Eskom will be split into three separate units
Government support for its balance sheet
PRESIDENT Cyril Ramaphosa has announced plans to spin off Eskom into three separate units in order to save the cash-burning state-owned entity.
Ramaphosa said the government would support Eskom’s balance sheet in the immediate term, but emphasised that the embattled power utility would be broken up into separate entities that would be responsible for generation, transmission and distribution, which will be housed under Eskom Holdings.
He said the split would isolate Eskom’s rising cost and give responsibility to each appropriate entity.
Ramaphosa said the moves would ensure the stability of energy in the country.
“Eskom is in crisis and the risks it poses to South Africa are great,” Ramaphosa said.
“It could severely damage our economic and social development ambitions. We need to take bold decisions and decisive action.
“The consequences may be painful, but they will be even more devastating if we delay.”
Ramaphosa emphasised that the break-up was aimed at minimising adverse economic cost to energy consumers and taxpayers.
“As we address the challenges that face Eskom, we also need to safeguard our national fiscal framework, achieve a positive impact on our sovereign credit rating and pay attention to the rights and obligations of Eskom’s funders,” Ramaphosa said.
The power utility’s financial and functional failures are widely seen as the biggest single risk to the South African economy and are a corrosive source of uncertainty for business.
Eskom’s debts, which are more than 20 times larger than those of SA Airways, reached 8.5 percent of gross domestic product late last year.
The government already guarantees R350 billion out of Eskom’s R420bn debt.
The power utility currently wants the National Energy Regulator of South Africa to allow it to hike tariffs by more than 15 percent a year over the next three years.
It has warned that its debt will reach R600bn should it fail to implement its proposals.
Speculation has been rife that Eskom has asked to take a quarter or R100bn of the utility’s debt on to the government’s books.
Capital Economics economist John Ashbourne said it was possible, over the longer term, that the government could try to attract private capital to invest in Eskom.
“Given opposition from key unions, however, we think that any move towards the liberalisation of the sector will be very gradual, and probably only result in partial privatisation after a multi-year process,” Ashbourne said.
The power utility’s business model, designed in the 1980s, has come under close scrutiny for having not adequately evolved to take into account the new challenges facing a modern power utility, such as adjusting to power from renewable producers.
Ramaphosa said the split would also enable Eskom to raise funding for its various operations much more easily from funders and the market.
“Of particular and immediate importance is for the entity to manage an independent state-owned transmission grid, combined with the systems operator and power planning, procurement and buying functions.
“It is imperative that we undertake these measures without delay to stabilise Eskom’s finances, ensure the security of electricity supply and establish the basis for long-term sustainability.”
Ramaphosa said Finance Minister Tito Mboweni would provide further details on this in the Budget speech later this month.
“This we will do without burdening the fiscus with unmanageable debt,” he said.
Cosatu said it would demand guarantees that the restructuring of Eskom would not result in job losses.
Greenpeace Africa welcomed Ramaphosa’s breakout plans, charging that they signalled that Eskom’s current death spiral was being taken seriously.
Spokesperson Happy Khambule said removing Eskom’s monopoly and unbundling the utility was a step in the right direction, but did not go far enough to solve the utility’s almost complete reliance on coal, which drove the price of electricity up,
“It is good news that the president recognises that the utility’s business model must shift towards renewable energy in order to recover from its current crisis and that Eskom’s reform must be accompanied by a Just Transition programme,” Khambule said.