/ 2 September 2008

Erwin: Moody’s Eskom downgrade cause for concern

The recent rating downgrade of power utility Eskom by Moody’s is a concern and may endanger plans to source billions of rands from international capital markets, Public Enterprises Minister Alec Erwin said on Tuesday.

Eskom has embarked on a long-term expansion programme, which includes building new nuclear power stations, as Africa’s strongest economy battles a chronic power shortage that has led to lower output in key mining, smelter and manufacturing sectors.

But a decision last month by Moody’s to lower Eskom’s local and foreign-currency ratings has put pressure on the company to secure the necessary funding amid a global credit crunch.

”The recent downgrading by Moody’s is a concern, and we must avert any potential future downgrades by other ratings agencies,” Erwin.

Ratings agency Standard and Poor’s has placed Eskom on ”credit watch”, damaging efforts to secure international funding and prompting Eskom to seek alternative sources, such as with the World Bank.

”The health of Eskom’s balance sheet therefore remains critical as it goes into both local and international capital markets for borrowing,” he said in a text of a speech.

South Africa’s energy regulator in June agreed an average 27,5% electricity price increase for 2008/09, about half of what Eskom asked for as it sought to boost its coffers and cover sharply higher coal prices.

The National Treasury has agreed to provide R60-billion over the next three years to help Eskom pay for the R343-billion needed over the next five years to boost capacity.

The figure is projected to reach R1,3-trillion by 2026 to add 40 000MW to the grid.

But, with South African consumers paying among the world’s cheapest prices, Erwin reiterated the need for higher tariffs.

”Electricity tariffs must start to reflect the real costs of its production,” he said.

Erwin warned that South Africa would remain vulnerable to power cuts during the coming southern hemisphere summer as Eskom started maintenance work.

Ageing equipment in the company’s predominantly coal-fired power plants has been operating at near capacity to avert blackouts, putting the grid at risk of technical problems.

South Africa’s mines, including the world biggest platinum and key gold operations, were forced to shut down for five days in January as the power system came close to collapse. Consumers have been asked to cut demand. — Reuters