The credit rating agencies are currently in the country talking to government officials and other formations. Moody’s Investors Service (Moody’s) and Standard & Poor’s Financial Services (S&P) will publish their rating decisions on November 25 and December 2 respectively. The outcome of these decisions will have an impact on Eskom because the company’s credit rating is linked to that of the Sovereign.
Officials from Moody’s last visited South Africa and presented their credit opinion of Eskom on September 20 2016. They placed Eskom under negative watch and expanded on the factors that would result in a downgrade. These factors are the failure of the company to stabilise its financial and liquidity profiles, a change in the government’s support for the company or a downgrade in the Sovereign rating.
Moody’s labelled Eskom’s financial ratios as being distinctly weak, attributing this to Eskom’s rising operating costs driven by increases in primary energy costs, ongoing growth of Independent Power Producer (IPP) costs and the roll out of a large capital expenditure programme. They expected the financial ratios to remain weak given the persistence of high operating costs and a large planned capital expenditure programme.
Eskom has addressed all the concerns from Moody’s except for the ongoing growth of Independent Power Producers costs. The financial ratios will, however, be impacted negatively for as long as the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) continues to be rolled out at the current pace and cost. Eskom has previously stated that a 7.6 percent average tariff increase is required to fund power purchase agreements through the REIPPPP in FY2020/21. It is also an accepted principle that the tariff must rise in real terms to allow for Eskom to finance its increasing investment needs. Assuming inflation at 6 percent, the tariff increase would have to be higher than 13.6 percent to provide Eskom with a real increase and to be able to support the roll out of renewable energy IPPs at the current pace and cost. Currently, 4.9 percent of the disputed 9.4 percent tariff increase goes towards supporting the roll out of the REIPPP. This leaves Eskom with a sub inflationary increase of 4.5 percent. It is therefore clear why Moody’s view the ongoing growth of the IPP costs as a risk to Eskom’s financial profile.
The South African Renewable Energy Council is turning a blind eye to the crowding-out effect of the renewable IPP costs on the Eskom tariff. According to them, Eskom is engaged in a sustained attack on renewable energy programme in an attempt to protect its own narrow-minded interests. The likes of Professor Anton Eberhard and the right wing columnists have since responded by proposing that Eskom be broken up and radically restructured as proposed in the energy policy white paper of 1998 because it is proving to be a “poor instrument for a developmental state”. These responses are ideological and are geared towards the partial privatisation of Eskom and ultimately weakening the state. This, is a regime change agenda.
In the last couple of months, I have pointed to the weaknesses of the REIPPP in its current form, that the economy experienced a net loss of R4.27 billion in the first six months of 2016 due to the REIPPP and this loss is expected to double by the end of the year. This, read together with Moody’s observation that Eskom’s financial ratios will remain very weak because of the ongoing growth in power purchase agreements with independent power producers, among others, should make all of us to reconsider the pace and the cost at which the REIPPP is being rolled out. Like the nuclear build programme, the ongoing growth in power purchase agreements with independent power producers should be rolled out at a scale and pace that the country can afford. In order to achieve this, let us consider the latest tariffs for wind, solar and the selling price of Eskom to its customers.
The IPP lobby group, supported by the Council for Scientific and Industrial Research, argues that the renewable IPP costs are now cheaper than Eskom’s average cost of supply with solar and wind tariffs coming in at 62 cents per kilowatt hour. Eskom currently has surplus capacity and can meet any increase in demand by incurring only marginal costs. Any additional IPP compete directly with the Eskom marginal coal cost of 30 cents per kilowatt hour.
The unblended Eskom tariff is actually 77 cents per kilowatt hour and this is what Eskom customers should be paying for their electricity. They actually pay a blended tariff of 83 cents per kilowatt hour because of the roll out of REIPPP whose energy is purchased by Eskom at 217 cents per kilowatt hour.
If the unblended Eskom tariff is 77 cents per kilowatt hour, then Eskom at worst should insist on a “feed-in” tariff of less than 77 cents per kilowatt hour. In fact, it would be prudent for the IPP lobby groups to propose to Eskom that it signs power purchase agreements within bid windows 4 to 4.5 at 62 cents per kilowatt hour or less for solar and wind.
The concept of a “feed-in” tariff of less than 77 cents per kilowatt hour may assist everybody to move forward as we lay the basis for the revised Integrated Resource Plan. The updated Integrated Resource is due to be released today and it will inform the country’s balanced energy mix beyond 2021. Much attention is going to be given to how much of renewable energy resources are going to be in the plan.
If there were some way that large amounts of electricity from intermittent producers such as solar and wind could be stored efficiently, the contribution of these technologies to supplying electricity demand would be uncapped. Renewable energy resources maybe used as much as possible, but intrinsic limitations mean that wind and sun can never economically replace sources such as gas and nuclear for large-scale, continuous, reliable supply.
As we receive the revised integrated resource plan, be reminded of the classic paper by Professor Paul Joskow of the Massachusetts Institute of Technology. Professor Joskow found that the levelised cost comparisons are a misleading metric for comparing intermittent and dispatchable generating technologies. It is going to be important to take into account the differences in the production profiles of generating technologies when evaluating the energy mix in the Integrated Resource Plan.
Matshela Koko, Eskom’s Group Executive for Generation