2018 will bring more bad news – But Good for End User Renewables
- It is simple really, but also mind bogglingly complex.
- When you (Eskom) have run out of money, but have millions of consumers using your product, your simplest option is to raise prices
- Not an acceptable option to your regulator (Nersa), you have to go back to your shareholders, tell them the problem, and borrow some more to get you out of the hole.
- If they, (the South African government) are not forthcoming, and tell you to go and borrow some more money from the private sector, when the banks say they want more collateral and guarantees you are back to the shareholder.
- This is the Eskom conundrum, they are to all extents and purposes ‘bust’, but at the same time they (unlike SAA) cannot be allowed to fail.
- For the government, the conundrum is that electricity is the key commodity to enable economic recovery and growth, but the cupboard is bare.
The Blame Game
- Apportioning blame is not going to get anyone anywhere.
- The current crisis is financial rather than supply / demand as we all experienced with load shedding back in 2008 and again in 2014/15.
- The long-term story of South Africa building power stations, having excess supply, enticing industry into South Africa (and with it the creation of jobs) to use cheap electricity, (post 1994) is a problem the government would like to have today.
- Today, we have around 5,000MW surplus power, enough to power all the other SADC countries, and more new power coming on from Medupi and Kusile creating an even larger surplus.
- But the price of new electricity generation is expensive, due to the huge cost overruns, the delays in delivery, and the mountain of debt incurred in building power stations costing R250b.
- The fundamental problem is debt, currently running at around R350b and estimated to reach R500b by 2020. The interest payments alone will be more than the salary bill of 46,000 employees.
Corruption – A Hideous Sideshow
- The real looming problem, it has been there for years, is debt.
- The side show that has captivated the media, the public and progressively internationally is the toxic cesspit within the executives at Eskom and which flows through all levels of management to the employees. The actions of key people have led to the theft of billions, but it is a side show to the real problem.
- Certainly, these people, Molefe, Singh, Koko, Ngubane, and many others, including the government bosses Zwane, Brown, Petersen, Martins, should be brought to book. Every effort should be made to recover the Gupta stolen millions, and one would hope that some of them might actually get jail time.
- As every sordid detail continues to unveil, it will provide for interesting even entertaining reading. People will fall, relegated to the history books, and in the same way as Enron and Arthur Anderson back in 2001, and already companies such as Bell Pottinger, and potentially, McKinsey, KPMG, Trillian, all suffering immense corporate damage, it will be part of the sad recent history of Eskom, where only back in 2001 the utility was named power company of the year at the Financial Times Global Energy Awards.
Where to From Here?
- So where to from here? It is an extremely difficult question, particularly when you have a Minister of Public Enterprise who is clearly corrupt, incompetent and is unqualified to be in charge of SOE’s.
- Should Eskom be under the Department of Energy, where with 5 ministers in 5 years (I lose count), the latest is clearly only appointed with the intent of nuclear being pushed through.
- Can a new board of directors really make a difference, when although there are some good people left at Eskom, the brain drain has been huge, and operational management may keep the lights on, but the big problem is financial.
- Eskom needs cash, lots of it, and faces reducing sales, increasing costs, ongoing long-term commitments to complete Medupi and Kusile, higher debt costs, and junk bond status.
- While Nersa has only allowed for a 5,23% increase in 2018 (rather than the 19% requested), a lack of reality or appreciation of Eskom’s financial position or rather financial crisis is clearly evident. Eskom are now pinning their hopes on the RCA requests under MYPD3 of R66b, yet to be agreed (which would add significantly to the allowed increase) and which would help the cash position. Nersa are unlikely to approve this either.
- Bottom line is that Eskom at the current rate is clearly insolvent, both today, tomorrow and in the longer term, as a stand-alone body.
Any Reason for Optimism?
- At Eskom’s press conference (Jan 30th) announcing a disastrous set of results with a 34% drop in profits, but at the same time confidence in meeting the immediate funding gap of R20b, it was encouraging to hear common sense and realism being expressed by the new Chairman Jabu Mabuza.
- Most significantly, emphasis was put on the key point that increasing Eskom’s borrowing and tariff hikes alone will not be the solution to get Eskom out of the hole. It is the shareholders problem, and despite Minister Gigaba stating (previously) that government will not put in a penny more, the reality is that it will have to, one way or another.
- This will almost inevitably force a cultural shift in government policy. Partial privatization, significant debt restructuring, who knows? but certainly the new Eskom boards approach to rooting out corruption, improving relations with the media, working in cooperation with Nersa, is making all the right noises, providing a feeling of hope and optimism that has not existed with previous Chairmen or boards.
Dramatic Surgery Needed
- Only the government balance sheet is propping up Eskom’s viability.
- Eskom does not need a band aid but massive surgery, and policy management both at government level, and internally within Eskom to avoid collapse.
- Back in 1998 a government white paper proposed a partial privatization of Eskom, with distribution and generation being split.
- Its relevance today is even greater, as the Eskom vertically integrated model doesn’t work anymore. Power companies around the world have been forced to change, and Eskom will be as well.
- The details will be difficult, but there are solutions out there, not only to overcome the immediate short-term cash, but the longer-term viability. Government thinking and policy control of SOE’s has to change.
Large Scale Renewables
- Throw into the energy mix renewables and the picture is even more distorted.
- Bottom line is that large scale renewables, wind and solar PV, can produce electricity far cheaper than new coal fired power, and much cheaper than any nuclear. But, to keep it in perspective, South Africa’s renewables are still less than 4% of Eskom generation.
- It really is not the tail wagging the dog, until you look at the options for replacement generation, when old power stations have reached their sell by date. Eskom blaming their woes on renewables is totally unrealistic.
End User Renewables – The Disruptive Technology
- Behind the (electric) meter renewables are potentially the really disruptive technologies.
- Solar water heaters are already heating water at an 85% discount to Eskom’s prices, when calculated over a period of 10 years and taking into the account of the consumer investment.
- Payback is down to 2 years and falling further.
- Rooftop solar electric generation (solar PV) has already come of age, for businesses that operate 365 days a year using electricity mainly in daytime. They can be cash flow positive from day 1 even when financed, and have a payback on investment of 5-7 years. ‘5 day a week’ businesses have a longer payback, and for the domestic consumer who generally require battery storage, the payback is still 12-15 years.
The End Game
- The end game is clear. More and more business will embrace solar PV and generate their own electricity as it will be far cheaper than using Eskom.
- The domestic consumer will also go progressively with solar water heaters, which can replace 35%-60% of the monthly electricity bill. In time, they will also go with solar PV for the same reason but it is still some years away.
- Ironically, while Eskom and the government have successfully killed off large scale renewables, Eskom is the friend of end user renewables. Not because Eskom will do anything to encourage them, or provide feed in tariffs (as in Europe) but because prices can only go up, and every increase in tariffs make solar water heating and solar PV that much more attractive.
- In turn, what this means to Eskom and indeed the municipal resellers of electricity is that their revenues will fall, while overheads and fixed costs continue to go up, putting even more pressure on price tariff hikes.
- The new board of Eskom face huge challenges having inherited a catastrophic cash flow crunch and unsustainable debt levels. Recognizing that Eskom is not a viable sustainable business in its current state, will force change, and maybe this will also benefit the clean energy sector.
- As end users move progressively into renewables, will Eskom move to being distributors, using the grid to supply surplus power from homes and businesses using PV, as in Europe? Will Eskom’s power generation be partially privatized, allowing more efficient investors and managers, to compete selling their coal power to the end user, who can probably produce their own power more cheaply? It seems unlikely as the cost model doesn’t work. Will government recognize that the current model is totally unsustainable?
- In my opinion there is nothing certain, other than the inevitable rise of electricity prices and growth of end user renewables, where the power (no pun intended) is shifting into the hands of the consumer.