Figure 1: Electricity available for consumption vs economic growth (% change y/y)
  • In November, electricity production increased by 1.7% y/y following a rise of 1.3% y/y in October. Electricity consumption lifted by 0.9% y/y compared to 0.0% y/y in October.
  • In the year to date to November, electricity production increased by 0.9% y/y outstripping the 0.4% y/y rise in consumption.
  • According to Eskom, the demand for electricity has declined by 0.5% a year since 2006, led by a 1.7% per year decline in consumption by large power users, such as the mining and manufacturing industries.
  • The demand for electricity from energy-intensive industries has been affected by the weaker levels of broader economic activity (see figure 1), commodity price volatility, rising electricity costs and in prior years, unstable electricity supply.
  • Electricity consumption is likely to remain relatively suppressed in the coming years, given that GDP growth is projected to rise towards only 2.0% y/y by 2021.
  • Resultant lower than expected sales volumes have impacted Eskom’s financial health in terms of revenue performance and credit metrics.
  • The utility is expected to remain under financial pressure after NERSA approved an average tariff increase of 5.23% for 2018/19, against Eskom’s request for a 19.9% increase (see figure 3). Eskom argued that “although sales volumes have dropped, Eskom primary energy costs has increased due to a combination of coal mix changes, use of more IPPs and operating costs growth.”
  • In terms of the government guarantee framework of R350bn, Eskom has utilised the majority of R254bn and a further R84bn is committed (see figures 4 and 5). As such, in the absence of an improvement in revenue, the risk remains that the contingent liability is realised for government’s account, or that recapitalisation will be required.
  • However, government’s guarantee exposure to state owned enterprises (SOEs) is already a key sovereign credit rating weakness owing to the weak performance of the SOEs. The IMF has estimated that rising contingent liabilities in SOEs could push government debt levels from 51% of GDP presently to above the high-risk benchmark of 70% of GDP (see figure 6).
  • In the meantime, Eskom received further credit rating downgrades from S&P and Moody’s In November 2017 whilst Fitch has placed the rating on a negative rating watch (see figure 7).
Figure 2: Electricity production and consumption (%)
Figure 3: Eskom’s average tariff adjustment
Figure 4: Eskom funding requirement
Figure 5: Guarantee exposure to major state-owned companies and development finance institutions
Figure 6: Public sector debt, % of GDP