Eskom has been thrown another lifeline by the government after a special cabinet meeting last Thursday approved a series of measures to shore up the embattled power utility, including a nod for it to raise additional debt to the tune of R50 billion.
“Eskom is facing significant challenges that threaten its sustainability,” the National Treasury said yesterday.
“These include a funding gap that requires closing to ensure security of supply. The main contributors to this gap include the fact that Eskom will not be generating enough revenue to cover the costs of electricity supply.”
Even so, questions will be asked about the sustainability of the stop-gap measures the government has cobbled together in an effort to stabilise Eskom. Investors will also scrutinise the possible effect of the aid package on the government’s finances, more so as the country grapples with a ballooning current account deficit and a moribund economy.
The utility not only faces a funding crunch but it has also been buffeted by massive delays in the construction and commissioning of at least two of its newest power plants.
Eskom has a R225bn shortfall in funding over the five years to March 2018. Standard & Poor’s rates its debt as BBB-, the lowest investment grade, according to Bloomberg. On June 20, the rating agency placed Eskom on a negative credit watch, meaning it had a 50 percent chance of being cut again to junk within 90 days.
That the government feels it must once again shore up Eskom underscores the severity of the energy crisis facing South Africa. The unreliable energy supply has been blamed by business as one of the most critical impediments to growing the economy.
The Treasury also said Eskom had been incurring additional costs to keep the lights on by running the more expensive open-cycle gas turbine power plants excessively because of a deterioration in the performance of some of its coal plants and delays in the build programme.
As a result, a package of solutions was required to ensure a sustainable electricity supply industry that focused both on funding and on improving the efficiency of operations.
The Treasury said the cabinet had decided on the following package:
Equity injection: A funding allocation would help relieve the impact on electricity consumers and add support to Eskom’s balance sheet. This would be funded from leveraging non-strategic government assets. Details would be provided in the Budget.
Debt: Eskom would raise debt of about R50bn in addition to its original plan of R200bn during the third multi-year determination period. While more debt would hurt Eskom’s balance sheet, it was necessary to reduce the immediate impact on electricity consumers.
Demand management measures: Acceleration of demand management measures that would not undermine economic growth and would help improve the electricity supply-demand balance.
Energy policy: Refinement of energy policy and regulatory governance mechanisms to help keep the lights on and give certainty about the energy industry in the future.
Cushioning poor households: Interventions to ensure that free basic electricity allocations were used effectively to cushion poor households from the impact of higher tariffs. The government would assist municipalities to address the weaknesses in the use of free basic electricity allocations.
Independent power producers: Support for the expansion of the independent power producer programme.
More efficiencies: Significant savings had been identified and agreed to with Eskom and would form part of the package to be implemented.
In another development, Eskom said on Saturday that the first 800-megawatt unit of the coal-fired Medupi plant would link up with the grid on December 24. Until now, Eskom had not given a precise date. – With additional reporting by Reuters