Founder: Turnaround Talk
Since Mid-Last year, Turnaround Talk has been publishing articles focused on the economic impact of loadshedding on the economy. Unfortunately, with no end in sight, this impact will only increase as inflation and the cost of doing business continues its upward spiral.
Recent statistics show that Pick n Pay generates between R2 billion and R3 billion/year in operating profit. However, the retail giant recently pointed out that diesel to run generators cost them R600 million to R700 million, reducing their profits by 30% to 40%. This is another example of how an external risk factor can have a material impact on a company’s ability to avoid, or sink into, financial distress. Its amazing how detrimental loadshedding has actually been
There is another impact of loadshedding on the horizon which will directly impact Eskom and its suppliers. Business analysts believe that, in the not-too-distant future, energy supply from independent power producers (IPPs) will outstrip Eskom’s energy supply. Further, this energy will be powered by renewables, not coal-fired power stations. Will this end loadshedding or mitigate it?
Clean, green and keen
The Moneyweb article points out that, Peter Armitage (Founder and Chief Investment Officer of fund manager Anchor Capital) says private sector investment in new generation capacity will see electricity from private renewable sources outstripping Eskom supply much “sooner than we think”.
Drawing on estimates and research by RMB Morgan Stanley Research, he predicts that new green producers will generate more electricity than Eskom by 2025.
“Effectively, Eskom supply about 25 gigawatt [GW] of electricity. Other producers are estimated to supply more than Eskom within two years,” he says.
Image By: Canva
Supply and demand in SA
The Moneyweb article adds that estimates show that analysts aren’t expecting much recovery from Eskom anytime soon.
Based on a continuation of its current performance of producing only 53% of its installed capacity (energy availability factor), it is estimated that Eskom’s production will recover slightly to 25.2GW by 2025, but by then production from other sources will reach 26.6GW.
The Moneyweb article points out that production by other sources includes electricity produced by big solar and wind farms, as well as small scale rooftop installations and 1.1GW imported from the Cahora Bassa hydroelectric scheme in Mozambique.
Production from renewable sources is expected to increase steadily, to nearly 37GW by 2030. Renewable energy is forecast to produce 62% of all electricity in SA by 2030.
Renewables produced less than 5% of all electricity in SA only a few years ago.
“It is obvious that the private sector can solve the problem – if the government allows them to contribute, as it has indicated,” says Armitage.
“Massive spending on renewable projects is coming through. We consistently hear about it from the mining companies, Anglo American will be producing 5 gigawatts of power within the course of five years in SA.
“The impact on banks is huge, the financing opportunities are about R1 trillion, or $50 billion. To put that into context, the GDP is about $350 billion.”
Armitage says government has to allow the private sector to play a role.
“If that is unleashed, we will see a dramatically better situation within 18 to 24 months,” he says.
The Moneyweb article points out that, unfortunately, government seems to be a stumbling block rather than an enabler – despite all the talk about the importance of reliable power, its commitment to reducing air pollution, and its continuous calls on the private sector to play a role.
Just a few months ago, in December 2022, the Department of Mineral Resources and Energy did not accept a single bid from companies lining up to develop new wind farms, without giving any reason for the decision.
A few weeks ago, Eskom went to court to force the Mafube municipality in the Free State to stop buying electricity from private solar farms that reduced load shedding in the towns of Frankfort, Villiers, Tweeling and Cornelia.
Image By: Eskom
What is actually at stake?
Besides mitigating loadsherdding, there is no doubt that the rise of IPPs will have a significant impact on Eskoms operating model.
The reality is that access to IPPs will be limited to urban areas; this means that rural and outlying areas will still depend on Eskom for their power. So the likelihood of Eskom becoming a proverbial dead duck is almost impossible. However, the company will have to go through a significant restructuring programme to avoid financial distress, including reducing its staff complement (which, unfortunately, will mean a considerable retrenchment programme) and improving the operational efficiencies of some of its more reliable power stations.
Because of the unemployment drive that will eventually have to take place at Eskom, labour unions have been vociferous opponents of the rise of IPPs. As with all business rescue/business turnaround exercises, unemployment may occur. But in the case of Eskom, can these skills be absorbed into the IPPs? Time will tell.
Finally, the rise of IPPs will significantly impact the coal mining industry. Mines with exclusive supply agreements with Eskom will either have to reduce their production (which will lead to unemployment in this sector) or focus all their output on export markets. However, the latter is proving challenging because of the Transnet export line bottlenecks.
As we can see, a lot is at stake when the proverbial house of cards collapses on Eskom. Within the next two years (if we believe the business analysts), we will see another significant business restructuring event with political ramifications. At least loadshedding will not be as severe as it is now.
Perhaps the ancient curse of may you live in interesting times was written with this moment in mind.
