The crossroads of power

Eskom will be at a crossroads in 2017. This year will see the utility define an energy policy that will shape its future for the next two decades as it faces increasing financial pressure.

A battle-bruised Eskom will start the year having faced a state capture scandal that forced its CEO, Brian Molefe, to resign, and having squared off with the renewable energy sector.

Khulu Phasiwe, Eskom’s spokesperson, said Eskom’s priorities were to address the concerns that had been raised by the ratings agencies, namely the expiry of the Guarantee Framework Agreement that allows the utility to borrow up to R350 billion and the uncertainty over the outcome of the ongoing court case against the National Energy Regulator (Nersa).

Jarredine Morris, Energy Intensive User Group of Southern Africa (EIUG) spokesperson, believed 2017 could be a good year for Eskom if the utility improved the reliability of its existing generation fleet and execute its expansion plans.

The group, whose members consume more than 40% of local energy, said it didn’t expect any load shedding in the coming year, provided Eskom maintained its focus on maintenance and project management.

However, Morris said that the group was worried about Eskom’s health and its future.

“The EIUG and Eskom are joined at the hip and the risk of overbuilding leading to above-inflation price increases and falling demand feeding on one another in a negative spiral is a great concern.”

Financial pressures

Eskom’s expansion bill is mounting with the Medupi and Kusile costs already far over budget.

The needed retrofits and decommissioning of plants are likely to increase the financial strain on the state enterprise. It is struggling with a “junk” credit rating, which will increase its borrowing costs.

Stephen Labson, a fellow at the University of Johannesburg’s Centre for Competition, Regulation and Economic Development, believes that Eskom is in poor financial shape.

He said the power utility’s recent results showed increasing costs and a decline in profits.

A set of risk factors was likely to unfold over the next few years at Eskom, he said.

This includes R40 billion of underrecovered costs that are now unlikely to be reflected in tariffs until 2019 or later.

Eskom’s debt obligations were reported as R317 billion, with an increase in finance costs of roughly R4 billion for its last six-month period.

As Eskom wants to borrow to fund nuclear, for example, Labson said the figures were cause for worry.

“There seems to be a disconnect between what Eskom can recover in terms of the rules of the Electricity Pricing Policy and the reality of what is affordable and politically palatable,” she said.

“They are picking up massive new debt on their balance sheet in an environment where their sales growth is close to zero,” Morris said.

“Should Nersa allow above-inflation price increases to enable Eskom to earn a fair return, it may further stifle growth.”

Eskom would support Nersa in the coming year by appealing the court ruling that sought to set aside Nersa’s decision to grant Eskom a 9.4% tariff increase, Phasiwe added.

Policy roadmap

Another major challenge for Eskom will be to align policy between the minister and department of energy expressed through the already-contested integrated resource plan outcomes, on one hand, and the minister of public enterprises and Eskom on the other.

Nicole Löser, attorney at the Centre for Environmental Rights, said: “This is where Eskom’s controversial push for nuclear procurement, and its refusal to sign new renewable energy power purchase agreements, must be resolved urgently.”

The intensive users group didn’t really believe that Eskom had a road map of where it wanted to go.

Said Morris: “They seem to want to maintain the status quo, which is out of touch with reality.”

After the departure of Molefe, former head of generation Matshele Koko is now the acting CEO that will have to steer Eskom through some stormy waters.

Renewables

Koko has been one of the fiercest critics of renewable energy, often penning opinion pieces slating the technology for nondelivery and defining a pro-nuclear energy policy.

In December, Eskom issued a no-obligation request for information for South Africa’s nuclear new build programme.

If Eskom continued its anti-renewable energy stance, it risked becoming obsolete, the renewable energy industry warned.

It risks putting job creation and the supply of affordable, clean, accessible electricity for all South Africans in jeopardy.

Renewables giant Mainstream’s CEO, Eddie O’Connor, said if Eskom got its house in order and delivered on its renewables promises, South Africa as a whole would benefit.

Nuclear

Eskom believes that nuclear will be the best technology to replace its ageing, climate-unfriendly coal fleet.

Löser said Eskom would face growing opposition to the nuclear procurement programme from both civil society and corporate South Africa.

Morris said that Eskom should abandon its nuclear ambitions because nuclear is unaffordable and not required.

Environmental pressure

Air pollution caused by Eskom’s power stations is an increasing problem and with new plant minimum emissions standards kicking in during 2020, environmental pressure will continue to mount on South Africa’s biggest polluter.

While Eskom has obtained postponement of compliance for some of its coal power stations, South Africa’s commitments under the Paris Agreement and upcoming regulatory measures to reduce South Africa’s greenhouse gas emissions are sure to place strain on Eskom’s dirty coal fleet and its finances.

Eskom also has to start decommissioning and retrofitting many of its ageing coal-fired power stations soon to comply with regulation, entailing significant expenditure.

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