The head of South Africa’s state power utility needs to substantially reduce its R402 billion ($28 billion) of debt to realize his vision of transforming the coal-addicted behemoth into a leading green-energy producer and create as many as 300,000 jobs in the process.
Eskom Holdings SOC Ltd supplies more than 90% of the nation’s electricity, the bulk of it from coal, and emits more than two-fifths of the nation’s greenhouse gases.
Andre de Ruyter, 53, its chief executive officer, wants to tap concessional loans from development finance institutions to finance renewable plants in exchange for accelerating the closure of some of its old, polluting power stations.
But persuading financiers to fund Eskom will be a tall order, given that its debt is already at unsustainable levels due to cost overruns at new plants and four straight years of losses. The government has been talking about reorganizing the utility’s balance sheet for years yet has failed to take a decision, and has instead stepped in with bailouts to enable it to keep operating.
Eskom’s transition to renewable energy “will be difficult, if not impossible,” without a solution to its debt woes, according to David Masondo, the nation’s deputy finance minister.
He’s suggested several options, including that foreign utilities take a stake in the utility; that its shares be listed; or that some of South Africa’s sovereign debt be scrapped in exchange for recapitalizing Eskom and ensuring that it reduce its emissions.
Eskom is considering investing R106 billion in renewable energy projects within the next decade and is analysing various financing options. The adverse impact on the coal-mining industry and communities that rely on it could be offset by a gain in manufacturing jobs, according to De Ruyter.
“An integrated approach to resolving the debt challenges, while exploring new and innovative pathways to fund a just transition, is required to move us forward towards a sustainable electricity industry,” Eskom said in an emailed reply to questions.
Sithembiso Garane, head of listed credit at Futuregrowth Asset Management, South Africa’s biggest specialist fixed-income money manager, said the government has indicated its commitment to keeping Eskom afloat and he’s “cautiously optimistic” a decisive debt solution will be found.
The equity injections that have been provided so far are “are barely scratching the surface when it comes to extinguishing Eskom’s solvency risk,” Garane said. “The remaining operational inefficiencies and unsustainable debt burden patently require further extra-ordinary support.”
Weaning Eskom off coal could make a significant and expeditious contribution toward global decarbonization efforts, according to Shridaran Pillay, Africa director at risk advisory service Eurasia Group.
“What remains to be seen is if there is the political will for this transition to happen,” he said. “There is understandable reluctance to shift the debt on to the government’s books and I think that options put forward of potentially selling a stake of the utility or listing it are something that will have to be considered sooner rather than later.”