Hello and welcome to the So What podcast, in which political economic analyst JP Lantman
discusses the issues uppermost in the minds of South Africans.
You can find a written version of this content on JP's website, jplantman.co.za.
I am Ruda Lantman and I am your host.
These first few recordings were done at our dining room table, but we will soon be moving
into a studio.
Hello and welcome to the second recording, the second part of this recording, which goes
with JP's newsletter of the 1st of August 2022, Electricity Green is the New Gold.
It is so packed with information and almost double the usual length.
So we've broken it up, please listen to the first part as well.
And now we're coming to what we've called frequently asked questions about this.
What about ESCOM debt?
What's going to happen with that?
Yep, it looks fairly certain that about 200 billion of the 400 billion that ESCOM owes
will be transferred from the ESCOM balance sheet to the Treasury, the National Treasury,
in other words, the South Africa as a country's balance sheet.
Now that sounds very intimidating, but it's not really.
Of that 400 billion debt that ESCOM has, more than 300 billion has been guaranteed by the
government anyway.
So government or the taxpayer is liable to pay for it if ESCOM can't pay.
So whether it sits on the ESCOM balance sheet or sits on the Treasury balance sheet, it's
really very much the same thing.
How do outsiders like the rating agencies see this?
The rating agencies, as a general rule, add these guaranteed debt, what is called contingent
liabilities.
They add it onto the nominal debt that the government has and they then calculate what
the debt is as a percentage of GDP and how that affects the ability of the country to
repay.
So the economist that has been rated once again as the best economist on the JSE, Elna
Moorman, has calculated that if 200 billion of the 400 billion is transferred to Treasury,
it will lift the South African debt profile from about 75% of GDP to 78% of GDP.
And in her opinion, that is not a game changer.
It's not an event that will trigger a rerating of where we are.
In fact, it will probably, as it has already done, trigger a rerating of ESCOM's debt,
making it easier for ESCOM to borrow, not making much difference on the South African
side.
So that's likely the way that it will play out.
Now, Rudolf, what we must not forget is that since 2018 or 2019, Treasury has been allocating
many billions of rands every year to ESCOM as a kind of a direct subsidy to enable ESCOM
to survive.
I think it's a much better arrangement to just take the debt on.
ESCOM can get rid of that interest payments and you've got a much healthier situation.
We don't have details yet of precisely what that transfer of debt will look like.
We'll get that in October at the time of the so-called mini budget.
But we know from reports that have been leaked that Treasury is pushing that after the transfer
of debt has taken place, there must be certain follow-up steps that ESCOM has also taken
to improve their own balance sheet and own liquidity position.
And maybe that includes that they offer to sell Madhupi or Kusila.
Once Madhupi or Kusila is up and running properly and has been sorted out, it'll be a fantastic
investment.
You won't pay what it costs.
That you won't do.
You will pay it at a much discounted price.
But at the right price, Bauer Station is a lovely investment for a pension fund.
We've got income for the next 30 years and it's consistent income.
So it must be possible to do deals like that.
And we will get those details in October.
ESCOM is talking about building battery energy storage systems base.
Battery energy storage systems base.
It's a wonderful, wonderful name.
And planning to take on debt, extra new debt for that.
Should one be worried?
No, I wouldn't be worried because relatively speaking, the amounts are small.
The debt is a loan from the World Bank, which André Deraiter has negotiated.
It's for 11 billion rand, which will go into the base project, energy battery storage system.
Now, if you think about it, 11 billion rand is less than 3% of ESCOM's debt.
Whether it's there or not, I think it's not really material.
We know ESCOM can't pay the interest and they can't pay the debt.
That's why treasury will come in.
So in the treasury standing behind this kind of deal.
But what 11 billion rand does, it's beginning the process of building a storage infrastructure,
energy storage infrastructure in South Africa.
We did exactly the same thing at the beginning of renewables.
The first renewable contracts were signed at, just hold on to your chair, 4 and 50 kilowatt
hour at the stage when ESCOM was selling power for less than around a kilowatt hour.
On top of that, it carried a government guarantee.
So we've really sweetened the deal a hell of a lot for those first renewable producers
to get the wheel rolling.
And today, of course, we have the benefits.
The price have dropped from 4 and 50 per kilowatt hour to 47 cents.
You know, it's a fantastic drop in price and you were able to start a whole new industry,
which we couldn't do before that.
So I think it's a good investment.
If it opens the door to battery storage, it opens the door to battery manufacturing in
sub Africa with a big vanadium producer, with the biggest vanadium producer in the world.
You use vanadium in manufacturing batteries.
So the potential is huge that can all flow.
But you need, as you pointed out earlier, you need a client, you need a customer, and
that customer will be battery storage systems.
And that's why I think it's a good thing that ESCOM has taken the initiative here, although
it is still very expensive.
Hopefully over time, it will come down.
The second question, of course, that everyone asks is, yeah, well, it's all fine.
But will it ever happen because this government doesn't seem to be able to implement any of
its own plans, I'm quoting.
What is your answer to that?
Well, I think one must distinguish, you know, there's government and here we've got government
but ESCOM.
And as the president said in his television address, ESCOM now has a very competent management
team and has huge confidence in them.
And I think it's right to have confidence.
So yes, it will be implemented.
And in fact, ESCOM is already of that 11 billion rand loan from the World Bank.
They've already made a 4.4 billion rand contract with two companies, a South Korean company
and a Chinese company to come and build best systems, battery storage systems here in
South Africa with technology developed and tested and used in South Korea and China.
So yes, it will happen.
And how will it affect us?
I must read to you the names of a few places where we're going to see that.
We're going to see these best systems, in other words, battery storage systems installed
at Skaapvlei, Paleishevel, Graa Water, Pongola, Elanskop and Hexerfeef.
These are all rural names.
These are all Prattland names where you currently have bigger or smaller solar or wind farms.
You put batteries down there when the sun is shining or the wind is blowing, the batteries
can be loaded.
And tonight when the sun is not shining, you can draw from batteries and feed the grid.
That's why ESCOM is doing it.
I think it's a very strong development.
And to answer your question, it's already happening.
Not it will happen.
There are the towns with the names where the systems will be installed.
So yes, it will happen.
And the criticism that the contracts are going to not only foreign companies, but companies
from the East who are renowned for bringing in their own workers and using no one locally?
Well, they will certainly have to train local people.
Otherwise, do you understand Graa Water forever?
I don't think so.
Now, I'm not too concerned about that.
The fact is we don't have the technology.
We probably don't have the expertise to build it.
And that's part of the thing.
You must have your people here trained so that future best storage systems can be built
by them.
And that's the way that I think it will play out.
So what has happened to the IRP from 2019?
Is that now has that been ditched or what?
No, on the contrary, the IRP of 2019 is being implemented ahead of schedule.
I quote some numbers in the in the written text, but essentially the IRP runs up to 2030.
And by 2025, by 2025, we were supposed to have procured 9400 megawatts of new solar
and wind power in terms of the in terms of the IRP.
We are already sitting at 7800 and this is now 2022.
So we will easily beat that 2025 target.
If you then add to the fact that a lot of the activity has shifted to the private sector
with the president's announcement around private sector participation and on the storage side,
a lot of the activity has shifted to ESCON, then I think we'll easily beat the IRP targets.
As a nation, we will easily beat them because solar plants will be built outside of the
IRP and batteries will be put up, battery storage systems will be put up outside the
IRP.
So in a sense, the IRP thing is academic, but we certainly will beat the numbers, which
is an IRP.
No question about that.
What about what shall I call it?
murmurings about a second ESCON?
I think it's exactly that murmurings.
Yeah, a second ESCON doesn't fit into the long term picture, which we've been discussing
here today.
Absolutely not.
And, you know, you must always see things in context.
I watched the speech that the president made in which he made this comment about the second
ESCON at the South African Communist Party summit or meeting.
It was one hour and seven minutes.
It was really, if you watch the whole thing, it was really a throwaway comment.
The throwaway comment was then picked up by the media and taken further and so on and
so forth.
But it was really a throwaway comment.
I would be very surprised if that becomes part of ANC policy and then even more surprised
if it becomes part of government policy.
There's a hell of a difference between talking at the SSCP conference, having an official
ANC policy and then having government policy.
Those are three very different positions.
So now I don't think we'll see it.
What we I think we'll see is a gas company, a government owned gas company to build the
infrastructure that we need to use gas in the country.
We don't really have a gas infrastructure, only in a very small and limited way.
If we want to reach a point of having 3000 or 6000 megawatts of gas supply available
to the economy, we will have to put a few pipes in the ground.
To put it that way, we'll have to build infrastructure.
That could possibly be done by a government company, a state owned enterprise.
So in that sense, there could be, but that's a second ESCON, but let's be very clear, a
gas company is not a second ESCON.
It's like saying a zebra is the same as a kudu.
No, no, no, no, no.
That's not the case at all.
I first want to see in any case who's going to finance it.
I don't think there's money in the budget for it.
And I very much doubt whether private financiers would be willing to step in unless their government
guarantees and so on.
So let's see how that space develops.
I'm very much in favor of gas supply and I don't see a second ESCON as part of the long
term plans.
We've talked a lot about procurement for generation, but what about transmission?
Because the transmission lines need to be upgraded enormously.
Absolutely.
Transmission will remain a government monopoly.
That's the case in the Netherlands, it's the case in China, it's the case in several countries.
And that would be the case here as well.
The president made that clear.
ESCOM itself is working with an upgrade of the transmission lines of about 130 billion
rand.
They're talking about 8000 kilometers of transmission lines and they're talking about 100 new substations
to be built.
And the price tag of that is 130 billion and more.
So yes, that'll have to be done and the transmission company that will be formed will have to take
that on.
A portion of the money that we are getting or hope to get from the COP26 conference,
that 8.3 billion dollars, it's about 140 billion rand.
A portion of that 140 billion will go for transmission lines for ESCOM because that's
really the heart of energy transition.
If you can get your transmission lines and your substations right, the rest follows.
So I think that's how ESCOM will finance it.
Thank you.
Do you want to just have a look at what you yourself have listed as so what at the end
of this two part series?
Yeah, and we must apologize that it's so long, but the topic is just big and complex and
one has to see it in its whole.
When we talk electricity, we normally stop with load shedding, but there is just so much
more to it.
And that really is the only point I want to highlight.
The Chinese word for crisis consists of two characters and the one character indicates
danger and the other character indicates opportunity.
And I think that's exactly electricity in South Africa.
It's the biggest single danger facing this country at the moment.
It's the biggest single constraint holding us back.
But by the same token, it's the biggest single opportunity.
There's nothing else in this economy, agriculture, tourism, you name it.
There's no other industry where we have the possibility of the investment and the jobs
and the growth that we can have with electricity, switching from coal to renewables.
And in that sense, it really is a case of green is the new gold.