Issue 139 • 23 May, 2008

‘Humble’ Eskom is on the mend, but assailed by yet more bad news

There is a steady flow of positive news coming from Eskom, as the South African power giant seeks to restore its reputation after several very bad months. Key decisions on a new conventional nuclear power plant are expected within weeks (and possibly awarded to either Areva or Westinghouse by end-year), most major contracts have now been awarded for the massive new Medupi coal-fired plant, and within two months another 500MW of capacity will have been added to the 1,600MW already up and running from three return-to-service (RTS) coal-fired plants where work continues.

Backed by such positive newsflow, Eskom is gearing up to show that, while it is a more “humble” entity as a result of this year’s travails, it can pilot South Africa out of its troubles. And in so doing, the mighty monopoly is arguing that it’s worth the 53% tariff increase request that the National Energy Regulator of South Africa (Nersa) must finally rule on come 6 June.

With Gauteng’s poorer neighbourhoods ravaged by communal violence and many South Africans expressing some foreboding over the upcoming political change – despite voters and markets now being apparently reconciled to the little-trusted Jacob Zuma taking over as state president from the unloved Thabo Mbeki in 2009 (with Zuma’s next set of trials put off until after the polls) – the mood in SA is not good. According to Eskom, in electricity, as in politics, there are positive and negative cycles – Eskom general manager Andrew Etzinger has sounded out old heads and discerned that this year’s crisis is not sufficient to trigger a “new era” in the industry’s history, but rather reflects the bottom of a “negative cycle, as we also found ourselves 30 years ago.”

Such debates are for historians. The critical question is: can Eskom restore reserve margins, sufficiently tackle multiple demand-side questions and make a positive contribution to the reform and sustainable growth of the South African electricity sector, and the economy in general? This was a critical theme for the several Eskom executives who put their heads above the parapet to speak at Spintelligent’s African Utility Week events in Cape Town on 20-23 May. Meeting South Africa’s electricity supply challenge is a big ask, even before massive – and still unresolved – transmission and distribution needs are taken into account. Now forecasting 4% annual demand growth, Eskom says it needs to double its 40,000MW generation capacity by 2025. No wonder it believes it should install 20,000MW of nuclear capacity by then. Against a mood of guarded optimism, leavened with some very necessary reality checks, Eskom executives and local analysts believe a substantial portion of these ambitious targets can be met; and if timetables are now followed the system can be stabilised within seven years, with SA once more in the comfort zone well before the 2025 target date.

What will be required is a very large infusion of cash to achieve this, as well as a new discipline and understanding on behalf of consumers. It is critical that, as is widely expected, Eskom gets its way over introducing a big tariff increase – perhaps even near the 53% it is demanding from Nersa, although not likely in one upfront hit. The tariff hike will be phased. There will probably be an added burden on government as it increases subsidies for poorer consumers – who the mid-May township riots have emphasised live in the most fragile of conditions.

What Eskom describes as “the shareholder” – the government – will be asked to pay more. Finance Minister Trevor Manuel has said he will provide more funds for investment, but has cautioned that he will seek greater responsibility in return (AE 138/9, 133/24). The government is riven by turf wars over the extent the state should control such ‘strategic’ sectors – outgoing Public Enterprises Minister Alec Erwin advocates much greater hands-on control than trade unionist turned monetarist Manuel. Mines and Energy Minister Buyelwa Sonjica mainly sat on the fence as she opened the Cape Town conference, but registered that Mbeki remains “known to take [the sector] seriously”. The government will find large amounts of public money for Eskom.

But plans to install 20,000MW of nuclear power, develop PBMR and renewables (still an issue that seems to set few Eskom hearts fluttering, but on the agenda nonetheless), install massive new coal-fired capacity, and develop cross-border trade will involve even more money than “the shareholder” alone can provide.

Happily, Eskom has traditionally drawn on its triple-A credit rating to borrow large amounts in the international capital markets. So just as load-shedding has finished in this early SA winter and Eskom is talking bullishly about projects under way, bankers should be lining up to finance the contracts boom. But this is certainly not Eskom’s year: Moody’s Investors Service has just announced that Eskom’s much vaunted rating is under review for a downgrade, which most observers believe is inevitable.

Whenever it suggested Eskom was not worth its triple-A, Moody’s timing was never going to be great. The review announcement, sandwiched between the government’s energy summit and Nersa’s public hearings on the tariff hike, was criticised in a rearguard action by government officials for ‘coming too late’ – the real crisis was months ago. But Eskom was always going to do well, in a world drenched with sub-prime gloom, to maintain the markets’ full confidence after the travails of 2007/08. A one or two notch downgrade “could stop us being able to borrow”, a senior Eskom official confided in conversation with African Energy. This view was shared by well-informed Johannesburg bankers.

This is not necessarily bad news. ABSA’s head of power, energy and investment banking Anand Naidoo told the Spintelligent conference that Eskom would in future “have to seriously consider off balance, partial recourse project finance,” as opposed to the competitive corporate lending to which it has become accustomed. Such a move will encourage the company to plan more comprehensively and spend more wisely. This will be essential if Eskom really wants IPPs to occupy 30% of the SA generation market – now the stated aim of policy.

But it’s still a gloomy outlook when, just as you start getting your project development and policy mix right, the banks decide, if not to foreclose, then at least that you must pay substantially more for your glittering new projects than you have calculated in all those well-meant recovery plans. The Shareholder’s tax-payers will not be pleased.

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