Economic slowdown helps Eskom keep the lights burning

AFTER power cuts that crippled economic growth‚ South Africa has kept the lights on for more than six months and outages may not return in the next few years.

But the improved outlook is less about what the state power utility is doing and more to do with an economic slowdown. A rout in metals prices has hurt mining and lower global demand has curbed manufacturing‚ which together make up 20% of the gross domestic product of the country.

While less demand keeps supply consistent‚ it exacerbates the financial issues faced by Eskom.

“The issue isn’t that Eskom has magically turned around – the issue is that demand has fundamentally collapsed‚” Energy Intensive Users Group of SA spokesman Shaun Nel said.

The group represents 31 of the country’s largest electricity consumers, including Sasol and Anglo American Platinum.

“If the commodities situation remains for next year as well‚ then we’ll see the likelihood of power cuts next year significantly diminished as well,” Nel said.

Power generated by Eskom’s plants fell to the lowest since 2006 last year‚ the utility said on its website.

Still‚ revenue has increased every year since then as the national energy regulator allowed the company to raise prices by an average 16% annually‚ or more than double the mean inflation rate of 6.1% over the 10-year period.

Despite this‚ its cash needs have climbed, as it needs R237-billion in additional finance in the five years to 2019.

Yields on Eskom’s dollar-denominated bonds due in January 2021 have climbed more than 300 basis points since the start of 2015 to 8.81%.

“We have seen a drop in terms of demand‚ but it’s not drastic‚” Eskom spokesman Khulu Phasiwe said.

“There may be a drop in terms of demand in the mining sector, but that is largely compensated through purchases by neighbouring countries‚” he said.

Eskom has agreed to sell power to Zambia and Zimbabwe. They are discretionary deals that can be downsized if South Africa’s grid becomes constrained.

The utility would be forced to improve savings and reduce the amount it spent on coal‚ used to generate about 80% of its power‚ after the energy regulator capped an electricity-price increase for the coming year to an average 9.4%‚ Fitch Ratings analysts said in a March 3 note.

The agency assumed Eskom would be allowed an increase of about 12%.