A laggard in renewables
COST OF MEDUPI AND KUSILE SPELL FINANCIAL TROUBLE AHEAD With solar PV and wind now significantly cheaper than new coal-fired generation, Eskom may have unspoken motives for blocking additional renewables development.
Renewables are appearing ever more appealing. In recent years, SA has run a successful but limited renewable energy procurement programme: 2.2 GW of renewable energy capacity has been completed, attracting over US$14 billion in investment.
Developers are waiting on Eskom to sign further offtake agreements for the next round of approved projects, which total 2.4 GW. Unfortunately, Eskom has stonewalled here, refusing to sign the deals while claiming renewable energy is too costly – despite having benefited financially and operationally from its renewables programme.
One clue as to why it is resisting is that it has an institutional commitment to a major coal generation build-out in the face of a declining electricity market. It is building two coal-fired plants, Kusile and Medupi, each with 4.8 GW capacity, at a combined cost to completion estimated at R448 billion.
Meanwhile, higher electricity prices and sluggish economic growth have led to declining demand. In its 2017 financial results, Eskom reported a 3.7% drop in sales to the industrial sector and a 5.7% slide to the agricultural sector. It now has more than 5 GW excess capacity.
Expansion of competing renewable energy will further increase its coal-fired overcapacity, which is slated to grow needlessly, as Eskom will add another 8 GW of capacity by 2022 when all Medupi and Kusile units come online. Eskom’s growing overcapacity and its failure to grasp the role of renewable energy in the new energy economy puts it at serious financial risk as its hugely-expensive new coal plants must be paid for, regardless of how much electricity it can sell from them.
Eskom’s March 2017 annual report reported total debt securities and borrowings of R355 billion, with finance costs up 82% to over R14 billion. R18.2 billion of deferred finance costs relating to continuing project construction were capitalised, dwarfing its R888 million net profit. Its financials are set to deteriorate significantly as Kusile and Medupi are commissioned and as current capitalised interest and depreciation costs start to be expensed, even as Eskom’s overall utilisation rate declines materially.
This is complicated by the Development Bank of SA threatening to recall a R15 billion loan. Also, a R2.4 billion loan from the New Development Bank (NDB) has been put on hold; the only NDB loan to SA so far was meant to finance transmission lines to connect new renewable capacity projects.
Eskom has said it’ll take on an additional R327 billion of debt up to 2021, so interest expenses will also increase. As electricity demand declines and renewables take up market share, it stands a good chance of generating too few sales to be profitable. Because government has provided guarantees on Eskom’s R350-billion debt (R210 billion has been drawn down), Eskom is in a position of slipping into a default, putting a major burden on the state.
This analysis was extracted from an October 2017 study by the Institute for Energy Economics and Financial Analysis (IEEFA), Global Electricity Utilities in Transition: Leaders and laggards.
Tim Buckley and Simon Nicholas are with the IEEFA