Eskom ‘needs’ your money

2014-07-13 15:00

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The energy parastatal faces an uphill climb to stabilise its finances and ensure it does not fail the nation

Eskom might have declared a profit of R7.1?billion on Friday, but it is still icurring losses where it really counts.

The state-owned power utility simply cannot keep itself afloat through cost savings and efficiency improvements alone, acting CEO Collin Matjila said

this week.

Keeping Eskom sustainable is becoming more expensive by the day and in the end, power tariffs will have to rise by more than is currently being allowed, according to the utility.

Keeping Eskom afloat and operating as a “going concern” is going to be very, very expensive.

It will probably require more government support, new and innovative ways to borrow money or involve “quasi equity” investors?–?and a “reprioritisation” of its capital expenditure on power generation.

Above all else, according to the utility, it will require South Africans to fork out more for electricity.

The state-owned power company declared a R7.1?billion profit for its last financial year but in reality, it is not making positive returns.

The return on Eskom’s assets is -0.5% while “ideally”, it should be equal to the cost of capital, 7.65%, according to finance director Tsholofelo Molefe.

Technically, this would mean it is making enough money to maintain and replace its power stations into the future, which it is not doing.

Eskom completely missed its target for the cost of generating power last year. It was meant to be 52.7c per kilowatt hour.

Instead, it rose to 59.7c/kWh, mostly due to a staggering diesel bill related to the company’s two open-cycle gas turbine (OCGT) generators in the Western Cape.

The average selling price rose to 62.8c/kWh in line with the 8% limit imposed by the National Energy Regulator of SA (Nersa).

This left Eskom with less than half the gross margin it had been targeting.

The current multiyear price determination (MYPD) was implemented a year ago and stretches to early 2018.

Eskom asked for annual increases of 16%, but Nersa only allowed 8%, creating the infamous R255?billion “shortfall” over the entire period.

Eskom cannot realistically plug the hole with extra borrowings above its existing R300?billion debt programme.

Its interest bill is already set to balloon as the debt financing of the new power stations piles up. In the last financial year, debt and interest payments totalled R17?billion. This is expected to rise to R35?billion next year. Its total debt rose by 25% to R254?billion.

Added to that, Eskom’s credit rating has just been cut by Standard & Poor’s in line with the government’s rating?–?and is being kept on negative watch for another downgrade.

Eskom has been talking to the Treasury about its “capital structure”, meaning that it wants a boost to its standing R350?billion guarantee. Without this guarantee, the company would be considered “junk” by credit ratings agencies.

Its debt is 11 times its earnings, but an “investment grade” requires this multiple to be three.

Eskom’s first best hope to raise power prices is the “regulatory clearing account” with Nersa.

The company has applied to Nersa to determine the difference between the revenue and costs set in the previous MYPD. This could potentially allow Eskom to add any under-recovery to tariffs.

Trying to get Nersa to review the current MYPD is a “last resort”, says Collin Matjila, Eskom’s acting CEO.

The diesel bill

Eskom more than doubled its reliance on the two expensive OCGTs in the Western Cape.

The sheer magnitude of this diesel bill is a major contributor to the hole in Eskom’s pocket, contributing roughly 7% of the cost of generating power in the country.

In this week’s results, Eskom revealed the generators burnt 1.15?billion litres of diesel worth R10.6?billion in the financial year.

The Nersa-approved budget was only R2.5?billion and Eskom planned to overshoot this by spending R3.6?billion.

By way of comparison, all Eskom’s coal and uranium in the year cost R59.2?billion, making diesel account for about 15% of primary energy costs.

The OCGTs were run almost twice as hard as in the previous year, being online for 19% of the year?–?very high for plants meant to provide emergency “peaking” power for short periods.

The reason they were used so extensively was the catch-up on maintenance last summer when Eskom turned off as much generating capacity as it could for repairs.


Eskom’s scramble to catch up on maintenance at its power stations adds another major expense. The company spent R14.3?billion on maintenance last year, a 40% jump on the previous year.

After the power crisis of 2008, Eskom started running its aged fleet of power stations at full throttle while minimising maintenance.

Among others, this kept the lights on for the 2010 Fifa World Cup. The consequences are now “haunting us down the line”, says Matjila.

Regular breakdowns are “drastically” reducing the power supply. The “unplanned outages” reported by Eskom in its regular system bulletins this year average more than 4?900 megawatts at any given point and almost never falls below 4?000MW.

Independent power producers

Eskom is now starting to connect the various small power plants being built in terms of the Renewable Energy Independent Power Producer Procurement Programme.

But their contribution in the past financial year was still very limited providing 250?000kWh, which cost on average R1.40 per kilowatt.

Paying for the independent power producers was a major contributor to Eskom’s failed bid to increase tariffs by 16% a year. Of that increase, three percentage points were meant to cover the renewable power purchases that are coming.


The first unit of the Medupi power station is still on track for synchronisation with the national grid “in the second half of 2014”, more specifically December this year.

Chasing this deadline “comes at a cost”, according to Matjila. The 4?800MW station’s first 600MW unit will only reach full generation six months later.

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