South Africa plans sweeping power sector reform as Eskom struggles

PRETORIA (Reuters) - South Africa plans a sweeping overhaul of its power sector by breaking up loss-making state utility Eskom over the next three years and opening the industry up to more competition, a long-awaited government paper showed on Tuesday.

Analysts welcomed the move but were sceptical that officials would follow through with it in full, given fierce opposition from labour unions and vested interests in the energy sector.

President Cyril Ramaphosa, under pressure over a flagging economy, promised in February that he would split Eskom into units for generation, transmission and distribution, but there have been few additional details since then.

Tuesday’s paper on Eskom was especially important as it came three days before Moody’s is set to review South Africa’s last investment grade credit rating, which is hanging by a thread.

The paper set out a vision for a restructured electricity supply industry, where Eskom could relinquish its near-monopoly and compete with independent power producers (IPPs) to generate electricity at least cost.

But it contained few specifics about how officials plan to ease the company’s crippling 440 billion rand ($30 billion) debt burden and stopped short of moving some functions outside an Eskom holding company.

“The paper is strong on vision, but the market is marginally disappointed that the transmission system market operator isn’t fully spun out and that there was no more detail on the debt,” said Peter Attard Montalto, head of capital markets research at Intellidex.

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“There are question marks around the paper’s acceptance across the political spectrum, including with unions,” he added.

Government has pledged to keep Eskom’s three new units within a state-owned Eskom holding company to reassure a political constituency that is vehemently opposed to privatisation and wedded to state-led economic development.

Some analysts say that keeping the transmission unit within an Eskom umbrella runs counter to its stated aim of boosting competition as it will undermine the unit’s independence.

Eskom's financial crisis:

FILE PHOTO: Men walk past electricity pylons as they return from work in Orlando, Soweto township, South Africa March 18, 2019. REUTERS/Siphiwe Sibeko/File Photo


Public Enterprises Minister Pravin Gordhan said the paper was the beginning of a “protracted process” to foster greater efficiency, transparency and management focus in the sector.

The government plans to set up a transmission unit within Eskom by the end of March 2020 and complete the legal separation of all three units in 2022.

One or more Eskom generation units will be created to compete with IPPs and the distribution model will be reformed so more power can be procured from small-scale producers.

The aim is to change a situation where South Africa is reliant on Eskom’s creaking fleet of mainly coal-fired power stations for more than 90% of its electricity and has rigid rules for power procurement.

Nationwide power cuts spread over several weeks in the first three months of the year contributed to a steep economic contraction, sending Eskom’s operational and financial crisis to the top of Ramaphosa’s to-do list.

The power cuts resurfaced this month and Gordhan said on Tuesday that government would procure an additional 2,000 megawatts of power soon to stabilise the system.

The government has already promised Eskom more than 100 billion rand of bailouts over the next two fiscal years, as well as additional money spread over the next decade, but analysts say that without meaningful structural reform Eskom’s finances won’t be sustainable in the long term.

Finance Minister Tito Mboweni is expected to announce further support for Eskom during his budget on Wednesday.

The paper said a new boss for Eskom would be appointed in coming weeks, later than initially envisaged. Government also wants the energy regulator’s tariff methodology to change to give businesses greater certainty over electricity prices.

Eskom will consider competing in future renewable energy bidding rounds, where government says it will vie with IPPs on a level playing field.

Eskom’s woes are rooted in massive cost overruns on two huge coal power stations, years of low tariff awards and steep rises in coal and salary costs. It made a loss of more than 20 billion rand in the last year.

Reporting by Alexander Winning; Editing by Emelia Sithole-Matarise and David Holmes