Power struggles may ease, but what does this mean for Eskom?

06 April 2023

STEMMING THE TIDE OF INFLATION

To understand how the debt relief package affects the fiscus and, in turn, all of us, we need to grasp some of government’s position when it comes to state-owned enterprises (SOEs).

Some SOEs, such as Eskom and Transnet, are systemically important to the continued functioning of South Africa, while others, like Denel and South African Airways (SAA) are “nice to haves” but are not of strategic importance to the country’s very survival. There are also two other types of SOEs – those with guaranteed debt (such as Eskom and SANRAL) and those without guaranteed debt (such as Rand Water).

This gives us four types of SOEs in South Africa, which we can view in light of where they fall in a matrix, as shown below.

Knowing where an SOE falls in this matrix helps us to understand how the various market participants view SOE debt and its impact on the fiscus. Given the strategic importance of Eskom, its explicit guarantee and the complications that would result from an Eskom debt default, few market participants would not view Eskom’s contingent liability as part of the state’s debt load. Eskom and the state have been joined at the hip for years.

This is quite evident when you consider that the announcement of the debt-relief package has had no noticeable effect on our bonds. South African government bond yields are trading below the average for second half of 2022, and the spread relative to the US 10-year for our local 10-year is similarly lower. This does not mean that the 2023 Eskom-National Treasury deal is without consequences.

The details of the debt package contain both capital and interest repayments totalling R254 billion over the next three years. There are, however, provisos. Eskom is prohibited from building new generation capacity – it must focus on transmission, distribution and maintenance All sales of assets must be used for debt relief No new borrowing from 1 April 2023 Debt relief is to be used only for the settlement of existing debt and interest payments No remuneration adjustment is allowed that negatively affects its financial position

In essence, all new power generation is in the hands of the private sector, and Eskom is on the road to being primarily a distributor of electricity. This new direction of travel is one of the strongest indicators that the state is being forced to confront the weakness of its centralisation of production and control strategy.

THE COMPLEX WEB OF PRIVATE POWER PRODUCTION

Being given free rein and the prospect of an uncertain energy future, the private sector and households have jumped at the opportunity to increase their energy independence. Not a week goes by without an announcement of another power project initiated by some corporation.

In early March, the City of Cape Town (CoCT) released numbers showing that 10% of all solar installations since January 2018 were implemented in the first two months of 2023.

Figure1: Solar installation applications in the City of Cape Town (2020 - 2023) 

Source: City of Cape Town

This, of course, is great news for the medium-term power outlook in the country, as the less power Cape Town and the large corporations need, the more power becomes available for the rest of the country – or so you would think. However, things are not always as simple as they seem.

Eskom’s accounts show that its best payers, who buy directly from the parastatal, are the CoCT, Anglo American, BHP, Sasol, other large miners and corporations. They have no debt outstanding, they pay promptly and without the need for encouragement. Looking five to 10 years ahead, one can easily see that the balance of users paying Eskom for power will shift away from these prompt-paying entities towards those who have historically caused Eskom’s accounts department headaches. Between the Free State and Mpumalanga alone, 26 municipalities owe more than R30 billion.

This begs the question: What happens to Eskom when it runs out of paying customers? Fortunately, this has been considered.

As Eskom moves from a generation to distribution and transmission entity, it will make money the same way that municipalities have for years. Most municipalities have been making a large portion of their annual revenue from the on-sell of power they buy from Eskom. As an example, the CoCT has an annual revenue budget of R48.8 billion, of which R16.1 billion (33%) is from electricity sales. So, what does Eskom’s move to distribution and transmission mean for the viability of municipalities?

As both Eskom and the CoCT shift towards increased independent power generation, this model is still viable. City of Cape Town’s budget is safe as they are now able to make similar margins from residential and corporate power producers, and the same could be true for Eskom if transmission and distribution is properly maintained and developed.

South Africa’s power outlook is much better than it was one year ago. There is a viable path forward, with a more decentralised model and fewer catastrophic failure points. It did take a crisis to get us here, but you know what Britain’s war-time prime minister, Winston Churchill, used to say: “Never let a good crisis go to waste.”