SA transmission firm seen hobbled by Eskom millstone

Under separation plans, the power utility would extend a R39.9bn loan to NTCSA.
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South Africa’s plan to create a power transmission company that will attract the investment needed to strengthen the national grid has been hobbled by its restrictive debt arrangements with parent Eskom, two people familiar with the situation said.

Under the plan to separate the unit, which Eskom presented to its creditors on June 10, the national power utility will extend a R39.9 billion loan to the National Transmission Company of South Africa, or NTCSA.

That funding will be guaranteed by the NTCSA’s assets if Eskom, which is R396 billion in debt, doesn’t meet its own obligations.

Eskom’s board will also approve an annual borrowing plan for the transmission company that will take the form of inter-company loans, the utility said in its presentation. Additional borrowing will need to be approved by Eskom.

The plan protects Eskom’s creditors by ensuring that NTCSA can’t ignore its obligations to the utility while paying its own debts. Still, it hampers the transmission company, which will derive revenue by charging separate tariffs, from forming partnerships with private companies to strengthen and expand the grid, said a creditor and an adviser familiar with the terms, who spoke on condition of anonymity because the discussions aren’t public.

“The subsidiarisation of NTCSA is the first step in the total unbundling of the electricity industry,” Eskom said in a response to queries. It didn’t answer questions as to whether the arrangement was temporary or whether it would inhibit partnerships with private developers.

Informal approaches have been made to Eskom and the Department of Public Enterprises, which oversees the utility, to see if they would reconsider the structure, the creditor and adviser said. The department referred queries to Eskom.

“Creditors at the Eskom holdings level don’t want to lose the security,” said Vuyo Ntoi, co-managing director of Old Mutual’s African Infrastructure Investment Managers, which has invested in renewable energy plants in South Africa. “It will be a challenge if the transmission company can’t take on additional debt.”

Eskom has previously estimated that R180 billion needs to be invested in transmission and distribution networks to take advantage of the country’s renewable energy potential.

The grid needs to be expanded in the Northern Cape, an arid province with almost uninterrupted sunlight, and in the Eastern Cape, which is suited to wind power plants. Without an expanded grid the country will struggle to transition away from the use of coal, which is largely mined in the east of the country, is burnt at plants close to the mines and accounts for more than 80% of power generation.

Eskom is separating into transmission, generation and distribution units that will operate as separate entities in a bid to improve its operational and financial performance. The company has subjected South Africa to intermittent power outages since 2008 and is surviving on government bailouts.

© 2022 Bloomberg L.P.

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What is the plan?

Will Transmission be the central energy buyer and grid balancing entity? ie it buys from IPP, Eskom, Mozambique and sells to distributors like councils and Eskom Distribution and export countries. That means it should also take over operation of the pumped storage system which is consumptive not generative. Same also it will decide when to run peakers, recharge pumped hydro, etc. And decide about loadshredding and load reduction?

Quite an animal!

Once upon a time, long ago, a group of future-orientated individualists with the Calvinist orientation built this very productive farm at the southern tip of Africa. This masterpiece of foresight and intellectual capacity won international awards for its quality craftsmanship and productive efficiency. Then, partly because of international political pressure, but mostly out of humaneness, they voluntarily handed the farm over to the local population. The farmer had many high-caliber rifles and shotguns and his children were excellent marksmen, but since they knew what war is like, they settled for a peaceful solution. They did not sell the farm. They gave this debt-free farm to a socialist community for free.

This masterpiece of engineering became a BEE farm. The new farmers did not have any skin in the game, and since they were communists, they were accountable to nobody. Therefore, they immediately began to monetize their newly-found positions of power. They stole their own fencing to sell as scrap metal. They pawned the windpump to buy beer. They offered the farm as collateral and took the cash to buy expensive cars. They gave the crop and livestock away for free to buy favors from the rest of their communalist clan.

After a while, this farm could not produce enough food for the farmer and his family. They turned a commercial farm into a subsistence farm. They turned a productive farm into a debt-ridden, overgrazed, and eroded piece of land. Where that farm was able to support the taxman in the past, it is now a burden to the taxpayer.

In a futile attempt to postpone bankruptcy, the farmer subdivided a piece of his bankrupt farm and gave it to his son. He was a BEE farmer, so he was able to extend his overdraft on his bankrupt farm to lend working capital to his bankrupt son on his new piece of bankrupt land. He also told his son that he was willing to lend him more money in the future as long as the son is willing to share in the debt burden. The creditors were in such deep trouble, that they were forced to play along, and also postpone the inevitable. They all knew that if they could play for time, the pension savings of the communalist clan will bail them all out eventually.

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