Eskom’s debt headache likely to be a long hangover
When public enterprises minister Pravin Gordhan unexpectedly told the audience at Eskom’s financial results briefing last week that he would reveal a solution to the power utility’s R480bn debt problem within a couple of months, Eskom CEO
André de Ruyter was quick to reassure the market this wouldn’t involve a “haircut” that would reduce the value of their bonds. Instead, he pivoted to the prospect that as Eskom debt matures, it could replace it with cheaper, longer maturity “green finance”, with estimates that up to R200bn of such finance might be available. Eskom has long said it needs to more than halve its debt in order to be sustainable. Its financials showed again it is not making enough money to cover the interest and repayments on its debt and survives only thanks to government handouts totalling almost R140bn over a three-year period.
The idea its legacy coal debt could be replaced with cheap green finance is appealing in many ways. It came out of a proposal from Eskom’s sustainability task team last February that estimated as much as $11bn (R173bn) could be available for a blended climate facility involving global climate funds, development finance institutions and other institutional investors.
Global climate funders could be keen to invest in decarbonising the economy; so too would other institutional investors given how big the green theme has become in financial markets. SA has the opportunity to transition to a more renewable energy and gas-powered grid as many of its coal-fired stations near the end of their lives. But lenders aren’t going to give cheap concessional finance without watertight conditions.
That would likely mean Eskom would have to accelerate getting its coal-fired power stations off the grid. The Integrated Resource Plan envisages that more than a quarter of its coal capacity will be decommissioned by 2030. Accelerating that would presumably mean shutting down old power stations across Mpumalanga in the near future. And that is complicated in so many ways.
Eskom has embarked on “just transition” talks with the mining and power station workers and communities that would be affected by these shutdowns, with a view to repurposing the stations and sustaining the communities. That will obviously come at significant cost. How significant would depend on the conditions imposed by the climate funders. But it’s clear that in net terms the new green borrowing wouldn’t be equivalent to the old borrowing on Eskom’s balance sheet, even though it would be cheaper – so it couldn’t on its own be a solution to the debt problem. The political and socioeconomic problems are if anything even greater. Let’s see if the political support — from the government, the ANC and the unions — will indeed be there when Eskom starts closing power stations and their coal mines.
And then there is the formidable problem of keeping the lights on. De Ruyter talks of a sustainable halt to load-shedding only by September 2021, and has emphasised the urgency of the additional
11.8GW of renewable energy from independent producers that the government and the regulator have promised. But that will take time, and closing power stations prematurely is a risk to the grid.
So the green option might be part of a debt solution, but it’s no silver bullet. Even less so are other proposed solutions – such as converting Eskom’s debt to equity or shunting it into a special purpose vehicle. The simplest solution is to shift a chunk of the debt onto the sovereign balance sheet, especially given that more than two-thirds of it is guaranteed by the government anyway. But bondholders may not easily agree to that, and even if Eskom is arguably the biggest risk to the sovereign balance sheet, adding its debt directly onto a government debt burden that is already headed towards 100% of GDP will mean even scarier numbers. One thing is certain: Gordhan isn’t about to solve this in two months.
Then there is the formidable problem of keeping the lights on