Sorry, Eskom load shedding is likely to continue

South Africa would have breathed a collective sigh of relief in recent days, as the country has managed to avert electricity blackouts which were a daily occurrence in December and at the beginning of January. However, Absa has warned that load shedding is likely to continue.

It said in a research note published on Monday (20 January), that Eskom continues to be a major source of fiscal and general macroeconomic risk.

“The unbundling programme laid out in the discussion paper last year on its own cannot fix the electricity sector’s challenges and the pushback against reforms at Eskom is intense. Load shedding is likely to continue and Eskom may need even more bailout money than that already allocated by the government.”

Senior economist at Absa, Peter Worthington, said that the country is spending as much as 1% of GDP to keep Eskom afloat.

The Medium-Term Budget Policy Statement (MTBPS) in October forecast a main budget deficit outcome of 6.2% of GDP in FY19/20, rising to 6.8% of GDP in FY20/21, equivalent to a primary deficit of 2.6% of GDP, including financial support for Eskom amounting to about 1% of GDP, the paper said.

The return of load shedding at the beginning of December, and again in early January, is an unwelcome reminder that Eskom’s ongoing operational challenges, especially in generation, remain a severe downside risk to Eskom’s finances, the fiscus, and South Africa’s growth prospects, Absa said.

Eskom’s energy availability factor (EAF), which is the proportion of its theoretical generating capacity that is actually available at any given time, fell to new lows towards the end of 2019 as unplanned outages (breakdowns) mounted, Absa pointed out.

“With electricity demand likely to ramp up sharply in the second half of January as businesses and factories return to work, the prospect of further load shedding remains high, until such time as Eskom makes a lot more progress in rehabilitating its existing plant and/or procuring new supply.”

However, Eskom’s chief operating officer, Jan Oberholzer, said in early January that Eskom is mulling over a new maintenance strategy, to be considered by the board before the end of January.

This strategy would prioritise creating sufficient headroom for intensive maintenance over a couple of years, such that the utility could only deliver a minimum power supply of about 25,000MW, which is about 5,000MW short of the current ‘normal’ demand, raising the risk of ongoing regular load shedding, Absa said.

However, even without this new ‘stricter maintenance’ strategy, there are ongoing risks of load shedding, it said.

“Unplanned outages as of the morning of 17 January stood at 11,374MW, well above the 9,500MW level at which the utility says it can comfortably meet demand without having to resort to the emergency water and diesel reserves at its pumped storage and open cycle gas turbine generators.”

Worthington pointed out that such methods employed to keep the lights on are expensive.

MyBroadband reported that Eskom is currently paying multiple times more for diesel-generated electricity than the price of renewable energy, citing Dennis Dykes, chief economist at Nedbank, who described the situation as “completely bizarre”.

Dykes told Cape Talk that running diesel generators “costs R36 or R37 per kWh versus 40 cents for renewable energy”.

“You can’t make this up,” he said.

The City Press also reported that Eskom is exceeding its budget for diesel by nearly 50% to prevent load-shedding. The report added that “it costs Eskom at least R27 to buy one kilowatt-hour of electricity from private diesel turbines”.

Energy analyst Chris Yelland estimated that the cost for diesel generation is closer to R4 per kWh, but this is still around 10-times more than renewable energy.

Absa noted that in mid-December, the Department of Mineral Resources and Energy (DMRE) issued a request for information for emergency power procurement and demand-side measures of 2000-3000MW that could be quickly operationalised. Proposals are due by 31 January.

“However, the government has not yet announced a fifth procurement round from independent renewable energy producers nor moved forward on proposals to liberalise small-scale embedded generation, which the solar photovoltaic power association said could deliver 2000MW of power over 12 months.

“The government has hinted at action on these fronts, but at this stage, it remains uncertain,” Absa said.

Overall, predicting the timing, duration and intensity of possible load shedding events in 2020 and beyond is very difficult, said Worthington.

“Thus we cannot explicitly embed it into our macroeconomic forecasts, but it remains a persistent downside risk to growth, while the costs of shoring up the faltering utility financially are an adverse risk to the government’s fiscal performance.”

Absa said that another Eskom-related issue to watch closely in the coming months is its progress towards functional separation of its generation, transmission and distribution businesses, targeted by end-March.

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