South Africa moves to close Eskom ‘funding gap’ and boost power sector investment

Out-Law News | 19 Sep 2014 | 2:52 pm | 3 min. read

South Africa’s government has announced a package of support to fill a “funding gap” for the state-run Eskom power utility, which the National Treasury said is “facing significant challenges that threaten its sustainability”.

The Treasury said Eskom will be raising additional debt in the region of 50 billion rand (ZAR) ($4.5bn), over and above original plans to raise ZAR 200bn ($18bn).

According to the Treasury (2-page / 128 KB PDF), while higher debt levels will have “a negative impact” on Eskom’s balance sheet, “it is necessary to reduce the immediate impact on electricity consumers”.

The Treasury said “raising more debt is supported by the substantial guarantee facility available to Eskom from government, which will be used to reduce Eskom’s cost of debt, but also needs to be supported by a sustainable industry, relying on managing costs and raising sufficient revenue to cover these”.

There will be “an allocation of funding” to Eskom “to help relieve the impact on electricity consumers, as well as add additional support to Eskom’s balance sheet, which needs to be strengthened”, the Treasury said. Details of the financial support are to be unveiled at a later date as part of budget announcements.

The Treasury said the “main contributors” to Eskom’s funding gap include the fact that the utility will “not be generating enough revenues to cover the costs of electricity supply”. Eskom has been incurring additional costs “to keep the lights” on by excessively running “the more expensive power plants”, such as open cycle gas turbines, as a result of deteriorating performance of some of its coal plants and delays in a programme of new-build, the Treasury said.

South Africa’s government has said it will support an application by Eskom to the National Energy Regulator of South Africa for tariff adjustments that “will provide Eskom with the revenue and cash flows the utility needs to complete the current programme of building power stations” and repay associated debt and interest.

According to the Treasury, the government plans “interventions to ensure that free basic electricity allocations are used effectively to cushion poor households from the impact of higher tariffs”. The government will also “implement a programme to improve the efficiency of municipal electricity operations”, the Treasury said.

In addition, the Treasury said the government would work with Eskom in support of a national independent power producer programme to complement Eskom’s own plans to build new electricity generating facilities.

“Significant savings have been identified and agreed to with Eskom and will form part of the package,” the Treasury said. “As a result, Eskom will need to improve the efficiency of its operations through more effective maintenance of existing power stations, limiting cost overruns in the new-build programme, improving procurement outcomes and management of working capital.”

Meanwhile, Eskom has begun the “countdown” to grid connection of the Medupi coal-fired plant near Lephalale in Limpopo, which is the first power station that Eskom has built in 20 years. The first of the plant’s six generating units, which each have an electricity generating capacity of 794 megawatts (MW), is scheduled to be connected to the grid at midday on 24 December 2014.

“The event will mark the biggest technical milestone to date in Eskom’s ZAR 300bn ($27bn) capacity expansion programme aimed at ensuring future security of electricity supply,” Eskom said. “Once complete, Medupi will be the fourth-largest coal power station in the southern hemisphere and the largest dry-cooled power station in the world.”

The utility’s interim chief executive officer Collin Matjila said: “We’re on the verge of starting to deliver on the biggest energy expansion programme South Africa has seen in decades, which is a critical step closer to a future of reliable energy supply.”

Up to 95% of South Africa’s electricity is currently generated by coal-fired power stations and the country is among the world’s top 25 producers of greenhouse gases, according to government figures.

As of November 2013, South Africa was rated as the 12th most attractive investment destination for renewable energy, according to the government, which said last November that it had approved an additional 17 renewable energy projects.

Those projects are designed to pave the way for a further $3.3bn worth of investment – that will add up to 1,470 MW of generating capacity to the national grid. Eskom will buy power from the new plants in terms of power purchase agreements signed with the producers and backed by the government.