Toughest of times for Eskom

28 August 2009

Eskom, South Africa's state-owned utility, has reported a record annual loss and has warned of a funding gap for an expansion program needed to prevent a repeat of the blackouts the country experienced in 2008.


The company, which supplies about 95% of South Africa's electricity and more than 60% of Africa's, reported a loss of 9.7 billion rand ($1.25 billion) for the year ended 31 March. In the previous year, Eskom made a loss of 210 million rand ($27 million).


  "The organisation's
  financial results clearly
  indicate that financial
  sustainability is now
  Eskom's single, central
The scale of losses
  incurred is clearly
  unsustainable, and the
  board is determined to
  move quickly to return
  the organisation to
  financial health."
  Bobby Godsell
  Eskom chairman

Eskom also said that it foresees a funding shortage of some 80 billion rand ($10 billion) for its expansion program aimed at reducing the risk of power shortages. In January 2008, as domestic supply reached its limit, South Africa suffered crippling backouts and electricity exports to neighbouring Botswana and Zimbabwe were stopped. This led to a wider grid failure affecting Zambia.


Godsell said, "The bottom line in terms of the funding model is that Eskom can only build new infrastructure if we have the money to do so. At present we have not secured all the funding needed for the current build projects. We have taken a conscious decision that we will stop or delay projects if we do not have the funding."


He noted, "We need to mobilise greater equity resources to fund the build program. The government has already provided 60 billion rand ($8 billion) in a loan with equity characteristics. Government revenues are likely to be severely constrained in the near future. We need to find other sources of expansion funding, perhaps in the form of a development bond that will enable South Africans to invest in the expansion of our country's energy system."


"The capital costs of our build program have escalated considerably," Godsell added. "Prior to the recent global economic crisis, construction costs were escalating worldwide and across all industries. The global recession has created new market circumstances."


Eskom's CEO, Jacob Maroga, said: "The year under review has been primarily about keeping the lights burning and recovering the power system." He added, "The year under review has also been dominated by the accelerated implementation of Eskom's build program." A total of 30,460 million rand ($4 billion) was spent on that and since its inception in 2005, capital expenditure has amounted to a total of 54,304 million rand ($7 billion).


Maroga noted, "As at 30 April 2009, 4454 MWe was commissioned since 2005. A further 6184 MWe will come on stream within the next five years."


And the nuclear program?


In early 2007, Eskom's board approved a plan to boost electricity output to 80 GWe by 2025. This included the construction of 20 GWe of new nuclear capacity, which would see nuclear's contribution grow to 25% from the present 5%. The plan for the nuclear new-build program would kick-start with up to 4 GWe of pressurised water reactor (PWR) capacity, to be constructed from about 2010 with commissioning in 2016. Five sites in the Cape Province were under consideration, although the most likely initial site would be that of Koeberg, the site of South Africa's only existing nuclear power plant.


Having already made "considerable progress" in the process to procure a PWR, Eskom’s board of directors decided in December 2008 not to proceed with the project due to the companies own financial constraints and the global economic situation. Political instability in South Africa at that time also played a part in the board's decision.


For a time the nuclear program seemed completely forgotten, but more positive noises have come from government in recent weeks. Eskom noted, "The process to introduce further nuclear stations is now being led by the government. Eskom will continue to work with government in this regard."