Powering South Africa’s Future: A Bold Plan to Shrink Eskom and End Loadshedding

To Investors,

Last year I wrote a letter to this group suggesting that the South African government should intentionally make Eskom smaller, reduce Eskom’s market share in the energy supply chain, for the benefit of Eskom itself – and for the benefit of South Africans. I wanted to re-publish the letter to reach out to more industry insiders and capital allocators for comments on the idea.

I’ve copied and pasted the original letter, but have added a few improvements for better communication.

In 2023 I wrote a short essay about how solar energy could be the answer to South Africa’s energy woes. You can read that note here.

In the same year, the South African government announced a debt relief package of R254 billion for Eskom’s debt and committed to also take up R70 billion of debt from Eskom’s balance sheet to hopefully reduce the debt further to sustainable levels.

Since then, not much has changed in South Africa (SA), with rolling blackouts (or loadshedding) continuing on and off in SA. A state designed monopoly, i.e., a monopoly that is born by decree, is the worst kind of monopoly. The main reason why load shedding persists in South Africa is because there’s no market feedback loop that says “Eskom, you can’t provide me the service I need, so I’m going with another service provider.” So debt bailouts aren’t the way to go because they only cause strain on the fiscal budget – negatively affecting South Africans, and negatively affecting Eskom’s executive team because they aren’t being held accountable as business leaders. I can’t believe I even have to write this last part out, but it's the environment we live in.

Eskom is a systemically important company, yes for the electricity infrastructure, but also because the company supports 40 000 jobs directly, according to Perplexity, and an estimated hundreds of thousands more through contractors, suppliers, and related industries. So it's imperative that the company must be rebuilt to make it more productive, and in my view, action to do that should be more aggressive.

If the government wants to commit to absorbing Eskom’s debt, they can do that, but the government should also pointedly strip market share away from Eskom by supporting residential solar initiatives.

Here's how it could work…

Phase 1: Subsidise Residential Solar Installations

To encourage widespread adoption of solar energy, the government should heavily subsidise the installation of residential solar systems, including battery storage. This could take the shape of tax credits offered if people go solar.

For example, in the United States there’s a tax credit for new electric vehicle buyers through a policy called the Inflation Reduction Act. A similar initiative in SA would significantly reduce the initial cost of adoption of a solar system for homeowners, promoting independence from the national grid should households wish; however, the bigger play would be for households to become net producers of energy.

Phase 2: Implement Net Metering Nationwide

At the same time as subsidising solar, following Cape Town's lead, all municipalities should adopt a net metering system. This system allows homeowners or businesses with solar panels to sell excess energy back to the grid, stimulating economic activity. For instance, in 2023, Cape Town's net metering system generated R26 million for businesses and households.

Additionally, this will lay the groundwork for a peer-to-peer energy sharing network, which could enable homeowners to share or sell surplus energy to neighbours. This model has proven successful in Australia for example, through collaborations with a company called PowerLedger.

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By reducin