Why South Africa Is Struggling to Keep the Lights On

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Severe blackouts have South Africans firing up candles, flashlights and generators as crisis-plagued Eskom Holdings SOC Ltd., which provides most of the country’s electricity, struggles to meet demand. The state-owned power company took almost 10 percent of its generation capacity offline to prevent the collapse of the national grid, a consequence of construction problems at two new plants and years of deferred maintenance. But Eskom’s problems run far deeper than temporary shortfalls. It is mired in debt and isn’t selling enough energy to cover all its costs, leaving it scrambling for money to replace aging plants. Now South Africa is weighing a plan to split the utility into three entities in the hope of reviving its fortunes.

1. What caused the power shortages?

Theoretically Eskom should be able to generate about 47,000 megawatts of power, but output fell as low as 26,000 megawatts when several of its plants were being serviced or broke down. The power crunch peaked in February when six of the utility’s units unexpectedly went off line, resulting in some of the worst outages the country has ever seen. A lack of money forced the utility to cut back on maintenance and repairs, and it lacks key technical skills needed to carry out the work, despite having a bloated workforce. Plants that produce more than half Eskom’s power are at, or nearing, their ideal retirement age.

2. How did this happen?

South Africa was able to produced more electricity than it needed when white-minority rule ended in 1994, but the government didn’t foresee how sharply demand would spike as the economy expanded and previously neglected black areas were connected to the grid. 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 ($21.2 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. 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 Eskom’s coffers with his tacit consent. Accusations that the utility was looted are now being investigated by a judicial commission. Zuma and his allies deny wrongdoing. 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. Since then, there’s been a concerted effort to stamp out graft, and a number of senior executives and staff have left the company. Ramaphosa was named South African president in February 2018, after the ANC forced Zuma to step down.

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 showing a loss of about 20 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 paying their bills as customers in impoverished townships default on their debts or steal power through illegal connections.

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

Ramaphosa has announced plans to split Eskom into separate generation, distribution and transmission businesses under a state holding company, a reorganization he says will enable each unit to manage its costs more effectively and make it easier for them to raise funding. He’s also said the utility will be given financial support, with details to be released in the annual budget. Eskom has floated a proposal for the government to take over some of its debt — an option not favored by Finance Minister Tito Mboweni, who is trying to stick to debt ceilings and preserve the country’s sole remaining investment-grade rating. The company is also considering selling assets and firing as many as 16,000 staff. That proposition would meet with fierce resistance from labor unions, which also oppose the breakup plan.

6. What happens if it fails?

The total collapse of Eskom isn’t on the immediate horizon, and it’s hard to see the government allowing it 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, South Africa’s economy would grind to a halt and many businesses would be driven into bankruptcy, triggering investor flight and multiple downgrades to the nation’s fragile credit rating — as well as potential social unrest. The ongoing power cuts are already weighing on South Africa’s rand and bonds, and present a huge risk to smelters, mines and and other energy-intensive businesses.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net;Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editors responsible for this story: Karl Maier at kmaier2@bloomberg.net, Andy Reinhardt, Antony Sguazzin

©2019 Bloomberg L.P.




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