Eskom heading for serious trouble

South Africa’s electricity crisis is heavily linked with Eskom’s financial crisis, with the utility weighed down by an unsustainable debt load and suffering from declining sales. 

This has also been combined with several sharp increases in the electricity tariff charged in South Africa, pushing many households and companies to seek alternative sources of energy. 

As a result, Eskom is stuck in a downward spiral, where its declining sales and debt-servicing costs force it to hike prices, pushing its customers to use less of its product. 

The Organisation for Economic Cooperation and Development (OECD) warned of the serious challenges posed by Eskom’s poor financial health. 

The OECD analysed Eskom’s finances as part of its latest economic survey on South Africa, where it discussed the reasons for the country’s stagnant economy and how it can be revived. 

At the root of Eskom’s financial crisis is its declining operational performance, which has greatly increased its cost of producing electricity and reduced its ability to serve consumers. 

This has translated into declining sales, with total sales falling by 15% in the decade from 2013 to 2023. It saw particular declines in sales to the rail sector, with Transnet turning to diesel locomotives due to infrastructure vandalism and load-shedding. 

Part of the decline can be attributed to sluggish economic growth and structural changes in economic activity, with services playing a larger role in activity. 

This has led to lower electricity consumption by large users, who previously formed Eskom’s core baseload, the OECD said. 

However, these consumers have also shifted away from Eskom due to the increasing cost of its electricity and its unreliability. A stable and cheap electricity supply is vital for operating businesses, particularly industrial operations. 

Eskom has also seen a sharp decline in demand for electricity from households, with residential sales down over 20% from 2014 to 2024. The utility’s industrial sales have seen a similar decline. 

Eskom’s declining sales can be seen in the graph below, which tracks the percentage change from 2014 to 2024. 

Eskom’s vicious cycle

The OECD said Eskom has entered a vicious cycle due to its declining sales and increased operational costs. 

The utility has significantly increased its prices to deal with rising losses while being unable to ensure an adequate electricity supply. 

This has made alternative electricity sources more attractive and is aggravating Eskom’s financial difficulties by pushing customers away from its product. 

Electricity tariffs have increased almost tenfold since 2000, rising particularly steeply since 2009, dramatically more than consumer price inflation. 

One reason behind Eskom’s insufficient financial profitability is that, before the recent steep increases, tariffs had been lower than the cost-recovery level for several decades. 

Corruption and mismanagement have also undermined the utility’s financial sustainability, increasing its operating costs and resulting in declining performance.

Another major driver of Eskom’s increased operating costs, which it passes onto consumers, is its increased debt-servicing costs. 

Over the past decade, Eskom has relied heavily on bailouts from the National Treasury to ensure its continued operation, which has weighed on public finances. 

It has also historically taken on significant amounts of debt to fund operations and the buildout of new capacity. 

With its two major projects, Kusile and Medupi, encountering significant delays and cost overruns, Eskom has not been able to generate sufficient cash flow to pay back its debt without government assistance. 

As a result, the company’s debt burden represents 15% of total government debt and is equivalent to 8% of South Africa’s GDP. This is unsustainable. 

The government has attempted to restore Eskom’s financial stability through its largest bailout yet of R254 billion over three years. This alone represents 5.5% of GDP. 

This has come with strict conditions, including a moratorium on further borrowing. All new debt and government guarantees are subject to the National Treasury’s approval. 

The strict conditionality imposed through the moratorium on new debt is intended to secure public funding. 

However, the OECD said that the arrangement risks hindering the deployment of investment in supply security along with the green transition of the electricity supply sector.