Business school teaching case study: Turning off carbon while keeping the lights on

Read the professors’ business school-style case study before considering the issues raised in the box at the end.

At the end of last year, Dan Marokane became the 12th chief executive of Eskom in the past decade alone. He returned to the embattled South African state-owned utility monopoly, which he had left in 2015, to tackle the tensions between fixing the company to ensure energy security in South Africa and meeting its “just energy transition” commitments to lower emissions.

At COP26, the UN Climate Change Conference in Glasgow, in December 2021, the US, EU, UK, France and Germany pledged $8.5bn to help South Africa shut its coal-fired powered stations. Eskom generates more than 90 per cent of electricity used in South Africa and the Southern African Development Community region, of which 85 per cent is produced from fossil fuels.

Overall, the energy sector contributes 41 per cent of South Africa’s CO₂ emissions, according to the World Bank, earning Eskom the dubious honour of being called “the world’s worst polluting power company” by some environmental groups. Eskom also finds itself at odds with climate activists and academics such as those from University College London and the International Institute for Sustainable Development, who argue that “no more fossil fuel projects are needed as renewable energy sources take up the demand”.

In addition, since 2008, Eskom has struggled with debilitating national blackouts euphemistically known as “load shedding”. These were caused by insufficient generation to meet demand for power as a result of poor management, corruption and bad political decisions. Electricity prices spiked and the lack of power further weakened the South African economy, costing as much as £40mn per day.

During the first half of 2024, the situation appeared finally to be stabilising, following the appointment of Mteto Nyati as Eskom chairman. Nyati had a successful track record in the technology and telecommunication sectors. Marokane, as a new chief executive with a supportive board chair, is also able to draw on his prior experience at Eskom, when he was in charge of generation.

Marokane has cautioned that, while there has been no load shedding for several months, “South Africa is not out of the woods yet”. His strategy includes carrying out extensive maintenance at underperforming coal-fired power stations that had been poorly maintained, and dismissing corrupt or incompetent managers. The turnaround is complicated by a new business model and the need for Eskom to move to cleaner energy production as part of the just transition programme.

Eskom was a vertically integrated business since its inception in 1923 but, in 2019, the South African government began a process of unbundling the company into separate subsidiaries for generation, transmission and distribution. The objective was to tackle the problems that led to load shedding and improve efficiency and transparency, reduce rent seeking, and protect capital providers interests.

The first division to be spun off in July this year was transmission, now an Eskom subsidiary known as the National Transmission Company South Africa, which operates with a separate board and management team. This has the potential to be the most profitable of the subsidiaries and will run the transmission system and buy electricity from multiple generators, not only Eskom. It will eventually provide a platform for generators, consumers, retailers and traders to trade with each other, as happens in a number of other countries. But Marokane might want to push back the timing of the spin-off for two related reasons.

First, Eskom ought to protect its less profitable generation division, currently dominated by fossil-fuel energy sources. In July, Eskom spoke out against government plans to issue licences allowing private generators to sell directly to customers, and to permit the import of energy into South Africa. The company was concerned that applicants would be able to cherry-pick customers, leaving existing small users without the present cross-subsidy from larger consumers.

Second, to meet its carbon emission reduction targets, Eskom must find a way to address a continuing reliance on fossil fuels as the main source of energy in its generation division. The company had pledged at COP26 to reduce emissions from 442mn tons a year to between 350mn and 420mn tons by 2030. Retaining transmission capability within Eskom could help support a sustainable restructure, leading to a better funded just transition plan.

Marokane was confident Eskom would reduce about 71mn tons of CO₂ from generation by 2030, as it aggressively built a renewable energy portfolio. Yet it has failed to repurpose its 63-year-old 1,000MW Komati power station, east of Pretoria — it was finally decommissioned in October 2022.

Owing to the social consequences of the loss of hundreds of jobs at the fossil-fuelled Komati, which were replaced by many fewer focusing on social entrepreneurship initiatives, Marokane described it as an “atomic bomb scenario in terms of social discord”.

Despite partnering with the South African Renewable Energy Technology Centre and the Global Energy Alliance for People and Planet to redeploy the hundreds of people who lost jobs after the closure of Komati, Eskom has found that the path to a just energy transition is not a smooth one.