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August 13, 2020

Africa

SOUTH AFRICA: Eskom power cuts resume even before lockdown is fully lifted

BY Anne Frühauf

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( 5 mins)
  • Just as the government prepares to relax South Africa’s lockdown restrictions to “Level 2,” fresh load-shedding illustrates how much Eskom’s generation constraints threaten to dampen the economy’s recovery prospects.
  • On the unbundling front, Eskom CEO André de Ruyter signaled this week that the utility would accelerate the planned process, though the onus is equally on the Ramaphosa administration to expedite the required policy change.

Operating capacity

Today, 13 August, Eskom implemented “stage 2 load-shedding,” which is when the utility cuts 2,000MW from the system, and has warned that scheduled power outages will continue into the weekend. Although reduced demand over five months of Covid-19 lockdown have provided slight operational reprieve for Eskom, de Ruyter expects electricity demand to return to pre-lockdown levels by September.

The latest load-shedding underlines how badly South Africa’s economy is positioned to bounce back from the pandemic-induced deep recession. The Council for Scientific and Industrial Research (CSIR) has warned that load-shedding this year is expected to exceed a record of 1,352 GWh in 2019, which included unprecedented “stage 6” power cuts. For 2020, the CSIR projects load-shedding – mostly at stage 2 – worth 1,383 GWh, with the outlook set to remain critical at least for another two to three years.

Unbundling

In this challenging operating context, one moderately positive signal was de Ruyter’s statement earlier this week that he plans to accelerate the timetable for Eskom’s unbundling, with a plan to be presented to Eskom’s board by the end of the month. The original timetable set out in Public Enterprises Minister Pravin Gordhan’s roadmap of October 2019 envisaged establishing a separate transmission company by December 2020, with the legal separation to be completed by December 2021.

However, following his appointment as CEO, de Ruyter said in June that the unbundling would take at least two years longer, with the initial separation of the generation and distribution divisions earmarked for 2022, and he no longer provided a firm target date for the legal establishment of the three subsidiaries. Perhaps de Ruyter’s strategy was to manage expectations, by under-promising initially and now preparing to over-deliver, but the slow progress of Eskom reforms to date has generated a big confidence gap regarding how quickly Eskom and President Cyril Ramaphosa’s administration will move to liberalize the electricity market.

Amid mounting fiscal strain, Finance Minister Tito Mboweni and the Treasury are pushing hard for progress at Eskom to justify the Treasury’s ZAR 150bn financial support package over 10 years and help foster even tentative confidence in the government’s broader reform effort. In the looming medium-term budget (MTBPS), Mboweni may emphasize once again that financial support is contingent on performance indicators such as unbundling, even if investors struggle to believe that such conditions have any real teeth given Eskom’s monopoly power status.

While the unbundling was never seen as a silver bullet for Eskom’s deep operational deficit and crippling ZAR 450bn debt, advancing Eskom’s separation – and carving out an independent transmission and system operator – is an essential first step to attract investment in private generation capacity. Yet, this depends not only on Eskom’s actions but also on regulatory change driven by the Department of Mineral Resources and Energy and the National Energy Regulator of South Africa (Nersa), and procurement by the Independent Power Producer (IPP) Office.

Meanwhile, the opposition-run City of Cape Town’s effort to expedite private investment suffered a temporary setback in the courts on 11 August, when the North Gauteng High Court referred its five-year-long attempt to get the minister of energy and Nersa to allow the city to procure electricity directly from IPPs back to the Intergovernmental Dispute Resolution Framework. This will reinforce the need for the speedy creation of an independent systems operator, which the Democratic Alliance (DA) is trying to push via the Independent Electricity Management Operator Bill, a private members’ bill in parliament.

Financial conundrums

On the financial side, Eskom’s litigation attempt, announced last week, to recoup ZAR 3.8bn worth of funds looted by former board members, executives and members of the infamous Gupta family is little more than symbolic, given how remote the chances are of recovering significant amounts.

More important is an Eskom court victory which enables the struggling utility to charge an additional ZAR 69bn in tariffs over the next three years. In 2019, Nersa had subtracted the Treasury’s three-year ZAR 69bn capital injection from the amount that Eskom was allowed to recoup via tariffs. Yet even if Nersa loses a planned appeal against the decision, fresh double-digit tariff increases may accelerate the scramble among industrial and residential customers to reduce their reliance on the national grid and thus accelerate the utility’s ‘death spiral.’

The question of municipal debt also remains largely unresolved, with the top 20 municipalities now owing Eskom about ZAR 30bn. Eskom has been pushing on this front, but the hardship induced by the pandemic may well increase political pressure to exempt vulnerable consumers and the most fragile business sectors from double-digit tariff increases, and to shield struggling municipalities from an aggressive clampdown on non-payment.

Most importantly, there is still no sign that a solution to Eskom’s ZAR 450bn debt problem is imminent, beyond the fact that the ruling ANC still seems to be eyeing pension funds as a possible funding source.

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