Bloated by debt, bled by corruption and battered by structurally declining sales, South African power utility Eskom Holdings SOC Ltd is facing what\u2019s known in the industry as a \u201cdeath spiral.\u201d<\/p>\n
And the Johannesburg-based company now poses to the biggest credit risk to Africa\u2019s most industrialized nation, according to S&P Global Ratings.<\/p>\n
More than a decade of unreliable supply and surging prices are driving consumers and businesses off the grid as the price of renewable energy drops, leaving Eskom with lower sales and high fixed costs due to the expense of building new power plants.<\/p>\n
The company that supplies 95% of South Africa\u2019s electricity is losing middle-class clients, while arrears from near-bankrupt municipalities climb as many customers in impoverished townships don\u2019t pay their bills or steal power through illegal connections. Rampant corruption and a bloated workforce have pushed total debt to R419 billion ($30.8 billion), and sales volumes – already at a decade-low – are falling, according to interim results reported last week.<\/p>\n
Solar Panels<\/strong><\/p>\n \u201cEskom\u2019s inability to supply electricity and the ever-increasing prices have provided an incentive for users to replace inefficient equipment\u201d and shift to solar panels, Elena Ilkova, a credit analyst at Rand Merchant Bank, said by email. This \u201cwill leave Eskom to supply increasingly higher-priced electricity to consumers who can barely afford to pay and many more consumers who either can\u2019t or will not pay,\u201d she said.<\/p>\n With elections about six months away, there\u2019s likely to be little help from the state. On Dec. 1, Finance Minister Tito Mboweni said the government can\u2019t afford any more bailouts and urged Eskom to go back to the bond market.<\/p>\n Earlier this year, Public Enterprise Minister Pravin Gordhan intervened when a management plan not to increase pay sparked protests, boosting recurrent costs. Eskom will propose that the government absorb R100 billion in debt, Sanchay Singla, a money manager at Legal & General who attending a meeting with the company, said.<\/p>\n Going to the bond market is an expensive prospect. The premium investors demand to hold Eskom\u2019s 2026 rand bonds rather than benchmark sovereign securities has more than doubled over the past five years to 124 basis points, even though the debt is government-guaranteed.<\/p>\n Demand Threat<\/strong><\/p>\n Similar to how a burgeoning customer base for telephones in Africa skipped the wait for landlines and started with mobile units, solar panels and other technology leave consumers completely disconnected from Eskom.<\/p>\n \u201cEskom prices have increased four-fold in nominal terms over the past decade,\u201d said Anton Eberhard, a professor at the University of Cape Town\u2019s Graduate School of Business. \u201cAnd solar prices have fallen 80 percent since 2011 and 50 percent for wind.\u201d<\/p>\n The company has publicly acknowledged this threat to demand.<\/p>\n \u201cAs new technology allows self-generation to become increasingly price competitive for the consumer, a utility\u2019s sales decline,\u201d Eskom said in its 2018 annual report under the heading, \u2018the utility death spiral.\u2019<\/p>\n The cost of servicing Eskom\u2019s annual debt has risen to R45 billion, equivalent to almost a third of South Africa\u2019s welfare budget, while municipality arrears climbed to 17 billion rand from R13.6 billion\u00a0 in six months. The country has experienced seven consecutive days of rolling blackouts with Eskom struggling to pay for adequate plant maintenance. Khulu Phasiwe, a company spokesman, didn\u2019t immediately respond to requests for comment.<\/p>\n Eskom has been its own worst enemy. In recent years it has, at times, urged consumers to switch to more efficient light bulbs and has subsidized the installation of solar water heaters. Rolling blackouts also reduce revenue. It boosted the number of people it employed by 46 percent over the last decade to about 47,600 without significantly increasing output.<\/p>\n In March, Jabu Mabuza, the company\u2019s chairman, said staff numbers will need to be reduced and it recently started talks to cut senior management.<\/p>\n Near Monopoly<\/strong><\/p>\n Eskom\u2019s announcement of a so-called turnaround plan has been repeatedly delayed and is now scheduled for early 2019.<\/p>\n \u201cEskom in its current format is unlikely to exist a decade from now,\u201d Ilkova said. \u201cThe business needs to be reconfigured.\u201d<\/p>\n That could mean breaking up its near monopoly over power generation and transmission.<\/p>\n \u201cThe only workable solution is to break up Eskom and to sell-off certain assets, such as the new mega power plants,\u201d said Darias Jonker, an Africa analyst at risk-advisory firm Eurasia Group. \u201cThis latter option is particularly politically sensitive and is thus unlikely to happen. In short, Eskom is pushing the government toward a fiscal crisis either way.\u201d<\/p>\n
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