- In January, the rate of electricity production increased by 2.4% y/y compared to the 1.5% y/y rise in December.
- Electricity consumption lifted by 1.5% y/y in January from a prior 1.0% y/y.
- The demand for electricity has moderated over the last few years in line with the deceleration in economic activity, particularly in the mining and manufacturing sectors which are energy-intensive industries (see figures 1 and 2). Eskom has also previously noted the effects of structural changes in electricity demand with “consumers turning to own supply.”
- Weakening sales volumes, combined with low single digit tariff increases awarded by NERSA over the last two years, have contributed to flat revenue growth for Eskom and the deterioration in its credit metrics (see figure 3).
- Eskom’s revenue performance could improve somewhat if the utility can recoup costs incurred in prior years via the regulatory clearing account. The applications have been submitted to NERSA. However, the scope for a meaningful strengthening in revenue will be restricted by only a modest recovery in economic growth, towards 2.0% y/y over the next few years.
- Weaker consumption and improved generation capacity has yielded surplus capacity, which is likely to remain a feature as additional units of the Medupi, Kusile and Ingula power stations become commercially operational.
- The 2018 Budget confirmed that in terms of the government guarantee framework of R350bn, Eskom has utilised the majority of R220.8bn and is expected to use R17.9bn each year over the coming three years to complete the current capital expenditure programme (see figure 4). Additionally, up to R200bn in renewable energy will be procured from independent power producers.
- A new Eskom board was announced in January to address leadership and governance concerns. Additionally, the utility will evaluate private-sector participation in certain projects to “improve its capital structure and strengthen its balance sheet”, according to the 2018 Budget.
- However, heightened liquidity risks, linked to Eskom’s funding deficit and refinancing risks, as well as the limited scope for government support, led S&P to further downgrade Eskom’s foreign and local currency credit ratings this week (see figure 5).
- Relieving some of the pressure on Eskom’s, as well as on government’s finances, will require a sustained economic growth recovery to 3.0% and beyond. Effective policy implementation and the enhancement of policy certainty are required to restore business confidence and improve the investment climate which would ultimately lift potential GDP growth. The 2018 Budget estimates that effective implementation of structural reforms could increase potential growth from 1.5% presently to nearly 4.0% (see figure 6).