“The solvency of Eskom has also become a factor in the international ratings agencies downgrading South Africa’s sovereign ratings.”
By Owen Murphy
Hardly a day goes past without the status of our electricity grid being in the news, often for the wrong reasons.
In December, the mining industry experienced enforced power cuts and some shafts and smelters stopped production.
Some mines were also forced to reduce power supplies to water pumping and ventilation units.
The challenges which Eskom faces are well publicised and include frequent changes in senior management, corruption in tendering processes and non-payment of accounts by customers.
This in turn contributed to low staff morale, inadequate resources being available for maintenance, liquidity problems and very large debt servicing costs.
The solvency of Eskom has also become a factor in the international ratings agencies downgrading South Africa’s sovereign ratings, given that the government has guaranteed the repayment of a large proportion of Eskom’s debt to its lenders.
The problems are well publicised, but one needs to look at the way forward for the decision-makers and whether we can see any signs for improvement.
Government is currently the sole shareholder in Eskom. In addition, the electricity generating sector is tightly controlled by the government, as it is the minister’s prerogative, (as provided for in Section 34 of the Electricity Regulation Act), to ensure security of electricity supply through determining, among other things, the size, technology type, which entity produces the electricity, and by when it should be connected to the grid.
Eskom’s coal-fired power stations, currently account for 71% of installed generating capacity (according to a table in the Energy Alert published by CDH on 21 October 2019) and will be estimated to have 43% of installed capacity by 2030 and will still be contributing 59% of energy supply by then.
Government is currently the dominant figure in the energy supply market through its control of the regulatory framework, its ownership of the dominant energy producer, and its ability to make management appointments at Eskom.
Government therefore has the ability to change course and to reverse some of the negative trends.
There are some encouraging signs that government is taking some steps in the right direction.
A recent indication of this new approach was with the appointment of a chief executive from the private sector who will be able to act more independently.
Another positive sign was the announcement that Eskom will be restructured into three business units: generation, transmission and distribution.
We understand that the thinking behind this is that it will allow the units to be streamlined somewhat, and to allow for a degree of privatisation going forward, although this has not been publicly stated.
An indication of government’s resolve to make changes to the sector through changes to the regulatory framework, was the publication of the updated Integrated Resource Plan (IRP) on 18 October 2018 with a stated objective as follows:
“The IRP is an electricity infrastructure development plan based on least-cost electricity supply and demand balance, taking into account security of supply and the environment.”
There has been some positive reaction to the plan, notably from the Council for Scientific and Industrial Research which has commented as follows:
“The finalisation of the IRP should provide the necessary certainty to all stakeholders as far as security of supply and energy mix choices in the medium to long-term is concerned.”
If we look at the challenges facing Eskom and the response from government to the problems, we can see that there has been a lot of thought put into formulating the plans that are required to turn Eskom around, and to reform the country’s existing energy mix via changes in energy policy.
It remains to be seen whether the government has the political will to push through with the reforms that it has identified.
It will face fierce resistance from the unions if the restructuring plans result in job losses, and partial privatisation possibly and the unions have already been very critical of the appointment of the new chief executive because they see it as a setback for transformation.
Government has identified the challenges that it faces and it has put in place a plan to turn Eskom around.
The country and the mining industry will be keen spectators.
The plan is a good one by all accounts, but it must be followed up, and government must have the courage to implement it as it was intended.
If they succeed it could inspire improved sentiment in many spheres, such as our debt ratings, the export-led mining industry and business confidence in general.
This will have a knock-on effect of encouraging much needed investment to expand the economy, and the mining sector in particular.
This is a huge opportunity and it should not be missed by government.
•Owen Murphy is auditing firm BDO’s Africa Desk leader