Beyond Eskom

2018-12-14 14:38
Edward West.

Edward West.

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Load shedding has become a part of our lives once again.

The municipality and the Pietermaritzburg Chamber of Business (PCB) plan to approach Eskom to find out just how long the load shedding will last this time, and just how bad it will get.

The future prognosis doesn’t look good.

Eskom gave us a host of reasons for the load shedding, including coal shortages and maintenance shutdowns, but behind it all lies an uncomfortable fact — it is running out of cash.

Its sales, particularly to large industries, have been falling for years.

It has applied to the National Energy Regulator of South Africa for a 15% increase in tariffs over three years, but even this outrageously high proposal is not enough to prevent a R100 billion shortfall.

The government will have to bail Eskom out, even though the fiscus’s ability to shoulder more debt is questionable.

Rothschild South Africa head Martin Kingston said recently that recapitalising Eskom could cost South Africa its last investment grade credit rating, but unfortunately, there is “no other obvious solution” if Eskom is to survive.

Eskom’s debt has ballooned from R106 billion to over R419 billion over a decade — years through which the power utility was also plundered due to corruption.

High fixed costs add to its woes.

Picking up the tab on an Eskom recapitalisation will likely push the government’s debt to unsustainable levels.

A debt payment default by Eskom also represents a systemic risk to other government bonds.

In the debt default scenario, the downgrade of the country’s last investment grade credit rating would merely be a sideshow, because the currency and economy would decline swiftly thereafter.

There has been speculation that the Public Investment Corporation (PIC), which manages state employees’ pension funds, will bail out Eskom.

But trade unions have already voiced their concern about their pension fund savings being used to prop up state enterprises.

Early this year, for instance, the Public Service Association (PSA), which represents around 200 000 public servants, reacted furiously to a PIC R5 billion lifeline loan to Eskom, calling it an “illegal transaction” that had “betrayed” workers.

That leaves the central government as the last resort.

It might have to raise additional taxes in the February Budget to finance an Eskom bail out. That is on top of the likelihood of above inflation-rate electricity price increases.

And there is a chance that the PCB and Msunduzi Municipality will have to revive the load-shedding mitigation project, which the PCB pioneered through the load shedding of 2015.

It involves large business users cutting their consumption for specific periods so that the power doesn’t get cut off entirely for the rest of the city.

It is a good plan, but given the extent of Eskom’s financial problems and its murky future, it may serve both organisations better to start thinking seriously about alternative energy options, even if the lights do not go out for extended periods this time.

Eskom generates most of its power from 13 coal-fired power stations. It will struggle to build another.

This week, environmental activists protested in Cape Town against plans to build two privately owned coal power stations, and they called on the Development Bank of South Africa to scrap its planned funding of these.

Many financial institutions and other multilateral organisations simply do not fund new coal-fired power stations anymore, for environmental reasons.

For instance, Standard Chartered Bank announced in September it would cease providing financing for new coal-fired power plants anywhere in the world, in support of the Paris Agreement on climate change.

Standard Bank has, according to reports, made this one of its policies as well.

Most multilateral development finance organisations based in the U.S. and Europe have since 2013 adopted strict lending rules for new coal power projects.

Although Asian organisations have to some extent stepped into the funding vacuum, it seems inevitable that once Eskom’s power stations reach the end of their lives over the next few decades, they will have to be replaced with alternative energy sources.

Compared with other provinces, there has been no substantial investment or project in alternative energy generation in KwaZulu-Natal.

The PCB and municipality were instrumental in setting up a feasibility study two years ago on the viability of piping natural gas to the city, while the municipality is also investigating the generation of energy from its landfill sites.

Hopefully, the current bout of load shedding will give the municipality and business owners in the city renewed impetus to get these projects off the ground.

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