Business

Eskom's R7-billion profit not enough to power its future

Lynley Donnelly

Eskom has warned that its R7-billion profit will not be enough to meet its revenue shortfall over the next five years and keep the lights on.

the first unit of new power plant Medupi, under construction in Mpumalanga, will only be fully commercially operational by mid-2015. (Reuters)

Although Eskom turned a R7-billion profit, according to its results released on Friday, the state-owned entity has warned that this will not be sufficient to plug the R225-billion revenue shortfall it faces over the next five years.

The country, in the meantime, faces continued power constraints as the first unit of new power plant Medupi, under construction in Limpopo, will only be fully commercially operational by mid-2015. This is in line with Eskom’s commitment to synchronise the unit – unit number 6 – to the electricity grid by December this year, after which it will take six months before it can supply sustained electricity to the network.

The rest of the plant’s six generation units will only be completed and become operational between 2019 and 2020, according to Dan Marokane, head of group capital at Eskom.  

To ensure unit six could be completed by the end of the year, resources were diverted from the next unit schedule to come on line, unit five. This has seen the gap between the completion of the two units increase to between 10 and 12 months rather than the six months Eskom had anticipated, said Marokane.

‘School fees’ paid
But the “school fees” paid in solving the technical issues on these two units means that Eskom does not expect a repeat of these problems at the remaining four units, according to Marokane. Eskom was looking at optimising its construction approach, including concurrent construction of the remaining units, to ensure a recovery to six-month intervals between the commissioning of the remaining units, he said

Marokane did not elaborate on how the delays are impacting on cost overruns on the project. Construction delays have already increased Medupi’s price tag from R91-billion to R105-billion, excluding interest.

Eskom has submitted a comprehensive sustainability report aimed at solving the company’s long-term funding difficulties, which is the subject of ongoing discussions with various government departments, acting chief executive Collin Matjila told a briefing in Johannesburg. As part of the plan, Eskom is pursuing an adjustment under the regulatory clearing account (RCA) administered by the National Energy Regulator of South Africa (Nersa). The RCA allows for the claw back of over or under-recovered costs, by Eskom, during a tariff determination period, provided these costs are deemed prudent.

The strain on the power system, exacerbated by delays in the construction of Medupi and its sister power station Kusile, have forced Eskom to ramp up its use of diesel-fuelled, open-cycle gas turbines (OCGTs). The cost of running these plants has doubled over the past year to R10.6-billion. It remains to be seen if Nersa will deem the additional costs incurred prudent, given that they have been driven, in part, to stop the power gap created by the construction delays at Medupi and Kusile.

But Matjila said Eskom was convinced it had a case.

“We believe that we have a case to make for the prudency of our expenditure on the OCGTs, but the decision obviously lies with the regulator,” he said.

Maintenance costs to keep its existing power plants running at their limits have also increased, rising to R13-billion from R10.6-billion in the previous financial year.

Sustainability plan
Alongside additional money from the RCA, Eskom was pursuing a broad range of options in its sustainability plan, according to finance director Tsholofelo Molefe.

These included alternative sources of funding, such as possible equity or quasi-equity instruments and exploring additional borrowing options. The ability to borrow sufficient funds at affordable levels was, however, constrained by recent credit ratings downgrades according to Molefe. Other options included the reprioritisation of capital expenditure within the R251-billion budget. But this could negatively affect operational sustainability and impact security of supply, she said. The company had also already embarked on a business productivity programme to reduce costs and drive efficiencies.

The impact of a ratings downgrade on Eskom was particularly acute. The company’s credit rating is linked to that of South Africa’s sovereign rating, which was recently downgraded. Eskom has been placed on credit watch by ratings agency Standard & Poor’s. If it is further downgraded in the coming 90 days, to sub-investment grade, Eskom’s cost of funding could rise between 30% and 40%, said Molefe.

A key feature of future sustainability for the company would be the move to “cost reflective tariffs” after the national energy regulator granted Eskom an 8% tariff increase in its most recent application. Eskom had applied for a 16% hike.

The tariffs allowed had “serious consequences for our business and further sustainability”, said Eskom board chairperson Zola Tsotsi.

Eskom’s revenue shortages could not be made up by the efficiency drives, he said. 

“However, migration to a cost-reflective tariff remains the main solution to ensuring the sustainability of the South African electricity industry, and indeed of Eskom,” he said.

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