Why Eskom’s Power Crisis Is South Africa’s Top Risk

(Bloomberg) -- A perennial crisis at South Africa’s monolithic electricity supplier, Eskom Holdings SOC Ltd., jeopardizes the nation’s entire economy. The state-owned utility can’t cover its costs and make interest payments on its mountain of debt, leaving it reliant on a series of government bailouts to stay afloat. The country has suffered intermittent power cuts since 2005 because dilapidated power plants can’t keep pace with demand. Now the government is splitting Eskom into three entities in the hope of reviving its fortunes.

1. Why is Eskom in such bad shape?

South Africa was able to produce more electricity than it needed when white-minority rule ended in 1994, but the government didn’t foresee how sharply demand would surge as the economy expanded and previously neglected areas were connected to the grid. Eskom announced a series of multibillion-dollar investments after the authorities awoke to the severity of the problem in the mid-2000s, but the projects came too late and took too long to build. The Medupi and Kusile coal-fired plants, two of the world’s biggest, were supposed to be completed in 2015, but still aren’t operating at full capacity and have run way over budget. Eskom’s other plants are on average more than four decades old. 

2. What’s the problem now?

A shortage of money forced Eskom, which supplies more than 90% of the nation’s electricity, to cut back on maintenance and repairs and it lacks key technical skills needed to do the work. Plant breakdowns are commonplace. Power stations that generate roughly a fifth of the utility’s output are due to be retired over the next decade and it lacks the money to replace them. With independent producers of renewable energy bringing more projects online, Eskom is now facing more competition and a slump in demand, a problem exacerbated by the coronavirus pandemic. The utility generates two-fifths of South Africa’s greenhouse gases, and is also facing pressure to reduce its emissions. 

3. Was management to blame?

Eskom went through repeated changes in its leadership and board of directors during the almost nine years that Jacob Zuma was South Africa’s president. Testimony presented to a judicial commission that’s probing graft suggests that the upheaval was an orchestrated attempt by Zuma’s allies to raid its coffers with his tacit consent. Zuma and his allies deny wrongdoing.

4. How precarious are Eskom’s finances?

Very. The company posted a loss of 18.9 billion rand ($1.3 billion) in the year through March 31, 2021, losing money for a fourth year. It paid $2.2 billion in interest charges on debt of about $28 billion. To ease supply shortages, the government has made it easier for companies to generate their own power and is increasing purchases from independent producers -- changes that will further eat into the utility’s revenue. Meanwhile, near-bankrupt municipalities are falling ever more behind in paying their bills as customers in impoverished townships default on their debts or steal power through illegal connections.

5. What’s been done to fix it?

Eskom’s board and management were replaced in January 2018, the month after Cyril Ramaphosa succeeded Zuma as head of the ruling party, the African National Congress. Phakamani Hadebe was named chief executive officer, but quit in July 2019 because his health was suffering due to the “unimaginable demands” of the job. He was succeeded by Andre de Ruyter, formerly the CEO of packaging firm Nampak Ltd, who has made a concerted effort to stamp out graft and recoup misappropriated funds. Several tainted senior executives and staff have left the company. 

6. What’s the plan?

The government is splitting Eskom into separate generation, distribution and transmission businesses under a state holding company, a reorganization it says will enable each unit to manage costs more effectively and make it easier for them to raise capital. A proposal to reorganize the utility’s debt that’s been years in the making has yet to be finalized. De Ruyter is trying to secure cheaper financing for renewable energy projects in exchange for accelerating the closure of coal-fired plants.  

7. Could Eskom fail?

A total collapse of Eskom isn’t likely, and Ramaphosa has said the government won’t allow it to happen. If it were to cease operating or the electricity grid were to collapse, South Africa’s economy would grind to a halt. That could trigger investor flight and threaten the nation’s fragile credit rating -- plus create the potential for social unrest. Power cuts have already weighed on South Africa’s currency, the rand, and its government bonds. They also present a huge risk to smelters, mines and other energy-intensive businesses.

The Reference Shelf

• Eskom’s financial results and presentation for investors.
• A map showing the location of the utility’s power stations.
• Why legal wrangling threatens to upend efforts to bolster South Africa’s power supply.
• How Eskom plans to transition away from coal.
• A podcast on why Eskom is struggling to keep the lights on.

©2021 Bloomberg L.P.