Moneyweb
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5 minute read
14 Feb 2019
3:23 pm

Splitting Eskom will protect its most strategic asset

Moneyweb

But much will depend on how the three individual assets are valued, and what portion of the utility’s crippling debt each is given.

Eskom's Medupi power station. Picture: Supplied to Moneyweb

When African Bank collapsed, there was clear focus on separating the ‘good bank’ from the ‘bad bank’ and salvaging whatever was possible.

Restructuring the debt-ridden Eskom into generation, transmission and distribution might be done in much the same way.

President Cyril Ramaphosa made the decisive announcement during his State of the Nation address last Thursday (February 7), but little detail has yet been made available.

In its tariff application for the next three years, Eskom did distinguish between the three units, which are all different licensees in terms of legislation.

The utility has just had its regulatory asset base revalued, and although the valuation itself was questioned during public hearings about the proposed tariff increase, it does provide an indication of the possible asset allocation once Eskom is split.

Valuations

For 2019/20, the value of Eskom Generation’s asset base is set at about R1 trillion, Eskom Transmission’s at R129 billion and Eskom Distribution’s at R111 billion.

It is clear that Generation is a much bigger business from an asset point of view than the other two.

Less clear is what the allocation of Eskom’s R420 billion debt will be between the three.

It is well known that Eskom’s biggest borrowings were for building the new Ingula Pumped Storage Scheme and Medupi and Kusile power stations, and this debt should, therefore, be allocated to Generation. But Eskom also borrowed to cover its operational expenses when Nersa repeatedly failed to grant it the full revenue it applied for.

What part of that should be allocated to Transmission and Distribution?

PowerX CEO and former Nersa regulator member for electricity Thembani Bukula estimates that 80-90% of Eskom’s mountain of debt should be allocated to Generation.

Generation gap

That would mean that Generation would be left with most of the debt headache, but fewer assets and a smaller income, since some of the revenue would be stripped out and allocated to Transmission and Distribution.

As things stand, the auditors have been worried about Eskom’s ability to continue as a going concern. Generation on its own would look even worse.

It would be a very bad bank.

For Transmission and Distribution, this could, however, be good news.

Bukula says both these businesses are fairly healthy. In fact, Transmission is a truly world-class business, he says.

Granted, Distribution will inherit the consumer debt from non-paying municipalities and Soweto residents, but it might be in a better position to truly focus on collections once it is standing on its own feet.

Strategic function

Transmission is the most strategic asset within the current Eskom framework. Transporting electricity from the generator to the distributor is a strategic function that governments usually retain control of in deregulated energy markets, says Bukula. It is then operated by a neutral system operator who guarantees non-discriminatory access to the grid.

Ramaphosa has indicated that this is the direction in which South Africa is moving. In announcing the restructuring of Eskom, he said: “Of particular and immediate importance is the entity to manage an independent state-owned transmission grid combined with the systems operator and power planning, procurement and buying functions.”

This system operator would buy electricity from Eskom Generation as well as from Independent Power Producers (IPPs) according to a set of rules that apply to each of them equally.

Ramaphosa indicated that Eskom Generation might play a more active role in renewable energy in future.

Liquidity threat

In presenting its Transmission Development plan for 2019-2028 late last year, Eskom Transmission said its capital expenditure for the period would amount to R109 billion. It also stated that the liquidity position of Eskom (in its current form) is a threat to the successful execution of this plan.

By separating the three business, Transmission and Distribution are protected from financial contamination from Generation. It should be able to raise funding against its own assets, and its maintenance and capital spending would not be reallocated to generation projects like Medupi and Kusile, where Eskom Generation seemingly lost control over the budget.

But what to do with the bad bank?

Eskom as an investment prospect

Selling stakes in power stations would be one of the options to reduce debt and improve the performance of the current inefficient Eskom fleet.

If this comes to market with a long-term Power Purchase Agreement (PPA) it could be attractive to, for example, pension funds looking for investment opportunities that offer a consistent and inflation-linked income, Bukula says.

Knowing Eskom’s finances inside out, he believes 12-15 year PPAs would be feasible with inflation-linked returns and won’t put too much upward pressure on tariffs.

Economist Mike Schüssler agrees that pension funds could have an appetite for such investments, but taking into account the current bad state of Eskom Generation’s operations, he says they would insist on a controlling stake.

If different power stations are sold to different owners, it would introduce competition, which would promote efficiency, he says.

“Even if the Generation debt is only cut in half, it would be much more manageable,” he says.

Schüssler says this is a workable option. “If we don’t do it, the whole economy is at risk,” he says.

The unions have already promised strong resistance to what they consider to be the first step towards privatisation and job losses.

The execution will depend on strong leadership that is able to stick to the agreed-upon plan irrespective of union pressure, he says.

And that is the crux of the matter.

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