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Dossier – utilities: Generating crises

By Erin Conway-Smith
Posted on Thursday, 7 June 2018 13:14

South Africa’s beleaguered state power utility is plotting a new course after a decade of electricity shortages, corruption problems and mounting debt. There is fresh urgency in reforming Eskom following changes at the helm of the governing African National Congress (ANC) and the country. Cyril Ramaphosa, who became South Africa’s president in February after scandal-plagued Jacob Zuma was forced to resign, has made addressing Eskom’s woes a priority.

But even with strong political backing from business-friendly Ramaphosa, turning around the power monopoly will be a herculean task. Energy experts question whether Eskom will be able to undertake long-overdue and deep reforms.

Ramaphosa, after becoming head of the ANC at a December party conference, moved quickly to change the leadership of Eskom, which has been roiled by claims of corruption in recent years. He appointed a new Eskom board led by the respected Jabu Mabuza, previously chairman of Telkom. Ramaphosa named Phakamani Hadebe interim chief executive to stabilise leadership at the utility. A new chief executive and other senior leaders are due to be named soon. In early April, Ramaphosa also referred the allegations of corruption and maladministration at Eskom – and Transnet, another state-owned company – to the Special Investigating Unit, which investigates malpractice at state institutions.

In a cabinet shuffle in February, Ramaphosa appointed Pravin Gordhan, a two-time finance minister, as minister of public enterprises. Jeff Radebe, who is seen as a safe pair of hands, became energy minister.

A long way to go

Despite the changes, ratings ­agency Moody’s further downgraded Eskom’s credit rating on 28 March, from B2 to B1 – the fifth tier of junk status. Moody’s noted that the leadership changes were a positive start, allowing Eskom to secure short-term funding and avoid a near-term default, but said they do not go far enough.

What Eskom needs, according to Moody’s, is a clear path towards stabilising its longer-term financial and business positions. “Eskom’s challenges are complex and not easy to resolve,” the ratings agency said in its press release.

Khulu Phasiwe, Eskom’s spokesman, says that a one-year business plan is currently under discussion by the board and due to be completed by late September. A longer-term strategy is also being developed. “We still have a long way to go,” Phasiwe admits. “But Eskom has made strides, and the market is beginning to take notice.”

A significant, stubborn challenge is flat demand for electricity. This is taking place against a background of rising debt levels and high operational costs for Eskom. The economy is stagnant, with Eskom selling less electricity in 2017 than in 2007.

Eskom currently generates more electricity than necessary, in stark contrast to the power cuts of recent years. In 2008, and again in 2014 and 2015, there was ‘load shedding’ as delays in building new power plants combined with backlogs in the maintenance of older ones to create a crisis.

Delayed interim financial statements show that Eskom’s debt burden is now R367bn ($31bn). Municipalities owe Eskom more than R30bn, leading to threats from the utility to shut off power.

The costs of building two new coal-fired power plants, Medupi and Kusile, have mushroomed amid repeated delays in construction. The plants are not due to be fully completed until 2021 and 2022. “It is a very difficult situation for Eskom,” independent energy analyst Doug Kuni says. “They have to continue borrowing to continue building, but Eskom cannot continue the new build at any cost.” Meridian Economics, a Cape Town-based consultancy, argues that Eskom should curtail construction of the Kusile plant and decommission older coal-fired power stations to cut costs.

Ballooning payroll

There are problems elsewhere. Over the past decade the number of employees at Eskom increased from 32,674 to 47,658, despite a reduced demand for power. While cutbacks to staff are needed, this would almost certainly meet resistance from South Africa’s strong unions, which are allied to the ANC.

To boost revenue, Eskom has repeatedly applied for significant increases in tariffs from the energy regulator. Eskom requested a 19.9% tariff hike for the 2018/2019 financial year, but the regulator granted a 5.2% increase in December.

The utility will need to borrow R72bn rand for this financial year, including a loan repayment and operational costs. “Eskom has always been dependent on the government to bail them out,” Kuni says. “And the government continues to bail them out. If Eskom was another company, they would have folded long ago.”

South Africa currently relies on coal for nearly 80% of its power. An updated Integrated Resource Plan, which would provide policy guidance on the future of the energy sector, is long overdue to be released.

Meanwhile, Eskom was late in signing 27 agreements worth $4.7bn under a department of energy plan to procure renewable energy from independent producers. Eskom signed the deals on 4 April, despite a court action by the National Union of Metalworkers of South Africa, which represents Eskom employees. The union says 40,000 jobs will be lost.

Since the government established the independent producers plan in 2011, demand for electricity has dropped as the economy slowed. Ted Blom, a former senior Eskom executive who is now a partner at Mining & Energy Advisors, says the last thing Eskom needs is more grid capacity.

Blom calculates that the average price for the renewables will be far more expensive than coal. He adds that Eskom is taking on more power supply and debt obligations that it can ill afford. Those power-producing agreements will “decimate” Eskom’s cash flow and its ability to pay its debt, Blom says, adding: “The cumulative effect on Eskom is disastrous.”

Other analysts say that the renewables could be cheaper than coal. A 2016 comparative analysis by the Pretoria-based Council for Scientific and Industrial Research found the cost of electricity from new solar photovoltaic and wind technologies to be 40% cheaper than new coal base load.

Climate engagements

Roger Lilley, a Johannesburg-based energy analyst, points out that South Africa has to meet its international engagements on climate protection : “The reality is that renewable energy will be part of our electricity generation programme going forward,” he says. “One way or another, the power utility has to generate electricity without polluting the atmosphere, and the only way it can do that is to go for renewable energy.” Lilley says that Eskom needs to close five of its old, inefficient coal-fired power plants that do not meet emissions standards.

Anton Eberhard, a professor and infrastructure specialist at the University of Cape Town’s Graduate School of Business, argues that Eskom’s financial situation cannot be fixed in the medium to long term unless the government unbundles transmission and generation.

Conflict of interest

Eberhard says this could be done through the creation of an independent transmission system and a market operator – initially as a subsidiary of Eskom that could later be spun off into a separate state-owned firm. “Eskom’s current conflict of interest as both a generator and buyer of power will be removed,” Eberhard explains. According to energy analyst Kuni, the best prospects for privatisation are in power generation.

Some investors might balk at getting involved with coal-fired plants. Eskom’s older stations, which use old technology and lack sufficient pollution mitigation, need investments in newer, cleaner technology. “It’s all doable, and it can be done in the medium to long term,” Kuni says. “Unless [Eskom] looks at privatisation and bringing in private partnerships, I don’t see how it can wipe out its debt.”

The ANC under Ramaphosa has mooted privatisation as a solution to some of the problems that ail state-owned enterprises. That idea has political support from other areas of the political spectrum. Natasha Mazzone, shadow minister for public enterprises for the opposition Democratic Alliance party, says: “We need to look at how to keep up with different technologies, and how we introduce competition into our energy market […]. These are things that should have been looked at, and plans should have been made 20 years ago. But it just wasn’t in the government’s best interests to introduce competition into our electricity market.”

She concludes: “Now we sit with a position where Eskom is virtually financially bankrupt – the amount of debt that Eskom has is obscene – and we’re in a changing world. […] Unfortunately this is a company that has failed to keep up with the changes.”

This article first appeared in the May 2018 print edition of The Africa Report magazine

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