on.

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So let's see how that space develops.

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I'm very much in favor of gas supply and I don't see a second ESCON as part of the long

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term plans.

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We've talked a lot about procurement for generation, but what about transmission?

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Because the transmission lines need to be upgraded enormously.

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Absolutely.

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Transmission will remain a government monopoly.

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That's the case in the Netherlands, it's the case in China, it's the case in several countries.

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And that would be the case here as well.

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The president made that clear.

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ESCOM itself is working with an upgrade of the transmission lines of about 130 billion

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rand.

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They're talking about 8000 kilometers of transmission lines and they're talking about 100 new substations

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to be built.

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And the price tag of that is 130 billion and more.

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So yes, that'll have to be done and the transmission company that will be formed will have to take

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that on.

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A portion of the money that we are getting or hope to get from the COP26 conference,

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that 8.3 billion dollars, it's about 140 billion rand.

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A portion of that 140 billion will go for transmission lines for ESCOM because that's

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really the heart of energy transition.

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If you can get your transmission lines and your substations right, the rest follows.

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So I think that's how ESCOM will finance it.

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Thank you.

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Do you want to just have a look at what you yourself have listed as so what at the end

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of this two part series?

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Yeah, and we must apologize that it's so long, but the topic is just big and complex and

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one has to see it in its whole.

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When we talk electricity, we normally stop with load shedding, but there is just so much

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more to it.

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And that really is the only point I want to highlight.

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The Chinese word for crisis consists of two characters and the one character indicates

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danger and the other character indicates opportunity.

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And I think that's exactly electricity in South Africa.

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It's the biggest single danger facing this country at the moment.

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It's the biggest single constraint holding us back.

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But by the same token, it's the biggest single opportunity.

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There's nothing else in this economy, agriculture, tourism, you name it.

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There's no other industry where we have the possibility of the investment and the jobs

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and the growth that we can have with electricity, switching from coal to renewables.

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And in that sense, it really is a case of green is the new gold.