Eskom's nuclear RFP launch surprises markets

Johannesburg – Market reaction to reports that Eskom will launch requests for proposals (RFPs) for its 9.6GW nuclear build has been negative, said Nomura economist Peter Attard Montalto.

In a statement issued on Tuesday, Montalto said that the news had come as a “surprise” as nuclear no longer seemed to be an issue after the Department of Energy (DoE) published its Integrated Resources Plan (IRP).

The approval of the Thyspunt site also contributed to the surprise, said Montalto.

Fin24 reported earlier that acting CEO Matshela Koko confirmed the RFPs would be launched this week. This followed news that the Department of Energy (DoE) plans to gazette a new nuclear determination to replace the 2013 determination.

The gazette is intended to change the procuring agency from the DoE to Eskom. This will reduce parliamentary and cabinet oversight and reduce public disclosure requirements for the nuclear build programme, he explained.

It will also lessen Treasury’s oversight.

READ: Eskom to release nuclear RFP this week – Koko

This news also adds to Eskom’s financial risk, and subsequently the State.

“We expect Fitch to downgrade Eskom next year which would remove any rating from investment grade and be a last nail in the coffin for many index funds offshore,” said Montalto.

A downgrade by Moody’s and S&P from BB- to B+ would also have some impact in terms of holdings, he added. Ratings agency Fitch also kept its outlook for South African utilities such as Eskom at negative. 

S&P’s outlook for Eskom remains negative. The nuclear development as well as the renewal of Eskom’s Government Framework Agreement (GFA) in March will weigh on bonds.

“Eskom is also likely still in need of additional equity injections in the coming three to four years.”

Nuclear would negatively impact Eskom’s balance sheet, without additional equity injections, he said. The total cost may be around $50bn, depending on the choice of technology.

Responses to the RFP are expected to be completed within one or two months, said Montalto. Eskom may have final bids by the second half of 2017. Construction could possibly start in 2019.

ALSO READ: S&P downgrades Eskom over financial risks

Montalto noted that there was not an adverse market reaction in Eskom bonds with the release of former public protector Thuli Madonsela’s report on State Capture.

Former Eskom CEO Brian Molefe was implicated in ties between the Gupta family and the power utility.