Eskom’s generating capacity is threatened with further instability because 12 power units could cease abruptly, creating a shortage of 4 956 megawatts.
(Madelene Cronje)
The Covid-19 pandemic dealt South Africa’s already fragile economy a hard blow last year and its recovery will remain hamstrung by electricity constraints, among other factors, as state power utility Eskom struggles on with a creaking system and financial woes.
For years, the government has balked at the idea of privatisation as a solution for the beleaguered entity, but it is fast running out of options — and financial resources — to keep bailing it out. On the other hand, Eskom provides about 95% of the country’s electricity and thus cannot be allowed to fail.
Last year was the worst year for load-shedding — a rotational blackout system Eskom has intermittently applied since 2008 to ease pressure on the grid — with 1 798 gigawatt hours of power cuts. These planned blackouts are estimated to be costing the economy R100-billion a year. Load-shedding will wipe out about 1.5% of GDP this year, according to professional services firm PwC.
“The number of hours and stages of load-shedding play a significant part in our forecasts for GDP growth for the remainder of the year. Lower growth means that we will see slower recovery of jobs,” PwC’s chief economist Lullu Krugel said. “However, in the same vein, if we are able to sort out our energy problems, we think that it can add back as much as two percentage points to our growth over the medium term.”
While the treasury mulls rescue ideas — that now include Deputy Finance Minister David Masondo’s personal idea of possibly listing the embattled utility — Eskom is planning big capital investments for the end-of-life of old coal-fired power plants, 8 000km of new transmission lines, an inland coal terminal, carbon capture and storage at Majuba power station and a host of other technological advancements to deal with the harmful effects of coal-fired power on the environment.
These are rather lofty plans for a company that owes R401-billion in debt and has so far done a poor job of managing it.
“Eskom has been surviving on bailouts from the government. Its debt service cover ratio is less than 0.5 — that is, it generates less than half the cash it needs to pay back the principal and interest on its debt. Since 2006, the government has provided R220-billion in bailouts to Eskom, including R32-billion this year — meant for repaying debt,” said energy analyst Anton Eberhard.
Renewable energy makes economic sense for the utility, he said: “Eskom is now beginning to accept that it is too expensive to keep these old coal power stations running.”
Eskom relies on coal-fired power stations to produce about 90% of its electricity and uses more than 90-million tonnes of coal a year.
But switching to renewable energy might not be the panacea for Eskom’s woes some might expect it to be, at least according to Masondo. During climate change commission hearings last week, Masondo said a transition to low carbon energy in a competitive market would lead to electricity prices decreasing, hurting Eskom’s revenue.
Interestingly, Masondo added that a possible listing of Eskom on the JSE was an example of the kind of out-of-the-box thinking that had characterised discussions about solutions to its financial problems, although he was quick to stress that he was airing ideas in his personal capacity.
Eberhard said that listing Eskom in the same way telecommunications giant Telkom was listed on the JSE in 2003 would have implications for the programme underway to unbundle the utility into three separate and three independent transmission, distribution and generation units.
“Eskom is still technically insolvent and it will need deleveraging of its debt before a JSE listing is feasible, otherwise investors will simply see their equity eroded. An initial public offering would also be inadvisable before Eskom is unbundled into generation, transmission and distribution. Listing even a part of Eskom Holdings now would complicate and even stall the unbundling,” Eberhard said.
Added to that, a proposed listing of Eskom would almost certainly meet the same vehement opposition from the ruling ANC’s tripartite alliance partners that they gave to the Telkom move nearly two decades ago.
The South African Communist Party and trade union federation Cosatu were worried about what Telkom’s privatisation would mean for jobs — and their fears were borne out.
(John McCann/M&G)
A year after Telkom’s listing on the JSE and New York Stock Exchange, the company announced it would slash 30 000 jobs — contradicting commitments it had made at the listing announcement.
But inviting private ownership helped turn the company’s financial fortunes around over the years. In 2019, Telkom, in which the government now has just a 40% stake, beat analyst expectations and announced it was hiking dividends after a strong performance.
Today, another troubled state company, SAA, is also up for partial privatisation, despite similar loud protestations from unions.
But Eskom remains in limbo as the government waits for the legal separation in December of its transmission division to yield new capital.
“Once transmission is unbundled it will begin to move back to investment grade and will be able to access competitively priced capital,” Eberhard said. “Transmission is Eskom’s best managed division. It’s also an easily understood business and relatively easy to regulate well, thus providing a low risk, steady income investment for capital providers.”
Eskom’s chief executive, André de Ruyter, told last week’s climate change hearing that the unbundling would also remove capital constraints from the generation unit.
Despite Masondo’s scepticism that turning to renewable energy is the answer to Eskom’s woes, De Ruyter believes the pressure to decarbonise as a result of climate change is an opportunity to pivot from coal.
The accelerated decommissioning of some of Eskom’s coal-fired power stations could secure $10-billion in low-cost climate finance.
According to Public Enterprises Minister Pravin Gordhan, increasing the threshold for independent embedded generation to 100 megawatts, expected on 10 August, will unlock investment.
“There’s a huge pipeline of projects waiting for the right regulatory environment,” Gordhan told last week’s climate change hearings on the country’s energy transition.
Through a just energy transition project, Eskom believes it will have the opportunity to pilot intervention in decommissioned coal areas of Mpumalanga where the commodity drives about 25% of the economy and about 364 000 people are directly or indirectly employed in the coal value chain. The project is regarded as a litmus test for whether Eskom can shift away from coal without leaving people in the coal sector stranded.
The transition will affect the future outcome of finance deals.
“[It] looks like SA is a front-runner for these deals. There’s a lot of international interest in helping coal dependent countries transition,” said Jesse Burton, of the Energy Systems research group at the University of Cape Town.
Eskom expects 12 photovoltaic solar power projects at existing coal-fired power stations to benefit from concessional climate finance, as well as three wind turbine projects, two gas projects, one battery storage project and one pumped storage project. This would produce 8 017.2 megawatts of additional energy.
In the meantime, in a scenario where the current power shortage continues until 2024 — when South Africa can realistically expect to start benefiting from new energy developments — estimates show that nearly R380-billion would be lost in nominal GDP.
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