South Africa’s biggest food producer is cutting Eskom out

Tiger Brands has signed an electricity wheeling agreement with Apollo Africa to reduce its greenhouse gas emissions. 

A reduction in emissions also comes with reduced reliance on grid-tied electricity from Eskom and its repeated above-inflation price hikes. 

The combination of these factors, companies being pushed by investors to meet ESG targets and surging electricity costs, has replaced load-shedding as the major driver for wheeling agreements. 

This agreement will begin with Tiger Brands’ manufacturing sites in Gauteng and will commence in 2028, with others to follow. 

Also known as “Power Wheeling”, wheeling is the process of transmitting energy from sustainably sourced power generators to end users in different regions of the country via the national power grid. 

Tiger Brands explained the transaction involves Eskom electrons being swapped for renewable energy electrons supplied by Apollo Africa under a Power Purchase Agreement (PPA). 

The PPA commits the business to sourcing a specified quantity of electricity from renewable energy sources such as wind or solar farms. 

Through this approach, Tiger Brands said it can access clean energy without being limited by the physical location of generation plants, giving the business greater diversity of sources.

Tiger Brands expects its sites in the Ekurhuleni Municipality to receive approximately 60% of their electrical supply from wheeling by 2028.

“Importantly, our business grows, cost efficiency is maximised, all while reducing our carbon footprint,” chief manufacturing officer Praveen Balgobind said. 

This wheeling agreement is part of a multi-phase journey toward a lower-carbon footprint through reduced energy intensity. 

All of this crucially increases Tiger Brands’ operational efficiency by reducing its cost base, which has become one of the few ways in which it can grow its bottom line. 

In a stagnant economy, demand growth for the company’s products has been relatively flat in recent years, with CEO Tjaart Kruger focusing on making it more efficient. 

Kruger has implemented a new federated operating model to move away from Tiger Brands’ historically top-heavy corporate structure, shrinking it from 12 business units into four. 

The CEO has also shifted focus away from getting underperforming lines to work towards segments where the company has a clear competitive advantage. 

This has resulted in the sale of R4 billion worth of non-core assets and the optimisation of existing businesses. The structural shakeup is estimated to save around R100 million annually. 

Kruger’s strategy has been loved by investors, with Tiger Brands’ share price nearly doubling since he took office in November 2023. 

Eskom is in trouble

Tiger Brands is one of many companies to have announced wheeling deals in recent years as corporate South Africa looks to reduce their reliance on Eskom. 

This was initially driven by a desire for an uninterrupted energy supply amid load-shedding, with alternative energy sources being vital to keep businesses operating. 

Many companies invested heavily in rooftop solar and battery storage alongside major diesel generator systems to power their manufacturing plants and offices. 

However, more recently, South African companies have been investing heavily in alternative energy sources to reduce their exposure to surging electricity prices. 

Electricity prices in South Africa have risen by more than 600% since 2009, with annual hikes repeatedly coming in at above-inflation rates. 

This is largely due to Eskom’s soaring production costs, with Electricity Minister Kgosientsho Ramokgopa explaining that the utility’s major cost centre is primary energy generation. 

This includes the cost of coal, nuclear fuel, and diesel, alongside other operational costs of running Eskom’s power plants. 

The utility expects price hikes to continue in the coming years as it believes electricity tariffs still do not reflect its costs. 

While Eskom needs higher tariffs to recover its costs of producing electricity, they are increasingly having a destructive effect on energy demand in South Africa. 

Higher electricity prices result in companies and households increasing their energy efficiency and, increasingly, pushes them to invest in alternative electricity sources. 

This creates a negative spiral for Eskom, with it reducing the size of the customer base from which it can generate revenue to cover its costs. 

As a result, it is hiking prices to generate more revenue from a shrinking customer base, which, in turn, pushes more of those customers to use less electricity from Eskom. 

Energy analyst and EE Business Intelligence managing director Chris Yelland explained that this has begun with Eskom’s best customers who use much of its electricity and are reliable payers. 

This makes it hard for the utility to begin reducing prices for its users to reverse the downward slide, as there is declining demand for its product. 

“To talk about saving money and bringing prices down for customers in an environment where you are selling less because demand is declining is extremely difficult,” Yelland said. 

“Declining demand actually pushes the price up because you are trying to recover a certain cost base off a declining sales base,” Yelland said. 

“Whilst there has been a dramatic improvement in the reduction of load-shedding, one has to be concerned about the decline in demand.”