Government throws Eskom a lifeline

The government has announced a bail-out package for struggling power supplier Eskom. (M&G, Madelene Cronje)

The government has announced a bail-out package for struggling power supplier Eskom. (M&G, Madelene Cronje)

The state has thrown a promised lifeline to struggling power utility Eskom, announcing a bail-out package aimed at plugging  its R225-billion funding gap and helping it get back to financial sustainability.

Experts have already warned however that the plan – which includes unspecified additional funding – raises the risk of further credit rating downgrades for the government.

The rescue plan comes as Eskom continues to face serious operational challenges, heightening the risk of more load shedding for consumers.  

On Sunday, the national treasury announced in a statement that the plan was aimed at helping to “relieve the impact on electricity consumers, as well as add additional support to Eskom’s balance sheet”.

It will include government support for regulatory tariff adjustments and further funding for the state-owned supplier, with the amount to be announced at October’s medium-term budget policy statement. 

The equity injection will come from “leveraging non-strategic government assets” – suggesting possible privatisation – with further detail to be revealed at the budget announcement.

Eskom will also raise additional debt of R50-billion, over and above the R200-billion earmarked for the current tariff cycle. “While higher debt levels do have a negative impact on Eskom’s balance sheet, it is necessary to reduce the immediate impact on electricity consumers,” said the statement. 

Eskom has existing government guarantees of R350-billion, of which it has only drawn R122-billion. The treasury said the guarantees will be used to reduce Eskom’s debt costs but stressed it needed to manage costs and raise sufficient revenue to cover these. 

Negative for balance sheet’
Other elements of the package include accelerating electricity demand management measures that do not undermine economic growth; supporting the growth of independent power producers and a drive to improve operational efficiency.

“Eskom will need to improve the efficiency of its operations through more effective maintenance of existing power stations, limiting cost over-runs in the new build programme, improving procurement outcomes and management of working capital,” the treasury said. 

Razia Khan, head for Africa macro research at Standard Chartered, said it was “something of a foregone conclusion that the state would provide Eskom the necessary support”. 

While details of the equity injection were still to be clarified, the mention of leveraging non-strategic asset did hint at “potential privatisation of some state assets,” she said in a research note. 

Ratings agencies would likely view the plan as a “negative for the balance sheet of the South African government,”  Khan said.

“With South Africa’s rating already threatened by its weak growth outlook, and an almost-across-the-board deterioration in a number of credit metrics, the decision of cabinet to approve an equity injection for Eskom – although expected – adds to potential downgrade pressure.”

Eskom’s funding gap is partly driven by the company not generating enough revenue to cover the cost of supplying electricity, says the treasury.

It is currently building two mega coal power stations in a bid to boost capacity and avoid widespread blackouts.
One of the plants, Medupi, was supposed to have come online by the end of last year but is  running behind schedule as a result of labour disputes. 

Supply challenges
Eskom’s operational challenges are as acute as its financial ones and the utility has reversed its previous policy of keeping the lights on at the expense of maintenance, heightening the risk of load shedding for consumers.

Over two fifths of Eskom’s power generating plants are in disrepair and urgently need maintenance to bring it back to adequate performance levels.

Of Eskom’s 87 coal-fired generation units – six are typically located at each power station – 36 are in urgent need of maintenance, according to Eskom spokesperson Andrew Etzinger. 

The backlog will take at least two years to eliminate he said in an interview last week. In addition, it would take “a significant amount of capacity” from both the uncompleted Medupi and Kusile power stations, before the country had an adequate electricity reserve margin. 

The previous strategy of deferring refurbishment  in a bid to keep the lights on had caused a downward spiral, said Etzinger. “What was realised was, it’s not sustainable,” he said. 

The deterioration has seen a dramatic drop in the energy availability factor (EAF) across Eskom’s fleet.

Chris Yelland, managing director of EE Publishers and Eskom expert, said despite energy consumption being at a seven year low availability had dropped even faster. 

Even if Medupi were to come online all at once, it would be outweighed by the drop in energy availability, he said.  

This was a consequence of Eskom’s previous decision to keep the lights on at the cost of maintenance, said Yelland. 

Load shedding
Etzinger denied political pressure ahead of the elections was the reason why Eskom had opted to pursue keeping the lights on at all costs. 

However, for the first time this financial year load shedding had been taken out of Eksom’s shareholder compact with the department of public enterprises, its shareholder. This reflected “an understanding of all stakeholders, including our shareholder, that keeping the lights on at all costs is just not sustainable”, he said.

As part of its new philosophy, Eskom has returned decentralised decision making to its power station managers. In the past they would have required permission from its head office, Megawatt Park in Johannesburg, before taking a unit out of service.

This is designed to return authority and accountability to power station managers and is in keeping with the drive to secure the health of its fleet in the long run. 

Industry speculation, however, suggests that the level of degradation of Eskom’s fleet has become widespread and severe, and is compounded by an attrition of skills at power stations. 

Etzinger said the utility was finding that when routine maintenance on generation units was done, it often sees “scope creep”. In other words, the repair work that is needed, is often more than is initially expected or planned for. 

Eskom did not have a “significant skills issue” he noted but it was working to make better use of the skills it already had. 

He stressed these problems did not necessarily translate into load shedding which was also influenced by demand, planned maintenance and trips at power stations. The difference now was that Eskom would not be deferring much needed planned maintenance to compensate for the unplanned outages in the system. 

“We can’t bend our maintenance regime anymore to fit the curve,” he said. – with AFP

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