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Eskom has a litany of financial and operational problems. In 2017, Goldman Sachs Group declared it the highest risk to the South African economy. Several members of the cabinet have also said so. President Cyril Ramaphosa declared that Eskom is “too big to fail”.
The first big problem is the R488 billion debt that Eskom cannot service, of which R350 billion is guaranteed by the government. Sales volumes decreased 4.7% between 2009 and 2019, according to data from Eskom’s integrated annual reports. Operating costs also increased by 30% in five years.
The power availability factor, what is available in power plants, has decreased by about 20% in the last 20 years as Eskom struggles to repair and maintain its previously abandoned and aging power plant fleet. This has resulted in an increase in the head loss, which damages investor confidence.
The company also has environmental problems: emissions exceed permitted levels.
Another problem is the culture of default: Eskom sells about half of its energy to municipalities and the rest directly to customers. Misconduct and mismanagement have hurt many municipalities. In 2019/20, municipalities owed 71.7% of what had been billed to them. An electricity payment strike against apartheid by Soweto residents has continued for 25 years of democracy. Despite Eskom’s recently more aggressive approach to debt collection, it had R38 billion in outstanding accounts receivable in June 2020.
There have also been reports of corruption throughout the organization.
The government has taken some steps to try to fix Eskom
In 2018, a new board was appointed with instructions to clean up the corruption. He dismissed several senior managers and pursues thousands of employees with conflicts of interest.
President Ramaphosa appointed a task force to advise him. His report has not been made public.
The Minister of Public Enterprises, Pravin Gordhan, appointed a Technical Review Team to advise on operations. Eskom is trying to implement its recommendations. Gordhan followed up with an “Eskom Roadmap” (2019) announcing the intention to separate the power company into three subsidiaries: generation, transmission and distribution. This is essentially a watered-down version of the 1998 Energy Policy White Paper reforms. Previous attempts to implement the White Paper reforms were unsuccessful.
Eskom says it is making good progress on the roadmap, but has a long way to go to bring energy availability back to record highs.
The elephant in the room has been R488 billion gross debt as of March 2020. The government appointed a restructuring director, but no reports or solutions to the debt problem emerged.
The government has kept Eskom afloat with R188 billion in ransoms for five years, with more to come. These roughly cover interest but not principal debt.
Possible solutions
There are three possible solutions. Both taxpayers and electricity customers, or a combination, will have to pay Eskom’s debt. There has also been talk of using funds from the Unemployment Insurance Fund and the Government Employees Pension Fund, but no plan has emerged.
The longer the government hesitates on this decision, the bigger the problem becomes. Whatever the decision, it will be painful for electricity consumers or taxpayers. It seems that the government does not dare to inflict this inevitable pain.
Keeping taxpayers paying is not good for the economy. But South Africa’s National Energy Regulator, which regulates Eskom’s tariffs, says Eskom’s costs are neither prudent nor efficient. That leaves the ball in the taxpayer’s court.
The regulator will have to change its position or leave the entire country in default. Electricity customers must prepare for further steep increases.
Meanwhile, intermittent load shedding continues. And several commentators have predicted a generation capacity shortage from 2021 to 2023. Eskom is forecasting a shortfall of 4,000 megawatts in 2021, assuming its fleet is operating at an optimistic 70% power availability factor by 2021.
What is the government betting on
Renewable energy projects that were delayed should start soon and supply 2,200 megawatts. Independent power producers have been invited to deliver 2,000 megawatts by June 2022, a difficult task. The tender to supply 11,813 megawatts through the construction of new power plants is about to open. Large companies can generate energy for their own use. Small businesses can get tax breaks for installing generators of less than 1 MW. This may be the fastest option, especially if they were allowed to sell the surplus power to the grid. The license requirement for these small generators has also been removed.
The few municipalities in good financial standing can now buy energy from independent energy producers. But the Municipal Financial Management Law makes it difficult.
So far, all independent power producers supplying the national grid have received generous 20-year government guaranteed purchase and tariff agreements. This means that it has been profitable and low risk for independent power producers to invest in producing power. But after the economic impact of COVID-19, can the government continue to assume such responsibilities? Anecdotal evidence suggests that banks will not make loans to independent power producers without government guarantees, especially when Eskom has undermined them in the past.
Going forward
Eskom is broke and cannot invest in any other capacity. Independent power producers will have to. But if there are no government guarantees of 20 years, they will need an independent transmission and market operator that they trust.
Unfortunately, the Eskom roadmap doesn’t offer that. It only offers a version owned by Eskom that still needs various government clearances, but is scheduled for March 2022.
Will independent power producers have enough faith in Eskom’s transmission subsidiary to invest billions? Otherwise, the country may be without lights for a few years, unless there are deeper market reforms.
Rod Crompton, Adjunct Professor African Energy Leadership Center Wits Business School, University of the Witwatersrand
This article is republished from The Conversation under a Creative Commons license. Read the original article.
