Eskom will probably struggle to find private investors willing and able to pour capital into reviving its ageing coal-fired power plants, given that funders such as banks and asset managers have committed to reducing funding for fossil fuel projects.
That’s the view of Futuregrowth Asset Management, one of SA’s biggest institutional bond investors. It questions the viability of electricity minister Kgosientsho Ramokgopa’s plan to revitalise some Eskom power plants with private sector investment.
President Cyril Ramaphosa endorsed the plan but Futuregrowth says SA would probably be better served if money went to renewable energy sources, particularly as the country committed to cut carbon emissions 20%-33% by 2030 in exchange for an $8.5bn funding package with rich nations at COP26. Why would private investors channel money to Eskom when they could soon have more sustainable alternatives?
Banks such as Nedbank and FirstRand have committed to phasing out new coal funding. Asset managers such as Ninety One and Old Mutual have joined a global fund managers alliance that pledged to achieve net-zero carbon emissions by 2050.
“One cannot entirely rule out private players investing in Eskom’s power stations but it would be unlikely that the financial sector would allocate capital to very old coal fired power plants with significant operational challenges, given the commitments financial institutions have made to reduce funding for fossil fuel projects,” Olga Constantatos, head of credit at the Old Mutual-owned Futuregrowth, said in an interview. “Most of Eskom plants are very old so it’s probably better to invest in renewables.”
Constantatos says while the R254bn in debt relief to Eskom, announced in finance minister Enoch Godongwana’s February budget speech gave Eskom breathing room, it still needs to address other challenges such as its high cost base, alleged corruption, municipalities not paying bills and revenue and cash flow difficulties. “It’s a good intervention but it’s not the only intervention that’s needed,” said Constantatos. “They also need to lower their cost base and they need to generate cash flows.”
The Eskom debt relief plan over three years involves Treasury advances of R78bn in 2023/24, R66bn in 2024/25 and R40bn in 2025/26. The Treasury will take over up to R70bn of its debt directly in 2025/26.
Eskom acting CEO Calib Cassim has said the debt relief and recent tariff hikes mean the utility does not have to borrow more money for operational capital needs for the next five years. The National Energy Regulator of SA (Nersa) approved an 18.65% tariff hike for 2023/24 and 12.74% for 2024/25.
That may help boost Eskom’s financial position, but Constantatos says higher tariffs may contribute to Eskom’s demise.
“Eskom is in a classic utility death spiral. It has a very high cost base so it has to charge higher and higher tariffs.
“The higher tariffs make more and more consumers either buy less electricity or migrate to alternative power sources, which reduces Eskom’s revenue and cash flows.
“That leaves Eskom with the same high cost base, just spread out over fewer customers, so they then need an even higher tariff which drives yet more customers away,” said Constantatos
“They could have a debt spiral if Eskom isn’t able to generate enough cash to meet its repayment obligations, even with government’s relief package.”
She said it will be better to turn Eskom into a transmission and distribution company while encouraging greater investment in decentralised renewable energy sources that wean the country off coal-fired power.
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