There has been a flurry of good news recently about Eskom’s increased energy capacity as electricity minister Kgosientsho Ramokgopa rolls out his plan to alleviate SA’s energy crisis.
This month saw the announcement that SA will be receiving an additional 1,000MW of gas-fired energy from Mozambique, while data for June shows a much-improved generation picture, with the energy availability factor above 60% for the first time since August 2022. We have also been experiencing reduced load-shedding, which has been attributed to reduced energy usage and less maintenance being carried out by Eskom during the winter months.
Eskom has published its winter outlook briefing, in which it announced that it plans to bring back 3,900MW of electricity generation by 2024. While load-shedding isn’t expected to disappear, this additional capacity would limit its overall impact and reduce the risks around stage 8 load-shedding.
Concerns about load-shedding reaching higher levels have lingered for some time now, yet the Eskom board has offered assurances that load-shedding will be resolved within the next 24 months. However, without a disciplined and robust rollout of a clear plan, this outcome seems unlikely, given the current reality.
Eskom aims to keep unplanned generation losses to below 15,000MW and it has planned for scenarios in which unplanned outages rise to about 18,000MW. If unplanned outages reach this level, stage 8 load-shedding looks probable.
However, despite the improvements and apparent good news surrounding Eskom’s energy plan progress, the fact remains that Eskom’s available capacity is 26,512MW, with overall demand sitting at 33,000MW. Therefore, even if we factor in the additional 3,900MW, without demand-side adjustments we will still be facing an energy deficit if our generation and grid challenges are not urgently addressed.
Loss-making model
The turnaround plan outlined by Eskom covers a one- to three-year time horizon. Its objectives include the separation of generation, transmission and distribution operations and a sustainable recovery in operations. The utility is also focusing on improving income statement performance, strengthening the balance sheet and ensuring it recruits and retains the right talent to transform the culture.
However, as it stands, execution of the steps needed to achieve the turnaround plan remains fundamentally poor. An added stumbling block is that even if Eskom were to execute the turnaround plan successfully it would still need significant funding to improve transmission infrastructure.
While the turnaround plan is short-term focused over the next three years or so, in the longer term the entity is loss making, therefore it cannot self-fund, which is a critical challenge to its recovery plans. Revenue growth is predominantly driven by tariff increases, which come up against political pressure and pushback.
In the past 10 years, the National Energy Regulator of SA (Nersa) has not once granted Eskom the tariff that was asked for. Margins will continue to be affected by lower top-line growth and higher maintenance costs, which means continuous cash flow pressure.
There is also the long-term risk to revenue as the private sector and the consumers who can afford it self-generate and move off the grid. Mining contributes 15% to Eskom’s revenue and most SA mining companies are looking into self-generation. Then there are other factors at play, such as non-paying municipalities and illegal electricity connections.
Investor concerns
The next six months will be critical for Eskom’s strategic execution. Barring improvement in coal plant performance, load-shedding is likely to be a long-term structural event considering the grid capacity constraints facing the utility.
As investors, we have fundamental concerns over SA’s long-term growth outlook given Eskom’s challenges. The risk that Eskom poses to our fiscus and overall investor confidence is continuing to rise and compound with each week that passes without any effective implementation of the necessary steps to address the crisis. By its own admission, Eskom’s winter outlook briefing highlights that load-shedding reduced SA’s third-quarter GDP growth by 2.1%.
This means that we now have to evaluate energy-intensive companies based on a number of factors relating to their mitigation of the energy crisis. Ultimately, what are their energy security plans in a world where load-shedding could be a structurally occurring event?
Through our engagement with company management on the effect of load-shedding on their operations, we have assessed that most companies are generally able to withstand the impact of stage 6 load-shedding at most. A move to stage 8 will be a material shift, with sectors such as mining indicating that companies would have to stop all production at stage 8.
Companies that directly produce commodities for Eskom do not get load-shed; however, food producers do, and they are feeling the pinch. Food producers and retailers (in both food and clothing) will therefore be the losers among SA’s corporates, but food security is also a concern should load-shedding worsen and persist.
The winners are companies such as Reunert, which has seen a spike in demand for its renewable energy products and the order book is the highest it’s ever been. Construction companies are also coming out tops, given that they don’t run off Eskom power but rather use generators and diesel to operate.
Regardless of where they sit in the spectrum of load-shedding impact, all the companies that we are engaging with are actively investing in renewable sources of energy to mitigate the broader impact, given the depth of the crisis we’re facing, a lack of any effective measures being taken as part of Eskom’s turnaround plan and significant reservations around the sustainability of Eskom’s business model.
Just transition at risk
This is what makes the new electricity minister’s existing coal plant extension plans all the more confounding. We do not have sufficient public funds to support these plans, and private funding is simply not being directed at power plants’ life extensions. The risk is that the country will miss out on critical foreign investment funding that would ensure that we at least attempt a critically needed just transition, which we do not have the public funds for either.
Moreover, the power stations are already old (barring Kusile and Medupi). Old assets are inefficient, and extending the life of these plants could be relatively more costly in the long run than just decommissioning them as planned and adding new green generation capacity. The initial plan was to decommission and repurpose the power plants for renewable energy generation capacity. The grid capacity from the decommissioned power stations could have also been used for new renewable energies. The electricity minister’s plan is going backwards.
Eskom’s business model as it now stands is unsustainable. Unfortunately, its financial position will only continue to deteriorate unless it can fix the operational performance of the power plants and root out corruption.
Elections are in 2024 and it is therefore as critical for the ANC that the governing party find a solution to the load-shedding crisis as it is for average citizens. We can only hope that they apply effective and sustainable solutions rather than just plastering over the cracks. To date, it appears that this has been the strategy.
• Mongwe is an investment analyst at Old Mutual Investment Group.
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