Eskom’s Operational Gains Overshadowed by Looming Financial Challenges

As Eskom celebrates 75 days without load-shedding, the longest stretch since December 2021 to February 2022, a deeper crisis looms. While the national power utility has significantly improved its generation capabilities, keeping breakdowns at bay and enhancing energy availability, it faces a critical issue: profitability.

Eskom’s Financial Woes

Despite the improved operational performance, Eskom is struggling to make a profit. The demand for its power is steadily dropping as new energy producers enter the market. This situation forces Eskom to continuously hike tariffs to cover lost sales and meet operational needs. However, these price hikes risk driving customers away, potentially initiating a ‘death spiral’ where the utility prices itself out of the market.

BDO South Africa partner and renewable energy expert Nato Oosthuizen highlighted this concern, calling it the “well-lit elephant in the room” amid the progress in load shedding.

  • Private Sector Impact: As the private sector becomes a more entrenched energy source for households and industries, Eskom’s revenue decline will become increasingly evident.
  • Financial Strain: “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,” Oosthuizen noted.

A Persistent Issue

Oosthuizen isn’t the first to raise these concerns. Former Eskom CEO Andre de Ruyter warned that the utility’s annual massive price hikes would eventually backfire. He noted that customers who can afford it will migrate away from Eskom’s grid, leaving only those who cannot afford electricity to rely on the utility. This scenario necessitates price hikes but leads to inevitable outcomes.

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Eskom already faces a significant non-payment crisis, with municipal customers owing tens of billions of rands. This debt poses a severe challenge with no easy path to recovery.

The Shift to Renewables

Independent energy expert Mohammed Madhi pointed out that renewable energy sources are becoming cheaper, while Eskom continues to raise prices. This disparity places Eskom at a disadvantage, making its inefficient power production costs a burden on customers.

  • Permanent Demand Loss: Energy analyst Pieter Jordaan noted a permanent loss in demand on Eskom’s grid of around 1,500MW, translating to 13 TWh or 6.5% of lost sales in 2024.

Tariff Controversies

Eskom’s tariff applications aim to reflect the cost of producing electricity. However, this cost-reflective tariff argument has faced significant pushback, especially from Nersa, the country’s energy regulator. Nersa argues that Eskom has abused this notion under the current tariff methodology.

  • Regulatory Clearing Account (RCA): Under the current system, Eskom can apply for future tariff hikes based on operational costs and projected sales revenues. The RCA monitors these costs and revenues and balances them. However, given Eskom’s financial state, the RCA has consistently favored the utility, leading to higher annual tariff hikes.
  • Recent Increases: Amid record load shedding and a deep financial crisis, Nersa approved tariff hikes of over 18% for 2023/24 and 12% for 2024/25.
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Stakeholder Criticism

Stakeholders argue that the RCA does not incentivize efficient use of generating capacity. Nersa and other critics claim that Eskom has misused the clawback mechanism.

  • OCGT Costs: The inclusion of Open Cycle Gas Turbine (OCGT) costs in the tariff calculations is particularly contentious. Eskom has spent massive amounts on these expensive generators, adding billions of rands to consumer costs.

Ongoing Financial Struggles

Eskom posted a R24 billion loss in the last financial year and is expected to post another loss this year. The utility faces a mountain of debt and a projected loss of customers and sales.

  • National Treasury’s Role: With National Treasury tightening the reins due to a debt-take-over bailout, Eskom needs more than 75 days without load shedding to stabilize its finances.

Conclusion

While Eskom’s operational turnaround is commendable, the utility faces severe financial challenges. Continuous tariff hikes, customer migration, and debt repayment obligations threaten its sustainability. The shift towards renewable energy further complicates Eskom’s future, necessitating urgent and strategic decisions to ensure long-term viability.

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