Eskom’s biggest customers are kissing it goodbye

South African mining companies have invested heavily in alternative energy sources to reduce their reliance on Eskom and minimise exposure to skyrocketing electricity prices. 

These companies first invested in alternative energy sources, particularly renewables, to mitigate the impact of load-shedding on their operations. 

However, with the apparent end of load-shedding in South Africa over the past 18 months, these companies are now investing in alternatives due to the rising cost of electricity. 

The rise in electricity prices threatens to erode the competitiveness of South African mines and reduce their profitability. This, in turn, is likely to result in reduced investment in the local industry. 

As a result, the issue of electricity prices has almost become an existential challenge for mining companies in South Africa, with elevated precious metals prices masking the severe consequences of repeated above-inflation electricity price increases. 

Minerals Council South Africa revealed that electricity prices for its members have surged 16% year-on-year, with water prices in a close second, rising by 12%. 

While the boom in precious metals prices will come to an end, these elevated costs will remain, forcing miners to adapt and make their businesses more sustainable before the crunch comes. 

Economist at the Minerals Council South Africa, Andre Lourens, said the rising electricity prices have become the most urgent threat the industry is facing. 

“This is eroding our competitiveness. This is a big concern. The issue of load-shedding, which has now abated, is being offset by the fact that electricity is so expensive,” Lourens told 702. 

Many South African miners began producing their own electricity during load-shedding to mitigate its impact on their operations. Now the investment case is primarily financial due to the price of electricity. 

“During the height of load-shedding. The reason for shifting towards self-generation was clear. We did not have electricity, and the sector needed it. The case for investing in renewables made itself,” Lourens said. 

“That problem has now been sorted, and everyone is happy about it. Now, we sit with the problem of very high electricity prices.” 

“Basically, what that does is incentivise the mining sector to continue investing in cheaper renewables to offset the expensive power we are getting from Eskom.” 

Lourens explained that companies have also invested heavily in renewable energy to offset their carbon footprint, minimising their exposure to carbon taxes. 

“But, there is no doubt, the price of electricity is the primary factor hastening the shift towards renewables,” Lourens said. 

Crucially, even with reforms underway and plans to slow electricity price increases, the benefits will not be felt in the short term. This makes the investment case even stronger for renewable energy. 

Eskom in a difficult position

As a result of companies reducing their reliance on its services, Eskom finds itself in a tricky position where it has to cover rising costs from a shrinking sales base. 

This means that, in the absence of ways to significantly reduce electricity production costs, the utility will continue to have to raise prices to cover its costs, creating a downward spiral. 

Mining companies play a particularly important role in this regard, as they are among Eskom’s biggest and best customers. 

With these companies and others reducing their demand for power from Eskom, the utility is likely to be left with a shrinking customer base made up of small consumers and a large share that are non-paying. 

Former Eskom CEO Andre de Ruyter warned that Eskom is losing its wealthier customers who can afford to defect from the grid and invest in alternative power solutions like solar panels.

If this trend continues, Eskom will be left with only lower-income and non-paying customers, who are currently being cross-subsidised by wealthier customers.

This appears to be occurring in South Africa, with businesses and wealthier households investing heavily in alternatives to the utility’s electricity. 

Eskom’s electricity sales have declined by a steady 2% to 3% each year since the 2015/16 fiscal year, with the trend expected to continue as more renewable power projects come online. 

Eskom’s electricity sales peaked at nearly 220,000 GWh in 2015/16 and had declined to 183,300 GWh by 2023/24, representing a sales decline of around 37,000 GWh.

EE Business Intelligence managing director Chris Yelland said this puts Eskom in a very difficult position, with the utility under immense financial pressure. 

“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. 

Yelland explained that South Africans are turning to alternative energy sources for affordability, not only for security of supply, as was the case during load-shedding. 

This has been coupled with industrial demand declining significantly amid a stagnant economy and smelters being effectively priced out of operation. 

“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.” 

“What is really going on with the decline in demand and the rise in alternative energy sources does not paint a healthy picture for a monopoly utility. In fact, it indicates just the opposite.”