Eskom woes to be confronted by task force

By:
Kanika Saigal
Published on:

South Africa’s irregular and failing electricity supply has become the target of a special task force as Eskom struggles to deliver enough electricity to power the economy.

Eskom control centre-600
Eskom's national control centre in Germiston, South Africa 

South Africa formed an emergency task force in mid-December in a bid to solve the country’s power deficit after a year of rolling blackouts. 

Eskom – the beleaguered state-owned electricity company – has struggled to meet demand and the resultant power shortages have cost the economy as much as $44.4 billion since 2008.

"Eskom needed to implement rolling blackouts to protect electricity supply, given the low reserve margin," explains Razia Khan, head of macro research for Africa at Standard Chartered. "In the absence of rolling blackouts, they risk greater damage to the grid."

International best practice suggests a peak buffer margin – the difference between peak demand and available capacity – of 15%. Eskom managed 4% in July 2013 and the gap has remained tight since. In response to growing demand, Eskom scheduled rolling blackouts over weekends in March, April and November to preserve electricity and to prevent the grid from collapsing.

Eskom's troubles have contributed to South Africa's slowing economic growth. In 2013, GDP growth in South Africa reached 1.9% and projections for 2014 put growth at 1.4%. "Eskom’s problems are damaging recovery prospects [for South Africa]," says Khan.

Alternatives

Scott Mackin
Scott Mackin, managing
partner at Denham Capital 

While the government tries its hardest to patch up Eskom, Renewable Energy Independent Power Producer Procurement Programme projects are under way and will pick up the slack in energy production in South Africa in the longer term.

Sixty-four projects have been awarded to the private sector through four bidding stages, which started in 2011. So far, private-sector investment has totalled $14 billion and these projects will generate 3,922 megawatts (MW) of renewable power.

"We should credit South Africa with a successful renewables programme," says Scott Mackin, managing partner at Denham Capital. "And doing these kinds of projects through private stakeholders will be much more efficient and keep costs down."

However, there have been delays in in getting rounds three and four off the ground.  

"The fact is that Eskom is the one that will have to ensure that these renewable projects are linked to the grid, and they must be able to do this within a reasonable time frame," says one analyst.

"With Eskom the way it is, with all the funding and infrastructure issues the company is having, they may run into trouble when they need to get these projects online. You can’t just pick the cheapest bid, but you need to pick the most viable one – something that will be able to work with Eskom’s current infrastructure. As a result, there have been delays in awarding the projects."

Funding pressures

The emergency task force is the latest initiative by the government to address the country’s electricity issues and plug Eskom’s funding gap, calculated by the state-owned enterprise (SOE) at R225 billion over the next five years.

"Eskom calculated the funding gap by looking at the difference in revenue produced by the tariff increase requested by the SOE, which was 16% per year for the next five years [from April 1, 2013, to March 31, 2018], and the tariff increase granted by the regulators, which was only 8%," says Paul Marty, senior analyst at Moody’s Investors Service.

"But in reality, the funding gap may even be higher than the amount officially stated by Eskom, given lower sales and higher costs than initially expected. In addition, capacity expansion programmes implemented by the company cost in excess of R50 billion per annum, thus putting pressure on the company. 

He adds: "There are many other ways to calculate the funding gap – Eskom has just highlighted one of them."

For many years, the extent of electricity demand growth
in South Africa had been underestimated

Razia Khan

When reported results for the six months through to September were announced in November, Eskom saw profits drop by 24% from R12.2 billion to R9.3 billion. For the full financial year, Eskom predicts that profits will fall to R0.5 billion as a result of lower revenue in the summer months (South Africa’s summer runs from October to February).

"The seasonality of Eskom’s business should be considered when reviewing the half-year results, as the expected decrease in net profit over the remainder of the year is a normal trend due to the lower summer tariffs coupled with a contraction in sales volumes," says Kate Rushton, principal and credit analyst on the Barclays Africa research team in Johannesburg.

Eskom’s maintenance strategy, duly revived in the summer months, will further impact profitability.

In an attempt to revive Eskom, newly appointed minister of finance Nhlanhla Nene announced in October that the South African government plans to inject at least R20 billion into the company through the sale of certain non-strategic assets.