Calls made for far-reaching Eskom restructuring as sustainability risks mount

9th January 2018 By: Terence Creamer - Creamer Media Editor

Calls made for far-reaching Eskom restructuring as sustainability risks mount

Photo by: Duane Daws

Eskom’s current financial situation makes it difficult to see any other path to sustainability than that of drastic cost-cutting, restructuring and bringing private equity into the business, Energy Intensive Users Group of Southern Africa (EIUG) past chairperson Piet van Staden argues.

In an opinion article published by EE Publishers, Van Staden also called for urgent intervention by government to avoid an Eskom default, which would take “the whole economy down with it”.

“The National Treasury has already admitted that Eskom is the single biggest risk to our economy. Should further equity injections be required from the fiscus to prevent a default, the quantum will probably dwarf the recent assistance given to South African Airways.

“Such assistance will just be kicking the can down the road, postponing the difficult decisions required. The longer we wait before we shore up the courage to chart a way forward to a sustainable electricity industry, the more taxpayers’ money will go into a bottomless pit, and the higher the risk will be of an Eskom default taking the whole economy down with it,” the senior energy executive at Sasol warned.

Similar sentiments were expressed recently by Business Unity South Africa (Busa) VP Martin Kingston, who described Eskom as arguably the greatest risk to South Africa’s fiscal sustainability and credit rating.

Kingston said the utility was “locked into an inflexible capacity expansion plan that is ill-suited to South Africa’s current and future needs”. Eskom’s business model, he added, was “no longer fit for purpose”.

Van Staden said Eskom was facing a “perfect storm”, owing to changes taking place on both the supply- and demand-sides of the electricity industry in South Africa.

“On the supply side, the cost of renewables is falling rapidly and will carve a ‘saddle’ out of the daily demand profile, with a rapid ramp-up of generation required from Eskom to meet demand at sunset. Wind is by its very nature a variable resource, and Eskom, as the supplier of last resort, must balance the variability.”

The demand-side changes, meanwhile, were being driven by energy efficiency improvements and a curtailment of production and investment by energy intensive industries.

“Large industry uses about 50% of the electricity in the country, and overshadows the growth that may come from the domestic and commercial sectors. Eskom has not seen any sales growth since 2007, the main reason for this being a contraction of more than 14% in industrial demand since 2011.”

OUT OF SYNC

Prospects of a return of significant investment by power-heavy firms were slim, leaving Eskom out of sync with its market. “It is building inflexible and very expensive new capacity, while the landscape is being changed by short lead-time and ever cheaper renewables eating into its sales and making the residual load profile incompatible with the existing fleet.”

Van Staden argued that any fresh efforts to balance Eskom’s books by way of tariff increases would trigger a further round of demand destruction.

“This phenomenon of price increases and demand destruction feeding on each other has become known as the ‘utility death spiral’, and manifests in many countries where fossil-fuel fired utilities are exposed to the energy transition. In South Africa, it may manifest as a ‘debt spiral’ due to Eskom’s massive expansion programme, absence of growth and the push back against further severe price increases.”

In November, Eskom acting CFO Calib Cassim confirmed that the business was not generating the cash reserves required to cover debt repayments as these became due and that during the current financial year the utility was R20-billion short after debt repayments were factored in.

Cassim also warned that in the 2018/19 financial year, the combination of interest and debt repayment (before any possible debt refinancing) would be R40-billion and that the figure would rise steadily to above R50-billion a year, with a peak of R60-billion in 2021/22.

In the coming two years, Eskom’s interest bill would exceed staff costs as its debt burden rises from R337-billion to R500-billion in the coming four years.

“Obviously, every time we don’t recover our costs and meet our commitments [through the tariffs] there will be a gap in the equation. How is that gap filled? If we can’t raise the debt to fill the gap, ultimately, because we are guaranteed, it has to go back to the sovereign and the National Treasury, which is the taxpayer. That’s the challenge that’s facing us: Eskom’s rating can affect the sovereign and similarly, depending on what the sovereign rating is, it has a direct effect on Eskom,” Cassim cautioned.

After the National Energy Regulator of South Africa (Nersa) announced only a 5.23% tariff increase for 2018/19, against the utility’s request for a 19.9% hike, Eskom immediately postponed its interim results to give itself time to assess the impact. Nersa approved allowable revenue of R190-billion for the year, against Eskom’s request for R219-billion.

Van Staden also expressed scepticism that Eskom would be able to address its financial predicament by turning to the capital markets and/or development financiers, arguing that, “investors required proof of consequence management against corrupt officials, and indications that a clean audit can be expected this year before additional funding becomes available”.

Recent leadership changes announced by Public Enterprises Minister Lynne Brown received a cool reception. Business Leadership South Africa described the decision to retain Zethembe Khoza as chairperson – alongside the reinstatement of executives Matshela Koko and Prish Govender following questionable disciplinary hearings – as shocking and inappropriate.

The organisation, which represents big business, reiterated its call for a complete overhaul of the Eskom board and for the removal of “executives who are captured”.

However, Van Staden cautioned that cleaning up the company and improving efficiencies might not be sufficient to ensure Eskom’s survival and resilience in the face of threats to the traditional utility model.

“Eskom is facing a perfect storm with both the supply- and demand-sides of the electricity industry in South Africa changing, making 20th century answers to today’s challenges irrelevant.”