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Eskom is the largest producer of electricity on the African continent and provides South Africa with 95% of its power. Recent years have seen the utility spiral into debt and dodgy deals, as well as become South Africa’s biggest threat. Find out why…
Eskom was established in 1923 as the Electricity Supply Commission (ESCOM) or Elektrisiteitsvoorsieningskommissie (EVKOM) as it’s known in Afrikaans. It is ranked among the top seven utilities in the world for generation capacity and was once among the top nine in terms of sales. The parastatal owns around 30 power plants nationwide, comprising stations fired by coal, gas, hydro, wind and nuclear, the latter of which the only commercial nuclear plant in Africa. Annually, about 12,000 gigawatt-hours are exported to Swaziland, Botswana, Mozambique, Namibia, Lesotho, Zimbabwe, Zambia and other SADC (Southern African Development Community) countries. In total, Eskom was able to provide 52,811 megawatts of electricity. From the early 2000s, the utility began to fail financially and implemented what became known as load shedding. Corruption, malfeasance, supply issues, growing debt and poor management worsened the utility’s condition and drastic measures need to be taken if there are any hopes to save it.
A myriad factors has placed the debt-strapped utility where it is. The implementation of load shedding in 2007-2008 may have been the start of its downfall, however, when South Africans got their first glimpse at the corruption and poor maintenance and management occurring at Eskom. Then-president Jacob Zuma and his administration decided to aim their efforts at expansion, rather than addressing the issue of aging power plants and increasing corruption at the state-owned company and began plans for additional six-pack coal-fired power plants. Eight years later, Eskom announced its intention to pursue nuclear power – something ex-president Jacob Zuma insisted was the solution to a growing energy problem. However, the utility could not afford additional builds due to a steep 34% drop in profits after sales declined and running costs climbed. Despite this, two new power plants, Kusile and Medupi, were commissioned in 2017 at the same time that the parastatal was found to be guilty of a major corruption scandal involving the Gupta family and the Zuma administration. Numerous questionable deals with companies like software organisation Trillian were uncovered during the Gupta inquiry, and some headway has been made since then in rectifying these illegal agreements. Trillian itself was ordered to repay almost R600-million by a Pretoria high court ruling, and other companies like McKinsey have agreed to return over R900-million to the utility as well. These funds won’t be enough to resuscitate the parastatal, however, which now sits at over R420-billion in debt.
One of President Cyril Ramaphosa’s primary aims when he took presidency early in 2018 was to correct and amend the Eskom issue. In President Ramaphosa’s February 2019 SONA (State of the Nation Address) he announced that Eskom would be split into three state owned entities: Generation, Transmission and Distribution. The government felt that this would be the only way to save the spiralling parastatal, in addition to R230-billion in fiscal support over 10 years. The utility reached crisis point again late in 2018 when aging power plants, unserviceable debt, decreased sales and growing costs had it unable to completely supply all of South Africa’s electricity demand, and thus it implemented load shedding again – something South Africa had not had to endure as intensely since 2008. The rolling blackouts lasted from November 2018 until April 2019, escalating as high as Stage Four, which entails the ‘shedding’ of 4 giga-watts of load from the national electricity grid to decrease pressure at the power plants. Many areas of the country saw as much as eight hours without power each day, with several areas experiencing even longer outages. To float the utility, Finance Minister Tito Mboweni announced a R69-billion bail-out over a three-year period but released a significant portion of said funds – around R17-billion – earlier on in the year. As it stands, Eskom is set to run out of funding again by October 31st, 2019, without any of its near R500-billion debt having been serviced.
As Eskom nears D-Day, tensions have risen, and fears are running high for South Africa and its political and financial partners. South African taxpayers have forked out around R105-billion rand to keep Eskom functioning – that doesn’t begin to cover its mountain of debt that keeps growing. The result is an economic standstill: the new tariffs imposed by Eskom earlier this year to try and assist in paying off its debt have caused a massive economic ripple as companies and vital industries struggle to keep their head above growing running costs, which has in turn caused retrenchments, a decline in consumer spending and a freeze in the country’s economy. Eskom is also running out of coal and resources to use at its power stations – though the utility is meant to keep a stockpile at around 80%, its energy resources currently sit at 69%, meaning any change in the demand – i.e. any growth in the South African economy – could send the country back into darkness.
Eskom’s revenue issues are compounded by a political game of chicken-and-the-egg: pinpointing where the never-ending cycle of declining sales starts is not a straightforward or simple exercise. Initially, the parastatal was a well-managed organisation renowned for its affordable electricity, and in 2001 was named the Financial Times Power Company of the Year at the Global Energy Awards Ceremony in New York due to having the world’s lowest-cost electricity. Today, sitting at over R430-billion in debt, that’s a hard picture to envision. However, several factors contribute to the growing debt, and together have crippled the once great utility…
Free Basic Electricity (FBE): The FBE is a government initiative put in place to provide electricity for low-income households, providing between 25-60kWh of free electricity every month. At its launch, decision makers at the utility stated their confidence at being able to support this project and still cover its existing costs. Over time, households receiving the free electricity appealed for an increase, stating that the amounts provided were insufficient. This saw an increase of up to 100kWh per household in 2009 – shortly after the implementation of load shedding. In conjunction to declining generation, poor coal supply and the growing amount of illegal connections, this model has only proven to be a detrimental facility the utility can no longer afford.
Illegal Connections: Illegal electricity connections are a growing concern in South Africa, posing a huge threat not only to Eskom but to human life, as these connections are often poorly crafted and can result in fatal electrical shocks. They also cause damage to infrastructure, which the debt-strapped Eskom is already struggling to maintain. The theft of electricity is a major cause of lost revenue and costs the utility between R2-billion and R4-billion a year, excluding municipalities which, if included, mean a loss of R7-billion every year.
Defaulting Municipalities: Eskom no longer sells directly to the public, except for specific areas like in Johannesburg which purchase electricity directly from the utility. In other provinces, municipalities manage the purchasing of power – or rather, they don’t. Many municipalities have been defaulting on payments and now owe Eskom billions. The Maluti-A-Phofung municipality in Free State alone owes Eskom R2.8-billion, as of the end of 2018.
Shrinking Industries: Major Eskom clients that do pay their electricity bills no longer support the parastatal as they one did. According to Stats SA, the mining and manufacturing industries comprise about 60% of power consumption in the country. However, these industries have gradually shrunk – an alarming fact considering their role as prominent GDP contributors. As of the end of Quarter 1 of 2019, South Africa’s GDP shrunk by -3.2%, surpassing the predicted 1.6%. Of this, manufacturing reported a -8.8% decline, playing a major part in the shrinking of the economy. A large factor of this poor performance is owed to Eskom itself, which implemented more than 270 hours of load shedding between November 2018 and May 2019. In addition to this, the poor state the country finds itself in (again in part thanks to Eskom) have seen foreign investments slowed and a weakened Rand against the US Dollar. The snow-ball effect has seen job cuts and price increases, making for uncompetitive services. It is a vicious circle without a clear-cut end or solution.
Eskom’s Tariffs: The parastatal has, in many ways, helped sink itself. With shrivelling customer bases, growing illegal connections and electricity theft, and a debt that, to date, remains mostly unattended, the utility has resorted to increasing tariffs in an attempt to survive. Its 2019 tariffs are a stark comparison to what they were forty years ago, when customers paid a meagre 37c/kWh. Today, municipal tariffs are well over 100c per kWh – a hike of over 170%. These tariffs will continue to rise for the next three years, a strategy implemented at the start of 2019 that hopes to reduce Eskom’s debt. However, the consequences may outweigh any positives as those bearing the brunt will be Eskom’s customers, specifically low-income households (which may increase the occurrence of illegal connections), small businesses, the retail industry and the manufacturing and mining industries – who are already suffering from the load shedding implemented earlier in 2019.
The combined effect of these elements have resulted in a catch 22 – Eskom is unable to service its debt and adequately cover its running costs because of dwindling sales, but increasing its tariffs have only worsened the situation. With the 31st of October nearing, the question remains: what would happen to South African businesses and industries if Eskom were to, once again, fail in providing the power they need?
Much like Eskom, South Africa’s manufacturing industry is in dire straits – only much of the fault for this in fact lies with Eskom. The harsh load shedding schedule put into effect earlier this year had organisations like Sacci calling on Eskom to exclude them from the rolling blackouts, to no avail. Instead, manufacturing plants faced up to eight hours a day without power, which had catastrophic consequences – production chains were forced to stop, deadlines were missed, orders decreased, and companies were forced to pay staff who weren’t working. To reduce strain and damage to machinery, plants would often shut off prior to their load shedding schedule, further increasing down-time. On top of this, Eskom’s new tariffs made running costs skyrocket. So, what can manufacturers do about the threat of load shedding once again?
The mining industry is one of South Africa’s biggest and is a major contributor to the country’s albeit shrinking GDP. Amidst the industry’s own set of problems, it has also faced load shedding. The added strain of these scheduled black outs has taken their toll on the industry, which has faced many of the same problems as the manufacturing industry: decreased operation times, missed targets and quotas, and staff who remain on a payroll despite not working. Eskom’s tariff increases hit this industry particularly hard given their long hours and huge amounts of power required. What options does this industry have when facing a second potential round of rolling black outs?
Feeding the South African population makes its agriculture industry the backbone of the country. It also makes relying on the grid and, in turn, Eskom and its equally corrupt and poorly managed municipalities, exceptionally risky. Farms require energy year-round to power heating and cooling facilities, electrical equipment, lighting and much more if they are to adequately care for crops and livestock. Farmers cannot afford down times as every single day that forms part of the different agricultural cycles is crucial to the success of a crop. Livestock require daily care if they are to remain healthy and suitable for the production of consumable goods. How can farms keep the lights on if Eskom implements load shedding again in 2019?
In addition to the industries that support the country, concerns are felt by the general population and other businesses or industries that rely on Eskom to keep them powered. Apart from the load shedding factor, the parastatal’s current state has caused a multitude of additional problems for the country: ratings agency Fitch downgraded the country’s investment outlook from stable to negative, making Moodys the only ratings agency to provide the country with any sort of positive investment standing; the unemployment rate has shot up to 38.5%, meaning over 10.2 million people in South Africa are without jobs; and recently, rumours have spread about the possibility of an IMF (International Money Fund) bailout, an option the ANC is unlikely and unwilling to take, but which may be the only way to save Eskom and the country. Currently, billions of Rands are being diverted from areas of crucial importance, like public transport, policing and social development. Eskom’s dire situation has had the ANC investigating prescribed assets again, something that was done away with in the late 1980s. With R6-trillion sitting in the asset management industry, it’s no wonder, though opposition parties have openly opposed this option and provided their own ideas on how to solve the increasingly worrisome problem. What options do South Africans have in light of Eskom’s added impending woes?
Given the current economic climate, which looks dark and foreboding given Eskom’s quickening death spiral, South Africans and the country’s businesses and industries may soon have no choice but to source alternative power solutions to keep the lights on. Because of the strict processes and policies in place regarding Independent Power Producers (IPPs) in South Africa, purchasing power privately may not be a viable (or affordable) option for lower-income citizens or small to medium enterprises. However, several other options are available that may help prevent disruption in daily lives or operations…
The importance of power cannot be understated. An entire country can be brought to its knees when the supply of electricity is at risk, causing a snowball effect that implicates the economy and the future of the country. Keeping your operation powered is any organisations primary objective. Be proactive – make provisions for power supply before the lights go out. For reliable, tailored industrial fuel solutions and business partners you can count on, contact us today.