Though a recovery of commodity prices does not guarantee industry demand recovery or further investment, when this situation changes, some industry may be able to respond by ramping up production
Eskom’s numbers show that it is operating more efficiently under CEO Brian Molefe than under his predecessors — but the fundamentals of the business are not in a healthy state.
The utility’s electricity output falls every year. Last week Statistics SA showed Eskom produced and sold 171,186 gigawatt hours (GWh) of power in the nine months ended September — against 173,689 GWh in the first nine months of 2015.
Despite Eskom’s spin to the contrary, the Stats SA numbers (collected from Eskom data) show its production has decreased every year since 2007, when it hit 241,170GWh. For all of last year, Eskom generated 230,000GWh.
This occurred even as new generating capacity from coal and renewables has been added.
This muted demand from a shrunken economy is the real reason Eskom has avoided loadshedding for more than a year and reduced unplanned breakdowns — not perfect supply.
Its available generation capacity has improved to 78.5% compared to below 72% in April last year. Because Eskom did not have to resort to using its costly diesel-fired open-cycle gas turbines as an emergency measure, it was able to save R6.4bn in the six months.
Debt is rising, as expected, to pay for the investment in the two new coal-fired power stations, Medupi and Kusile, and the Ingula pumped storage scheme. Eskom’s debt grew to R332.9bn by September, from R297.4bn a year earlier, resulting in an 87% rise in net finance costs to R6.5bn.
Eskom executives are confident the utility can raise funding. It has already secured 86% of the loans needed for this year. But the danger is the ability to service debt while demand is shrinking. Eskom already pays more than R30bn a year to service debt, says chief financial officer Anoj Singh.
The only way Eskom can offset dwindling volumes is by hiking tariffs, which tends to dampen demand in a weak economy.
In the six months to September, revenue grew 10.5% to R97bn compared to last year. Given that Eskom sold only 1.2% more electricity, this rise was mainly because of tariff increases. In fact, Eskom’s sales to industry (its second-biggest customer segment) fell 6.2%. Sales to the mining sector fell 0.3%,
Most of Eskom’s sales growth came from power provided to neighbouring countries, which grew 31.6%.
RMB analyst Elena Ilkova says the latest drop in local demand follows successive periods of falling demand. Though sales to neighbouring countries boosted Eskom’s revenue, it was mainly because these countries rely on hydropower that is now affected by drought. So this demand may not be sustainable.
Still, Eskom wants SA industries, such as ferrochrome and platinum, to invest in power-hungry activities.
Ilkova says Eskom’s strategy of stimulating local demand may be met with understandable scepticism from its customers because, for the past few years, it has been asking them to slash their demand.
A spokesman for the Electricity Intensive User Group, which represents some of SA’s biggest industrial companies, says "electricity is a significant input cost for industry, therefore Eskom’s tariffs and the electricity price path certainly do play a substantial role in any decision to increase production and ... future investment decisions."
What it means: The figures show that Eskom’s fundamentals are not in a healthy state.