HomeIndustry SectorsFinance and PolicyEskom's Molefe addresses financial stability and economic woes

Eskom’s Molefe addresses financial stability and economic woes

Brian Molefe agrees that load shedding has a negative impact on the South African economy

On Monday, parastatal Eskom said it welcomes the peaceful manner in which the Freedom Front Plus political party articulated its concerns, which include the proposed tariff hikes and the impact that load shedding has on the economy.

Eskom’s acting chief executive Brian Molefe said: “We agree that load shedding is having a negative impact on the economy, but the company only implements load shedding in order to protect the power system from an uncontrolled total collapse.”

Molefe added: “In fact we only load shed as much as we need, no more and no less. As evidenced in other countries that have experienced a total blackout, extricating a country from that situation is 10 times more expensive than enduring load shedding for a few hours a day.”

He continued: “Without minimising the impact that load shedding has on businesses and daily lives in general, it is important to bear in mind that even when we are load shedding at stage three, more than 90% of the country always has electricity at any given point.”

Financial stability

Eskom explains that financial sustainability is the ability of an entity to secure stable and sufficient returns to be able to cover operating costs, fund future growth of the business while maintaining and replacing the current asset base.

In an asset intensive industry, like energy, the return on assets should exceed cost of capital, Eskom said.

In the case of a state-owned entity, like Eskom, the return on assets should be at least equal to the cost of capital.

Historically, Eskom’s return on assets was less than its cost of capital resulting in a deterioration of the utility’s balance sheet. In addition, Eskom embarked on an expansion programme to be funded from a weakened balance sheet.

The profit margins are constantly declining mainly due to the electricity price, which is not cost reflective, Eskom said in a statement.

While Eskom’s asset base increased with the expansion plan, the profit margin declined. This resulted in Eskom experiencing a liquidity constraint as it struggled to fund normal business operations as well as the expansion programme.

Eskom faces numerous challenges directly impacting its financial sustainability. Obtaining parity between the price of electricity and the associated costs will form a fundamental part of the shift to sustainable growth.

Mainly due to the lack of cost-reflective tariffs over a sustained period, Eskom’s financial health has deteriorated to such an extent that its balance sheet will soon be unable to support current operations and the growth in the business, the utility said in a statement.

The continued deterioration of Eskom’s financial health has resulted in Eskom experiencing a liquidity constraint.

Although the support recently announced by Government will ease liquidity pressures in the short term, the issue of financial sustainability must still be adequately addressed and further interventions are required to improve Eskom’s sustainability.

Although Eskom is committed to meeting customer demands, it cannot afford to do so at the cost of financial sustainability.

Eskom needs to operate within its financial means and in a way that does not compromise the sustainability of the power system, the natural environment, the safety of its people and surrounding communities.

Electricity tariff hike

Eskom’s selective reopener application that was submitted to the National Energy Regulator of South Africa (Nersa), requires a cost recovery of ZAR32.9 billion for Open-Cycle Gas Turbine (OCGT) utilisation, ZAR19.9 billion for the Short-Term Power Purchase Programme (STPPP) and the impact of the increase in environmental levy.

The selective reopener will result in a total price increase of 25.3% for 2015/16. This will consist of the 12.69% already approved by the energy regulator, the 10.1% selective reopener for OCGTs, STPPP and a 2.51% increase in the environmental levy by ZAR0.02c/kWh. The latter will be collected on behalf of the National Treasury.

About 64% of Eskom’s current installed base load power stations are past their midlife, requiring longer outages and extended restoration time than planned. Midlife refurbishments or replacement being carried timeously reduce equipment failures from occurring, thus improving the ability to provide reliable supply to customers.

Capacity expansion

In a statement, Eskom said that in an effort to ensure security of power supply, the power utility is currently building new power stations and high-voltage power lines to meet South Africa’s energy demand.

Eskom claims that the capacity expansion programme will be complete by 2020/21. To date over 6,238MW of new generation capacity has been added to the energy mix and 5,814km of transmission lines and 29,655MVA have been installed.

The utility reminded the public that the power system will remain constrained until more units from the capacity expansion programme come online, especially during the summer months, where the demand profile changes from a short sharp evening peak to being constrained all day.

Nicolette Pombo-van Zyl
As the Editor of ESI Africa, my passion is on sustainability and placing African countries on the international stage. I take a keen interest in the trends shaping the power & water utility market along with the projects and local innovations making headline news. Watch my short weekly video on our YouTube channel ESIAfricaTV and speak with me on what has your attention.