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Eskom: A laggard in electricity transition

The power utility is likely to be in a world of financial trouble within five years.

In South Africa, where electricity prices have quadrupled since 2007 and an expensive coal-fired power build-out threatens to drive prices even higher, renewables appear ever more appealing. Unfortunately, for the last two years Eskom has been stonewalling on this front, refusing to sign new renewable energy power purchase agreements, while claiming that renewable energy is too costly.

Read: Eskom to face Nersa tribunal over IPPs

The analysis below on the issues facing Eskom has been extracted from an October 2017 study by the Institute for Energy Economics and Financial Analysis (IEEFA) titled: Global Electricity Utilities in Transition: Leaders and Laggards in 11 case studies by Tim Buckley, IEEFA director of energy finance studies, and Simon Nicholas, IEEFA energy finance analyst, with input from Dr Grové Steyn of Meridian Economics, and Jesse Burton of the Energy Research Centre, University of Cape Town. Click here to download the full report.

Eskom, South Africa’s unlisted, state-owned electricity company, generates about 95% of the nation’s electricity and about 45% of the electricity generated on the entire continent of Africa. Coal-fired generation produces 90% of South Africa’s electricity.

In recent years, South Africa has run a successful but limited renewable energy procurement programme. Renewable energy capacity of 2.2 GW has been completed to date, attracting more than US$14 billion in investment.

Enel and Engie are among the international investors in South African renewables, and developers are waiting on Eskom to sign further offtake agreements for the next round of approved projects, which total 2.4 GW.

Eskom, unfortunately, has recently stonewalled on this front, refusing to sign the deals while claiming that renewable energy is too costly. The company makes this assertion in spite of the fact that Eskom has benefited financially and operationally from its renewables programme.

One result of this intransigence is that an electricity utility has effectively been determining national energy policy. With solar PV and wind now significantly cheaper than new coal-fired generation in South Africa, Eskom may have unspoken motives for blocking additional renewables development.

One clue is Eskom’s institutional commitment to a major coal generation build-out in the face of a declining South African electricity market. The utility is building two huge coal-fired plants, Kusile and Medupi, each with 4.8 GW of capacity with a combined cost to completion estimated at R448 billion.

Meanwhile, higher electricity prices and sluggish economic growth have resulted in declining electricity demand. In its 2017 financial results, Eskom disclosed a 3.7% drop in electricity sales to the industrial sector and a 5.7% slide in sales to the agricultural sector. Eskom now has more than 5 GW of excess capacity — even before most Medupi and Kusile units become operational.

Expansion of competing renewable energy will further increase the utility’s coal-fired overcapacity, which is slated to grow needlessly as Eskom will add another 8 GW of capacity by 2022 when all Medupi and Kusile units come online.

Eskom’s growing overcapacity and its failure to grasp the role of renewable energy in the new energy economy places the utility at serious financial risk, especially since its hugely-expensive new coal plants must be paid for regardless of how much electricity the utility can sell from them.

Eskom reported total debt securities and borrowings of R355 billion in its March 2017 annual report, with finance costs increasing 82% to more than R14 billion. In addition, R18.2 billion of deferred finance costs relating to continuing project construction were capitalised, a figure that dwarfs the net profit for the year of just R888 million.

Clearly, Eskom’s financials are set to deteriorate significantly as Kusile and Medupi are commissioned and as currently capitalised interest and depreciation costs start to be expensed even as Eskom’s overall utilisation rate declines materially.

Generated power sent out by Eskom – 2006 to 2016

 Source: Eskom, Bloomberg

In its latest annual financials, Eskom also reports an 83% decline in net profit to R888 million, on an asset base of R710 billion. This has meant significant value destruction for shareholders, which in essence are households and business in South Africa.

These results are complicated by a threat by the Development Bank of South Africa to recall a R15 billion loan. Barclays Africa and Rand Merchant Bank are also seeking more accountability from Eskom.

In addition, a R2.4 billion loan from the New Development Bank (formerly the BRICS Bank) has been put on hold, and the only New Development Bank loan to South Africa so far was meant to finance transmission lines to connect new renewable capacity projects (even though Eskom’s anti-renewables stance has stymied completion of the loan until 2018).

Eskom has said it will take on an additional R327 billion of debt up to 2021. With its debt set to double over this period, the utility’s interest expenses will also see a significant increase. As electricity demand declines and as renewables take up market share, Eskom stands a good chance of generating too few sales to be profitable.

Furthermore, because the South African government has provided guarantees on Eskom debt of R350 billion, of which R210 billion has been drawn down, Eskom is in position of slipping into a default that would create a major burden on the state. This would only worsen the problems the South Africa economy faces already for being so dependent on Eskom electricity.

The rise of rooftop solar is creating additional trouble. South African rooftop solar stands to grow by 8 GW of capacity over the next decade, further eroding the utility’s sales. Eskom could respond by increasing electricity tariffs, if the government allows it to, and it may begin to address its overcapacity problem by closing older generating capacity in favour of expensive new plants. Such moves would only undermine Eskom’s assertions that coal-fired electricity is the affordable alternative in South Africa.

Read: Eskom applies for 20% tariff hike

Eskom is maintaining its resistance to renewables despite the Council for Scientific and Industrial Research (CSIR) having shown that wind and solar are now 40% cheaper than new coal-fired power in South Africa.

The utility’s campaign against renewables and its insistence on building out coal-fired capacity in a market with declining demand will see Eskom’s borrowing and interest costs balloon, eliminating profits and crippling the utility’s ability to generate cash.

Efforts by Eskom to rectify management missteps through large tariff increases will mean yet more financial pain for the South African public, for whom electricity prices have quadrupled since 2007.

As Eskom begins to lose public trust, more customers will seek other sources of power in a scenario that is already starting to play out. The City of Cape Town is now seeking permission to purchase electricity directly from private producers.

Eskom has stated that its financial ratios will improve over the next few years, letting the company achieve an investment-grade credit rating within five years. There seems to be little in the way of fact to support this narrative, however.

In April, Standard & Poor’s downgraded Eskom’s foreign and local currency long-term corporate debt, moving it deeper into junk status, to B+, with a negative outlook on concerns that the South African government’s ability to support Eskom’s huge debt has weakened. Moody’s downgraded Eskom to the second rung of junk status in June 2017.

Eskom is likely to be in deep financial trouble in five years’ time.

The above analysis has been extracted from an Institute for Energy Economics (IEEFA) study titled Global Electricity Utilities in Transition: Leaders and laggards in 11 case studies, and is extracted and published with permission. For references, please refer to pages 37, 38 and 39 of the complete study report.

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An absolute disaster in the making, but unlike the SABC for example or SAA, we cannot live without Eskom … UNLESS you are prepared to sink a good amount of cash into your own electricity generating plant, ie, rooftop solar. This is now looking like an increasingly essential addition to any household because the cost of electricity supplied by Eskom WILL go up in future. The above article tells you exactly why they will have to increase the price. Fewer people are buying their product and yet they have huge debts to pay, ie, electricity will become more expensive per unit. Apart from anything else, generating your own power comes with the vast sense of satisfaction of knowing you are giving Eskom the middle finger every time the sun shines.

where is Dr john Maree? Turning in his grave. Ja the children have broken SA’s biggest and best toy. Cheapest power in the world to a corrupt, bankrupt mess.

Government needs an Emergency plan to fix Eskom, SABC, SAA, PetroSA and now SAPS.

1) Maybe they should ask all money to paid to suspect tenders and contracts to be paid back.

2) All Management to re-apply for their jobs, and also advertise the same positions in the private sector.

What a continental stinking mess.

When are we having a Tax Revolt!

Eskom is rapidly destroying its revenue generating ability. Its only plan of action is to pass on cost to its captive market. However,as they keep driving prices higher year after year and renewables keep reducing in price and making technological improvements, it rapidly becomes more viable.

About 4 years ago I’ve installed my first Solar geyser (already recovered the capital in savings). I’m watching the electricity price and expect rooftop energy generation to soon become viable. At this point I will be independent from Eskom.

Eskom better keep up with the change or it will become our next post office.

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