Cutting costs and unbundling: All you need to know about Eskom's rescue plan

2019-10-29 15:33 - Lameez Omarjee and Jan Cronje
Public Enterprises Minister Pravin Gordhan. (Photo: Gallo)

Eskom is aiming to have completed the unbundling of its generation, transmission and distribution operations by December 2022, according to a new policy roadmap published by Minister of Public Enterprises Pravin Gordhan. 

The debt-laden utility's three legs will be "functionally separate" by around June 2021, and will become distinct legal entities by the end of the following year. But they will still fall under an Eskom holding company.

"The roadmap points out where we are taking Eskom in the next five, 10 years or more," Gordhan said at a media briefing in Pretoria on Tuesday, adding the long-awaited plan should be read in conjunction with the Integrated Resources Plan - the state's long-term blueprint for electricity production which was recently gazetted.

Gordhan said that Finance Minister Tito Mboweni would likely make an announcement on plans to reduce Eskom's R450bn debt burden when he delivers the medium-term budget on Wednesday in Parliament. He added the issue of debt must be solved soon, and government would be organising meetings with lenders. 

The plan to reform Eskom will unfold in a "slow, systematic and disciplined way," said the minister. "This is the beginning of the process, not the entirety of the process." But Eskom could not "remain as it is."

Peter Attard Montalto, head of capital markets research at research firm Intellidex, said in a note that the plan was overall "fine". "The market is marginally disappointed that the TSMO [Transmission system operator] isn’t fully spun out, and that there was no more detail on the debt, but the latter should not have been a surprise," he said. "The key will be in the implementation and the contestation to come on that implementation.”

Energy expert Chris Yelland told Fin24 by phone on Tuesday afternoon that the plan was an "important starting point" and that there were no reasons to delay it. "If we do not start now, we will not be finished in five-years' time or 10-years' time."

He described the plan as a "broad roadmap" of where the country is now and where it should be heading. "There is still a lot of detail to be filled in along the way."

Here is what you need to know:

'Cost-effective power' 

Gordhan repeatedly returned to the point that South Africans deserve cost-effective electricity, which Eskom is not providing at the moment. The fact that tariffs have increased by 500% over the past decade - without an associated boost in generating capacity - has put the economy under strain, and is not sustainable.  

Eskom must be restructured to survive 

The plan to split Eskom into three parts - generation, transmission and distribution - is going ahead. Of the three, the transmission entity will be spun out first, around March 2020.

All three entities will remain functional subsidiaries of a larger Eskom holding company. 

The minister said on Tuesday that monopolies were by their nature wasteful. A large part of the restructuring plan deals with increasing competition and competitiveness within the utility to eliminate waste and inefficiencies. 

In the generation space, the plan proposes that Eskom retain its existing generation fleet and each power station concludes a power purchase agreement with the transmission entity. Eskom will also be permitted to build its own renewable energy generation.

There will not be much focus on unbundling the distribution arm in the near future, due to its complexity. Municipalities currently play a key part in selling on electricity to consumers at a markup. "There is a bit more study that we need to do," he said. 

UCT professor Anton Eberhard, a member of President Cyril Ramaphosa's task team on Eskom, tweeted that the establishment of a separate electricity transmission company would be transformational by creating a transparent platform to buying competitively priced electricity.

Cost savings

Eskom has only been functioning in recent times due to lifelines from the state, as it does not make enough revenue from selling electricity to cover the cost of the interest on its debt. Treasury in February allocated Eskom R23bn each year for the next three years for a total of R69bn. The National Assembly, meanwhile, recently agreed to a special appropriation to grant Eskom R59bn over the next two years - over and above the allocated R69bn - to pay interest on debt.

To save costs, Eskom would be reviewing coal contracts, and government intends to meet with suppliers to review the cost structure, returns and fair price of coal. 

Other measures include a review of employee benefits and alternatives to retrenchment, consequences for non-payment of electricity to recoup some of the R25bn it is owed by municipalities, talks with the energy regulator about pricing, and new procurement approach.  The financial turnaround also includes a review of independent power producer contracts, and the disposal of non-core assets to raise cash.

State Capture 

The minister said that the damage caused by state capture was "huge" and "systemic". Skilled people were "chased out" the company. All these factors had a negative impact on Eskom's finances, he told journalists.  He added that "'trolls' would claim that Eskom was to be privatised, but said this was 'fake news'". 

Just transition

The plan acknowledges the need for a sustainable approach to be adopted for workers and communities impacted by the decommissioning of coal power stations. Alternative economic developments must be considered for affected communities and the state will be obligated to make sure affected communities can adapt to new opportunities. Gordhan said that labour unions and affected stakeholders are being engaged to understand the importance of changes to Eskom's future structure.  

New CEO

Eskom has been without a permanent CEO since May 2019, when Phakamani Hadebe announced his sudden resignation due to the 'unimaginable demands' impacting his health. 

Despite speculation that he might, Gordhan did not announce a new chief executive, saying the utility's new head would be announced next week. This would also be accompanied by board and management changes to account for Eskom's changed structures.

"We have a bright future for Eskom. It still has a few clouds around it now," Gordhan said.