The government has asked key suppliers to Eskom — independent power producers (IPPs) of renewable energy and coal producers — to help turn the economy around by considering cost reductions.
This is the first time the government has suggested to economic stakeholders that a haircut — a sacrifice on returns — be agreed as part of the solution to Eskom’s financial crisis.
Eskom now has R450bn of debt, which it is unable to service from its revenue. Its debt burden is expected to continue to grow as it battles to complete two large and overdue coal-fired power stations to increase the energy supply. A plan to restructure Eskom’s debt and split the company into three parts is expected before the end of October, when the government tables the medium-term budget policy statement.
It has not been proposed, however, that investors who hold Eskom debt also be asked to take a haircut. Such a move would have dire consequences for SA’s credit rating as it would be considered a debt default.
The meetings between the government and IPPs and coal producers were held last week and attended by mineral resources & energy minister Gwede Mantashe and public enterprises minister Pravin Gordhan. In reply to questions from Business Day, the department of mineral resources & energy said the reason for the meetings was to explore how other "role players, collectively, can make a contribution to revive the economy and pull the country out of the present low-growth situation".
"This would have to be done taking into account a whole host of issues, without impacting adversely on the individual company/producer and mindful of the sustainability of the sector. At the moment, there has been only one meeting with the role players in the mining and energy sectors, that is coal producers and IPPs, respectively.
"The outcome in each case was a commitment and principled agreement to make a contribution to the economic turnaround with a consideration to cost reduction. The parties
are yet to put together various options and mechanisms of how to realise these commitments.
"This will entail further interaction, including setting up task teams to work on the detail. At the moment we are far from a conclusive outcome that can provide specific answers. We have started on a positive note," said the department.
Both Gordhan and Mantashe have said on several occasions that they would like to renegotiate the tariff of the first two bidding rounds of the renewable IPP programme, as the prices negotiated at the time were expensive relative to the later rounds. Gordhan has said that the cost of the IPPs is a burden on Eskom, which is under severe financial stress.
But both IPPs and the investor community have warned that a renegotiation of contracts will undermine investor sentiment and cast doubt on the government’s integrity in honouring contractual obligations. The programme is one of SA’s most successful attractors of investment, raising R190bn over five years. The IPP contracts have also been sold on into a secondary market as investments attractive because of their clearly identifiable revenue streams.
The issue of who bears the cost for renewable energies is an ongoing debate. While the full cost is passed on directly to the consumer through the tariff, critics of the IPP programme point out that Eskom is compelled by the power purchase arrangements to pay IPPs regardless of whether it needs the power they produce to meet the needs of the system.
Eskom can produce coal-generated power more cheaply at R0.62/kWh than the average tariff of R2.01/kWh paid to IPPs.
However, costs for renewable energy have dropped. In round one, the prices for solar photovoltaic and wind power were R4.02/kWh and R1.67/kWh. By round four in 2016, prices had fallen to R0.96/kWh for solar and R0.76/kWh for wind.
Engineering News reported on Friday that in its meeting with coal producers "government proposed a new price-setting mechanism for domestic coal" in a bid to place a cap on the price Eskom pays.
The cost of coal, which has soared over the past five years,
is the utility’s single biggest input cost.
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