Key message: It is unlikely that Eskom in its current form can be fixed (operationally and politically). Financial stress may accelerate unbundling and privatisation.
- Eskom’s late release of the FY22 Annual Report (YE Feb) has been overshadowed by ongoing Stage 6 loadshedding since December. Eskom once again received a qualified audit opinion regarding its status as a going concern.
- FY22 sales volumes increased by 3% (largely due to the post-Covid recovery of many sectors) and, along with a 15.06% increase in the electricity tariff, revenue grew by 21% to R246bn. Eskom required R31.7bn government support in FY22 to break even on a cash basis.
- Electricity sales are expected to decline by 4% in FY23 and 5% in FY24 due to higher levels of loadshedding. In FY23 the projected impact of loadshedding on electricity sales indicates a cash loss before net debt movements and government support of R22bn.
- The fate of Eskom and the ANC does now appear to be intertwined. Eskom is highly unlikely to be fixable in its current form, with no common policy to follow and increasingly reduced support (financial and political) from its shareholder (government).
- Eskom management has limited options as many external decisions determine its fate (NERSA continuing to make illogical calculations in tariff applications, minimal new generation to allow Eskom to perform long overdue maintenance, inability of law enforcement agencies to act on corruption and sabotage, various vested interests resisting any moves in the right direction). Government, on its part, has displayed unbelievable ineptitude in energy planning and basic understanding of utility-scale electricity systems.
- Eskom’s liquidity issues are government’s liquidity issues. The financial pressure is likely to force the hand of government into an accelerated unbundling of Eskom and probably privatisation. The ANC’s ideological position on SOE’s and control of large sectors of the economic infrastructure is crumbling rapidly. Conditions for social unrest/tax revolts are favourable – let alone potential loss of votes.
- A simple example – the consequence of skipping the 18.7% tariff increase in FY24 would be reduced cash flow of approx. R50bn in FY24 and R50bn in FY25 – effectively the Presidents suggestion to forego the tariff increase has a negative R100bn outcome. The state cannot afford this.
- Notwithstanding growing resistance to coal, the reality is that South Africa needs its coal-fired power stations to run as long as possible to provide base load power in the absence of the ability to replace this in the short-to medium-term cost effectively and timeously. Privatisation of coal-fired power stations is likely to be the only solution to stabilise the grid to allow the longer-term Just Energy Transition to be tolerated socially and politically.
- Systematic risk is very high – and may need to get worse to get better (to wrest elements of Eskom out of state control). Any short-term reduction in loadshedding will be politically important but should not be interpreted as a “fix”.