Warning over Eskom’s ‘well-lit’ death spiral

 ·11 Jun 2024

Eskom is celebrating 75 days of suspending load-shedding this week, the longest stretch of zero rotational blackouts since the period between 5 December 2021 and 2 February 2022.

While the national power utility has exhibited a remarkable turnaround on the generation front—keeping breakdowns at bay while improving energy availability—this has presented the opportunity to refocus on the company’s true crisis: the fact that it simply isn’t making any profit.

With demand for its power dropping with every new energy producer that comes online, the utility will be forced to keep hiking tariffs and charging its customers more to make up for lost sales and meet its operational needs.

This will only serve to push customers even further away, bringing about a ‘death spiral’ as the group rapidly prices itself out of the market.

According to BDO South Africa partner and renewable energy expert Nato Oosthuizen, this is the ‘well-lit elephant in the room’ that remains unaddressed in South Africa amid the turnaround for load shedding.

Oosthuizen noted that as the private sector starts to entrench itself as an alternative energy source in households and major industries, and the country starts to feel the impact of this progression, “a decline in revenue for Eskom will start to become increasingly evident.”

“This could spell even tougher financial times ahead for(Eskom), and some difficult decisions may need to be considered, such as business restructuring and perhaps even retrenchments – a move that would have political ripple effects.”

Shooting itself in the foot

Oosthuizen is not the first or only expert in the field to flag this issue.

Former Eskom CEO Andre de Ruyter warned after his ouster that the utility’s modus operandi of applying for massive price hikes for electricity each year would ultimately come back to bite it hard.

He said that Eskom customers who can afford to do so will ultimately migrate away from Eskom’s grid, leaving only those who cannot afford to pay for electricity to consume the utility’s services. Price hikes are unavoidable and necessary—but the outcome seems inevitable.

Eskom already sits with a non-payment crisis. Money owed to Eskom by its customers—municipal customers in particular—is already in the tens of billions of rands, with no easy path to recovering this.

Independent energy expert Mohammed Madhi noted earlier this year that other sources of energy, like renewables, are getting cheaper, while Eskom is hiking prices by exorbitant amounts each year, pushing its inefficient power production costs onto customers.

Another independent energy analyst, Pieter Jordaan, has noted a permanent loss in demand on Eskom’s grid of around 1,500MW, which translates to 13 TWh or 6.5% of lost sales for Eskom in 2024.

Eskom is aware of the issue, but has little choice in the matter. It has repeatedly argued that its tariff applications are so that its prices reflect the cost of producing electricity in the country. It also has lofty plans to retain customers and get them back.

However, the ‘cost-reflective’ tariff argument has also faced significant pushback, least of all from the country’s energy regulator Nersa, which claims that Eskom has abused this notion in the current tariff methodology.

Price hike pain

Under the current methodology, Eskom is able to apply for future tariff hikes based on the costs of its operations as well as projected revenues from sales using the Regulatory Clearing Account (RCA). Nersa has proposed a new methodology that removes this as a feature entirely.

Eskom is not happy about the changes.

The RCA monitors and tracks uncontrollable costs and revenues assumed in Nersa-approved tariff hikes and compares them to the actual costs and revenues incurred by Eskom.

In theory, if there is a difference between the decision and actual costs and revenues, the RCA balance could either be recovered by Eskom (if overspent) or be given back to the customers (if underspent).

However, given the dire state of Eskom’s financial and operational performance, the RCA has always been in the power utility’s favour, and the RCA has led to Eskom applying for increasingly higher tariff hikes each year.

This reached an inevitable crescendo in the latest round of applications, where, amid record levels of load shedding and Eskom being in its deepest financial crisis in history, Nersa was forced to allow the embattled utility to hike tariffs by over 18% in 2023/24 and 12% in 2024/25 based on the RCA clawback.

Municipalities, of course, add their own finances into the mix, and households now face even steeper tariff hikes come July.

The biggest criticism of the RCA from other stakeholders, energy experts and analysts is that it does not incentivise the efficient use of generating capacity – with Nersa going as far as to say that Eskom outright misused the clawback.

This is because the RCA allows for various costs to be included in the formula beyond sales and revenue, such as coal burn costs, independent power producer costs, levies, and – importantly – Open Cycle Gas Turbine (OCGT) costs.

The inclusion of OCGTs is seen as especially egregious when considering the massive amounts being spent by Eskom on these incredibly expensive power generators over the past few years.

In effect, South African energy consumers aren’t paying a tariff that reflects what it costs Eskom to produce electricity, but rather a tariff that reflects how inefficiently the utility has been producing electricity.

While the utility has celebrated not spending as much on diesel in recent months—countering claims it was using diesel to keep load shedding at bay—diesel use is still in the billions of rands, adding to the R65 billion spent over the last five years to keep the lights on.

Losses and debt

Eskom posted a massive loss of R24 billion in the last financial year and is projected to post another loss in its current one. A turnaround in its finances is not seen on anyone’s Bingo card over the next few years.

These are losses on top of losses, all while the group needs to pay off its mountain of debt and is expected to bleed customers and sales.

With National Treasury tightening the reins on the group to raise more debt—thanks to its debt-take-over bailout—and South African consumers steering away from, or simply being unable to buy Eskom power, the utility will need more than 75 days of no load shedding to turn the ship around.

Read: Court slams Eskom for BEE discrimination

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