Eskom’s R35 billion cash cow is being given away

Under its existing unbundling plan, Eskom is set to transfer its transmission assets to the National Transmission Company of South Africa (NTCSA). 

These assets generate R35 billion worth of earnings for Eskom, resulting in the utility pushing back against the unbundling plan as it threatens its financial stability. 

However, transferring these assets to a separate entity is vital for the future of South African electricity supply, with private companies playing an increasingly important role. 

An open electricity market would see Eskom compete against private generators for the first time in its history. 

With its high cost of producing electricity, energy expert Matthew Cruise said there are real concerns that the utility could be outcompeted by private players. 

Cruise told 702 that while this should be allowed to play out and that there has to be an open electricity market, South Africa cannot afford to see Eskom fail. 

Prior to President Ramaphosa’s intervention earlier this year, Eskom’s unbundling plan had the transmission assets still under the utility’s ownership. 

This stood in contrast to the stated aims of Ramaphosa’s reform project, which was to unbundle Eskom and have a fully separated transmission company and operator. 

The President has reiterated this and created a task team to ensure that Eskom’s unbundling will result in the creation of an independent transmission operator.

However, this is not as simple as it sounds, with it having severe financial consequences for Eskom and potentially for South Africa. 

“Eskom must now take its transmission assets, which contribute R35 billion towards its earnings, and just give it away to an entity not within the utility,” Cruise said. 

“That can trigger a whole bunch of issues with debt holders and, if done incorrectly, it may result in Eskom’s credit rating being downgraded and the utility cut off from capital markets.” 

However, at the same time, the creation of an independent transmission operator is vital to create the conditions where private companies are comfortable committing billions of rands towards new generation projects. 

This investment is vital for future energy security in South Africa, with the government and Eskom not having the balance sheet strength to commit capital on the required scale. 

Eskom cannot fail

The unbundling of Eskom’s transmission unit is likely to exacerbate the utility’s financial woes, with it having around R350 billion worth of debt and relying on state bailouts to survive. 

Losing R35 billion worth of earnings would turn Eskom’s projected profit for the current year into a loss and significantly limit its chances of becoming financially sustainable. 

Cruise explained that Eskom’s financial health cannot be compromised as the country cannot afford to see the utility fail. 

Despite its historic mismanagement, rising electricity prices, and being a drag on the fiscus, the utility still plays a vital role in the local economy. 

“Eskom has made the argument recently that self-preservation is not immoral and that the utility has to still continue to be a going concern,” Cruise said. 

“The utility cannot be allowed to liquidate. It will be an issue for South Africa if it cannot pay its workers or suppliers.” 

Cruise said that if it ever comes to that, Eskom’s workers will strike, and there is a good chance that South Africa will have a complete power outage. 

“I agree with that. Eskom has to remain a going concern, and it is a delicate balance because it has to be unbundled.” 

Cruise said that South Africa can no longer have all its eggs in one basket with regard to electricity supply, as it needs diversity of generation. 

This puts the utility in a tricky position, with it having to unbundle its transmission assets without jeopardising the sustainability of its business. 

Eskom is making progress in this regard, and there are some benefits with the utility transferring away its transmission assets. 

Cruise explained that Eskom’s cost base will decrease once the transfer is effected, as it will no longer have to pay for the maintenance of the grid. 

This will be coupled with a decline in the utility’s workforce, saving it billions, and it will avoid having to invest hundreds of billions of rands in the grid. 

However, there is still a fundamental issue with Eskom’s finances, as it continues to effectively charge a premium for its generation costs. 

This makes the utility uncompetitive with private alternatives, which are already significantly cheaper and as reliable. 

Cruise said that for private players to truly compete with Eskom, they will have to invest in large-scale batteries to ensure their supply is reliable.