Dark days for Eskom

August 2 2014 at 05:32pm
By Craig Dodds

Just how grim Eskom’s finances are was laid bare during a joint meeting of energy and public enterprises committees.

Johannesburg – It’s a slow-motion train wreck happening before our eyes, on a scale so vast it has already stunted the economic growth potential of the country, yet it is only now that the government appears to have fully grasped the danger.

Citizens may groan (or worse) when they are unexpectedly plunged into darkness, but the situation at Eskom is much worse than the odd power cut would suggest.

Just how grim was laid bare during a presentation to a joint meeting of Parliament’s energy and public enterprises committees this week.

For starters, Eskom is struggling to make ends meet and faces a possible credit rating downgrade in September from two rating agencies, which would push up its borrowing costs.

Given that it is heavily dependent on borrowing to finance its massive build programme of new power stations, which it desperately needs to bring online to cover a spiralling energy supply shortage, this would be a serious blow to its precarious finances.

Eskom blames the National Energy Regulator of SA (Nersa), which sets the prices it may charge, for the bulk of its financial woes, saying the increases granted under successive multiyear price determinations (MYPDs) were inadequate, leading to a projected R225 billion “revenue shortfall” for the current period.

But the truth, said UCT’s Professor Anton Eberhard, an expert in energy sector regulation and reform and member of the National Planning Commission, was that time and cost overruns for the country’s new coal-fired power stations were the biggest factor.

“This is by far the major item on their balance sheet and it has a direct impact on their cash flows,” Eberhard said in an interview.

Because the plants had overshot planned commissioning dates by years, Eskom was paying interest on the capital raised to build them before they were even completed.

“They’re not generating electricity and they’re not generating revenue to service those debts,” Eberhard said.

What Eskom called a revenue shortfall was effectively the consumer paying for the delays and cost increases at Medupi and Kusile.

Because the economy had been bumping up against electricity supply limits since 2007, stretching Eskom’s ability to deliver enough power, it had been forced to run its ageing power plants harder than they could manage, with limited maintenance being done, causing the “unplanned failures” we experience as load shedding, according to the Eskom presentation.

Another consequence was a drop in the energy availability factor – the time power plants are able to be up and running – from 85 percent to 75 percent.

It also meant Eskom had been forced to run its expensive open cycle gas turbine plants – intended only as a top-up measure in peak demand periods – almost continuously, costing R10.5bn instead of the budgeted R3.5bn.

Strangely, considering it has been battling to meet demand, it lost 9 000 gigawatt hours, or R5.8bn, in electricity sales, according to financial director Tsholofelo Molefe.

Add to all of this the fact that municipalities alone owe Eskom R2.9bn in unpaid bills, up from R1.5bn in September last year, and it’s not hard to see why a credit rating downgrade is considered a real possibility – unless something is done fast.

Public Enterprises Minister Lynne Brown seemed alive to the crisis, telling MPs at the joint meeting in Parliament a plan was being drawn up.

“We have a time frame that’s kicking – and that is that by September we have to have a plan in place that makes logical sense to all of us,” Brown said.

The possibility of a capital injection from the fiscus – Eskom has suggested R50bn – or further tariff increases beyond the 8 percent granted under the current MYPD3, were among measures being considered.

As it is, Eskom was granted permission this week to raise tariffs next year – on top of the planned 8 percent – to make up for a R7.8 billion gap between revenue anticipated under MYPD2 and what it actually received.

Eberhard said he had calculated this would translate into a 5 percent tariff increase, which, with the MYPD3’s 8 percent, would bring the price hike next year to 13 percent.

Should Eskom apply to re-open MYPD3 – effectively asking for a top-up increase to tide it over the crisis, this figure could be even higher.

Brown said all options to meet the financial crisis were on the table.

“There has been serious public speculation about public sector equity injection, assets being sold, private sector equity and tariff hikes. These are levers which must be considered in any serious discussion,” said Brown.

Whatever the government chooses to do in the short term, the crisis seems to have triggered a shift in its thinking about the energy future.

For one thing, it is taking the ever-expanding possibilities of gas-generated power – from gas fields off Mozambique and our own west coast to shale gas deposits in the Karoo – more seriously than in the past, with President Jacob Zuma describing shale gas as a “game changer” in his State of the Nation address.

Eberhard said the hugely successful renewable energy procurement programme had been a “path breaker” in opening the government’s eyes to new possibilities.

“There’s been an extraordinarily successful procurement of private investment. Over three years, R120bn of private investment has come into the power sector and 3 922MW will be connected, and prices have fallen.”

There would soon be an independent power producer procurement process for a new coal-fired plant, followed by gas.

“So we’re definitely seeing the beginnings of the opening of the market for the private sector,” Eberhard said.

The passing of the Independent System Market Operator Bill – which will put private power producers on an equal footing with Eskom – was a key step in this direction.

For ordinary households choking on ever-rising electricity bills, this will come as a welcome relief: whatever profits they may reap in the future, private power producers – unlike Eskom – carry the costs of unforeseen expenses and delays themselves and are locked into 20-year fixed-price contracts, adjusted for inflation.

If there is a silver lining to the Eskom crisis, it is that it has opened the door to a more flexible approach to meeting the country’s energy needs.

But a stark anomaly looms in the shape of nuclear energy – a huge capital investment notoriously prone to overshooting deadlines and budgets – which Zuma and government ministers have described as a non-negotiable option that should be implemented immediately.

Source: http://www.iol.co.za/saturday-star/dark-days-for-eskom-1.1729558#.U-IQRICSxU4

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