Why the Lights Keep Going Out in South Africa

(Bloomberg) -- Rolling blackouts that began Nov. 29 have South Africans firing up candles, flashlights and generators. It’s all because Eskom Holdings SOC Ltd., which provides most of the nation’s electricity, can’t meet demand. While the government says it’s hopeful the crunch will ease by mid-December when many businesses shut down for year-end holidays, the energy crisis runs far deeper than a temporary shortfall. State-owned Eskom is mired in debt and isn’t selling enough power to cover all its costs, leaving it scrabbling for money to maintain and replace its aging plants.

1. Just how bad are the power shortages?

Theoretically Eskom should be able to generate about 47,000 megawatts of power, but currently it can generate only 26,000 megawatts to 27,000 megawatts because several of its plants are undergoing maintenance or have broken down. Demand is running at about 29,000 megawatts, so many areas of the country are being subjected to scheduled power cuts of a few hours several times a week.

2. How did this happen?

While South Africa had more electricity than it needed by the time white-minority rule ended in 1994, the government didn’t foresee how sharply demand would spike as it extended access to previously neglected black areas and the economy expanded. Eskom announced a series of multi-billion dollar investments after the government awoke to the severity of the problem in the mid-2000s, but the projects came too late and took too long to build. The first wide-scale outages occurred in late 2005. The Medupi and Kusile coal-fired plants, which were supposed to add almost 9,600 megawatts to the grid and be fully operational in 2015, are still years away from completion. Their projected costs have more than doubled to 292.5 billion rand ($20.7 billion).

3. Where was management?

The utility went through repeated board and management changes during the almost nine years Jacob Zuma was South Africa’s president, ending in early 2018. Investigations by lawmakers and the nation’s graft ombudsman alleged that the upheaval was part of an orchestrated attempt by Zuma’s allies to raid the utility’s coffers with his tacit consent. Accusations that the utility was looted are now being investigated by a judicial commission of inquiry. Zuma and his allies deny wrongdoing. Eskom’s board and management were replaced in January, the month after Cyril Ramaphosa succeeded Zuma as head of the ruling party, the African National Congress. Since then, there’s been a concerted effort to stamp out graft, and a number of senior executives and staff have left the company.

4. How precarious is Eskom’s financial position?

Very. By its own admission, it’s in a “death spiral.” It is saddled with 419 billion rand worth of debt that it’s battling to service, and it anticipates it will show a loss of more than 11.2 billion rand for the year ending in March. Sales volumes are at a decade low and continue to fall as the economy stagnates. Increasing numbers of businesses and middle-class consumers have moved off the grid as the price of renewable energy drops. Meanwhile, near-bankrupt municipalities are falling behind in their payments as many customers in impoverished townships default on their debts or steal power through illegal connections. A lack of funds forced Eskom to cut back on maintenance and repairs. Despite a bloated workforce, the company lacks key technical skills needed to carry out the work.

5. What’s the utility doing to get back on track?

It’s hired Boston Consulting Group to develop a long-term strategic plan and Lazard Ltd. to provide financial advisory services. Their feedback has yet to be made public. It’s also floated a proposal for the government to take over some of its debt. That’s not likely to go down well with the National Treasury, which is trying to stick to debt ceilings and preserve the country’s sole remaining investment-grade rating. The utility is also considering firing as many as 16,000 staff, an option that would meet with fierce resistance from labor unions.

6. What happens if it fails?

The total collapse of Eskom is not on the immediate horizon, and it’s hard to see the government allowing that to happen. The utility provides about 95 percent of the nation’s power. If it were to cease operating or the grid were to collapse, it would likely drive the economy to a standstill and many businesses into bankruptcy, trigger investor flight and multiple downgrades to the nation’s credit rating, and ignite social unrest.

The Reference Shelf

  • A Bloomberg story about how the Eskom crisis unfolded and another on the risk it poses to South Africa’s economy.
  • A link to Eskom’s mid-year results presentation.
  • An Eskom schedule of planned power cuts.

©2018 Bloomberg L.P.