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September 3, 2020

Africa

SOUTH AFRICA: Eskom – the high price of inaction

BY Anne Frühauf

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Power utility Eskom’s “level 4” load-shedding on 2-3 September confirms pervious warnings about the record level of load-shedding that is threatening South Africa’s post-Covid-19 recovery. At the same time, ballooning debt problems will intensify pressure on the government to find a financial solution for bailout-guzzling Eskom, but it is still doubtful whether the government can achieve any significant progress by the time of the Medium-Term Budget Policy Statement (MTBPS) in October.

Unplanned outages

Highlighting just how precarious South Africa’s economic recovery prospects are, Eskom resorted to “level 4” load-shedding on 2 and 3 September, following unplanned outages worth 11,300 MW (about a third of Eskom’s available dispatchable generation). Although reduced demand over five months of Covid-19 lockdown had provided slight operational reprieve, the energy situation is once again coming under severe strain as the pandemic lockdown is easing.

Eskom’s fresh recourse to “level 4” load-shedding also raises questions over whether CEO Andre de Ruyter’s strategy of more maintenance – combined with more frequent but more predictable and lower-level power cuts – is already failing. In parliament on 2 September, Eskom indicated that power cuts would continue until March 2022, but this may well be the best-case scenario. Given Eskom’s ageing fleet of power plants, even Eskom itself may increasingly struggle to make reliable predictions about when and how much load-shedding becomes necessary. As already highlighted, power outages this year are already surpassing the record outages of 1,352 GWh in 2019, including unprecedented “stage 6” power cuts.

New power needed

Beyond maintenance, there is consensus around the need for new power generation procurement. On 23 August, the Department of Mineral Resources and Energy (DMRE) launched its request for proposals (RFP) for 2,000MW of emergency power from independent power producers (IPPs). However, the quickest way to bolster generation capacity would be to scrap licensing regulations for self-generation projects of up to 10MW – an opportunity that the DMRE missed earlier this year, which means that any projects above 1MW still face cumbersome permitting requirements.

Ballooning debt

Eskom’s debt quagmire is also deepening by the day. According pre-audit figures disclosed in parliament on 2 September, Eskom debt reached ZAR 488bn as of March 2020, highlighting the extremely high cost of the government’s inaction. With every day that reform decisions are delayed, Eskom’s burden becomes more crippling and the long-promised debt solution more difficult to achieve. It is still uncertain whether the government will provide any meaningful progress in the looming MTBPS.

At the same time, Eskom has failed to meet some of the conditions attached to the Treasury’s ZAR 59bn bailout in 2019. According to the National Treasury’s chief director of state-owned enterprises oversight, Ravesh Rajlal, Eskom has postponed the deadline to dispose of the Eskom Finance Company by one year, from the end of March 2020 to March 2021. The utility has also failed to comply with the implementation of “remuneration standards,” which is reportedly awaiting approval from the Department of Public Enterprises (DPE). Finally, compliance has also been “partial” regarding conditions around cost containment, and construction completion plans for Medupi and Kusile. This redoubles the pressure on the Treasury to talk tough regarding Eskom, but it will struggle to enforce conditionalities given that the utility remains South Africa’s “too big to fail” conundrum.

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