Sense of crisis around Eskom is lacking in SA

(Deputy President Cyril Ramaphosa making remarks at the official closing ceremony of the SADC Observer Mission, SADC House, Kingdom of Lesotho). Deputy President of the Republic of South Africa Cyril Ramaphosa on a working visit to the Kingdom of Lesotho to officially close the SADC Observer Mission, Kingdom of Lesotho, 30/03/2015. Siyasanga Mbambani, GCIS.

(Deputy President Cyril Ramaphosa making remarks at the official closing ceremony of the SADC Observer Mission, SADC House, Kingdom of Lesotho). Deputy President of the Republic of South Africa Cyril Ramaphosa on a working visit to the Kingdom of Lesotho to officially close the SADC Observer Mission, Kingdom of Lesotho, 30/03/2015. Siyasanga Mbambani, GCIS.

Published Apr 1, 2015

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WE ARE, maybe surprisingly, more bearish now on Eskom than before our trip. In particular – we still do not believe there is enough sense of crisis around Eskom from the government or maybe more importantly from ordinary people.

We question in this environment if the right, very difficult, decisions can really be made about Eskom and wider energy policy. The ANC when pushed to the edge is capable of making the right policy choices but we are not at that point yet.

Load shedding has become a way of life for people and the wider spread of generator capacity has increased complacency among households even if the effects into industry and investment are still there with a lack of energy security.

As such popular pressure for policy change and any realisation within the ANC that there needs to be a fundamental rethink of energy policy or the position of Eskom is simply lacking.

The usefulness of the war room that has been set up under Deputy President Ramaphosa is uncertain, with the risk it has become simply a venue every stakeholder feels the need to be present at the table for rather than something that can drive change or change policy.

This it would appear has vastly complicated the process of dealing with Eskom from the government’s side (beyond simply through the Department of Public Enterprises [DPE], or DPE and Treasury working together), with little discernible upside from the new setup.

The level of political involvement in Eskom at the most senior levels is much higher than we expected and, indeed, there have been many conflicting statements captured on Bloomberg and Reuters from members of the government about what backing the inquiry into Eskom has.

We were wrong in a previous view. It appears in that the panel of academics and business leaders Ramaphosa announced recently was not the inquiry panel; it was another panel to advise the deputy president. The Eskom inquiry panel has run aground with senior management still suspended and now the sacking (sudden resignation) of the board chairman of Eskom.

The process of the state selling non-core assets still, we believe, has no top level political backing, given a confluence of different forces in this area, while the Treasury tries to push forward to find politically feasible ways of generating (fiscally off balance-sheet) cash for Eskom’s equity injection. The June deadline for the transfer looks unrealistic now.

We are increasingly worried about the risks of a brownout. This is the situation where load shedding does not cope correctly with reducing demand to match supply, base-load generation trips and with it the country loses all but its solar, wind and hydropower generation.

Drastic event

The country would be in a situation of losing around 90 percent of power supply for a two- to three-week period as the complex process of cold-starting base-load coal, gas and nuclear generation capacity occurs. This would clearly be the most drastic event in terms of impact on economic activity.

The probability of this occurring is still low. Effective load shedding prevents damage to power stations that are producing.

However, the lack of corporate governance and senior management in place at Eskom to take difficult decisions as well as the politicisation of the company at this juncture make the likelihood of a mistake that leads to a brownout now significant (especially considering the impact on the economy).

Before we ruled out this scenario as too low to be concerned about. This can no longer be the case.

Longer-run energy policy is more incomplete than we had expected. In particular the government is now seeing the route to energy security not as being through nuclear (though that is on the table still with all its associated risks and major cost uncertainty) but instead is turning to gas.

The hole here, however, is that the Mineral and Petroleum Resources Development Act amendment bill process, even if it splits out gas and oil as separate legislation, is still likely to require a 20 percent free-carry for government with some (maybe limited, maybe unlimited) possibility of the government acquiring additional equity.

As such, the outlook for domestic gas production has notably soured in the last two years. Equally, we cannot see that there is a major upside in additional gas imports from Mozambique. Put simply there seems limited scope for gas to fill the significant gaps within future energy policy.

Peter Attard Montalto is an emerging markets economist at Nomura. This article is adapted from a research note following his meetings in South Africa with policymakers, politicians, asset managers and others.

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