Eskom forced to rein in capital spending for next three years

Finance Minister Enoch Godongwana yesterday presented his Budget speech in Parliament.

Finance Minister Enoch Godongwana yesterday presented his Budget speech in Parliament.

Published Feb 23, 2023


Eskom will not be spending capital on any greenfield projects for the next three years as part of the conditions attached to the R254 billion debt relief intervention provided by the government in a bid to turn the tide on the utility’s financial position.

Instead, the struggling power utility will focus on maintenance of the existing generation fleet to improve the availability of electricity, while additional new generation capacity will be derived from independent power producers and the southern African power pool.

These are some of the conditions attached to the large-scale debt relief arrangement announced by Finance Minister Enoch Godongwana yesterday during his Budget Speech in Parliament sitting in the Cape Town City Hall.

According to the Budget documents, Eskom will have to focus on maintaining its existing power plants, and the only capital expenditure that may be undertaken for generation is required to relate to minimum emissions standards, flue-gas desulfurisation, and required maintenance.

The proposed debt relief has very strict conditions for Eskom, including restricting the power utility from using proceeds from the sale of non-core assets for capital and operating needs.

Eskom may also not implement remuneration adjustments, or golden handshakes, that would negatively affect its overall financial position and sustainability.

Godongwana said these conditions also required Eskom to prioritise capital expenditure in transmission and distribution during the debt-relief period, and for the company to focus on maintenance of the existing generation fleet to improve availability of electricity.

“We are acting decisively to bring additional capacity on to the grid. We are also working to transform the electricity sector to achieve energy security in the long term,” Godongwana said.

“We also require that the debt relief be used to settle debt and interest payments only, and that Eskom implement the recommendations emanating from an independent assessment of its operations, which has been commissioned by the National Treasury.”

Treasury has appointed an international consortium with extensive experience in the operation of coal-fired power stations to review all plants in Eskom’s coal fleet and advise on operational improvements.

The consortium consists of VGBE Energy, Dornier Power, KWS Energy, RWE Technology, and Steag Energy.

Its review is scheduled to conclude by mid-2023, and Eskom is required to implement the operational recommendations emanating from this independent assessment.

Godongwana made good on his promise for the government to shoulder at least two-thirds of Eskom’s debt burden by announcing a staggered R254bn debt relief arrangement over the next three years to pay down Eskom’s R423bn debt and interest payments.

He said the debt relief proposed would provide about R168bn in capital and R86bn in interest over the three years, adding that Eskom would not need to engage in further borrowing during the relief period.

The debt plan is contingent on electricity tariffs which the energy regulator has approved and measures to address R56.3bn in municipal debt arrears.

“We are doing this for two reasons: Firstly, doing so will ease pressure on the company’s balance sheet, enabling it to invest in transmission and distribution infrastructure,” Godongwana said.

“It will also allow Eskom to conduct the maintenance required to improve the availability of electricity. Secondly, R337 billion of Eskom’s debt is already government-guaranteed. Explicitly taking on this debt will reduce fiscal risk and enhance long-term fiscal sustainability.”

The government has conceded that the lack of reliable electricity supply is the biggest economic constraint, with economic growth forecasts slashed downwards.

Record levels of load shedding were experienced in 2022, with 207 days of rotational power cuts compared with 75 days in 2021, owing to frequent unplanned breakdowns at Eskom’s coal-fired power plants.

This year looks set to experience another record-high number of power cuts, as the total hours of load shedding increased from 1 165 in 2021 to 3 782 in 2022.

North-West University Business School economist Professor Raymond Parsons said the success of the Eskom debt-relief programme would be the difference it makes to stem the energy crisis.

“While the substantial debt-relief arrangement for Eskom is inevitable, it must be implemented in a way that overcomes the causes of the current malaise and supports the rapid development of the power sector as a whole to meet the critical supply and environmental problems being faced,” Parsons said.

To view Business Report’s full coverage of the finance minister’s 2023 Budget Speech, click here.