Eskom sends a warning to the government

South Africa should hold off on transferring assets from Eskom to a separate transmission company until the government addresses risks to the state power utility’s finances and its lenders, according to its chairman. 

Eskom’s board backs the creation of an independent transmission system operator to oversee the wholesale electricity market and ensure fair access to the grid.

But, it only wants the company to cede ownership of the transmission infrastructure once key financial hurdles have been cleared, Mteto Nyati said.

He warned that the transfer could trigger change-of-control provisions in lending agreements, give rise to accounting complications and unsettle bondholders.

“Our preferred route is the ITSO operating independently, and then later on you can transfer the assets if you still wish to,” he said in an interview in Bloomberg’s office in Johannesburg on Wednesday.

Nyati said that the correct sequencing of reforms will be key to a successful energy market overhaul. 

Eskom, which supplies the bulk of South Africa’s electricity, has been dogged by years of mismanagement and financial losses, and its inability to meet demand led to rolling outages that hobbled the economy. 

While the company has made some headway in addressing those issues, the government still plans to break it up into stand-alone generation, transmission and distribution units.

This will make them easier and more efficient to manage, while encouraging more private investment in power generation. 

Nyati’s comments come after President Cyril Ramaphosa last week endorsed the first phase of recommendations that reaffirmed the long-term objective of placing the grid under the control of a separate entity. 

The National Treasury will now lead the process of addressing outstanding issues, including asset valuations, obligations to lenders, and municipal debt, according to the Presidency.

Eskom is seeking an urgent meeting with the president to discuss its concerns, which mirror a warning issued by Moody’s in May that the restructuring must be carefully managed.

This is to avoid weakening the utility’s credit profile or eroding safeguards for creditors while it remains heavily indebted.

The company has taken steps to reduce its leverage, but municipalities owe it about R119 billion — debt that it will struggle to collect. 

The transmission business contributes about 40% of Eskom’s earnings, and removing those assets before the company’s legacy liabilities are addressed could materially weaken its balance sheet, Nyati said. 

A valuation commissioned by the board priced the transmission assets at about 110 billion rand, significantly higher than an estimate by the World Bank.

That discrepancy will need to be addressed before the details of any transfer can be finalised.

The board also argues that the process could create an unintended conflict of interest because the grid operator would be a participant in electricity transmission while simultaneously allocating access to the grid.

That would potentially put it in competition with private investors, who are expected to finance a significant share of grid expansion.

Eskom favours a model in which an independent operator would serve as a neutral market coordinator, plan the grid, allocate connection capacity, and run competitive procurement processes.

Ownership of the transmission assets would remain under the utility’s control for an interim period.

Nyati said Eskom’s views were informed by the consulting firm Kearney, which was contracted to assess international models for electricity market reform.

The board subsequently recommended a “TSO without assets” model to Electricity Minister Kgosientsho Ramokgopa, who later endorsed that approach as part of the revised unbundling strategy in December.

The board was thus surprised when Ramaphosa announced in his February state-of-the-nation address that Eskom’s transmission assets would be transferred to the independent operator.

It convened an emergency board meeting after the speech and concluded there was “no new information” warranting a change in its recommendation. 

The Presidency said engagement with Eskom will continue while work on the second phase of its restructuring continues.