Eskom boardroom battle hinders operations

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Eskom tariff hikes pose risks to mining margins as Nersa reviews funding for new power stations, IPPs, and Kusile delays; coal supply contracts, governance turmoil, and load shedding fears intensify South Africa's energy security debate.

Inside the Issue

Proposed multi-year electricity price increases by Eskom to fund new capacity and stabilize South Africa's power supply.

Seeks $50B for capital and new power stations
Nersa mulls 45% annual increases; public backlash
Mining costs could spike; margins under stronger rand

Eskom, South Africa's power utility, is awaiting National Energy Regulator of South Africa's (NERSA) answer to a request for an annual 45% raise in tariffs during the next three years. The answer will be given in 2010.

Eskom is also gearing up to raise $50 billion to fund capital requirements and a new power station-building program as it faces rising-demand pressure across the grid to close the country's energy security gap.

Long-term coal supply contracts, including sourcing of higher-quality coal for new supply agreements, are due to be signed by the end of 2010, and more than $14 billion will be invested in opening 40 new coal mines by 2020. Eskom also has been dealing with a sense of public distrust stemming from chronic power-cutting in 2008, caused, among other things, by short-sighted management letting the coal supply chain and power station feed stocks run beyond the sustainable edge of peak-demand parameters.

Just recently, there has been a soap-opera-style fight in the boardroom, with CEO Jacob Maroga, who was in position before and during the power outages, as independent solutions surfaced in response, and power rationing to industry, resigning after a request that he do so from the board and its chairman, ex-mining executive Bobby Godsell; but Maroga withdrew his resignation after pressure from some members of the black empowerment lobby. The board had preferred Godsell's strategic vision to the CEO's.

With the temperature rising, Public Enterprises minister Barbara Hogan appeared to fudge the issue and South African President Jacob Zuma appeared to backtrack on support for the chairman, who was in fact a government appointee. The end result is that Maroga is still at his Eskom desk and Godsell has tendered his resignation, and there is an ongoing public furor about governance issues at the utility, with some powerful unions backing Godsell.

This leaves the tariff paying public wondering how soon Eskom will find more ways to shoot itself in the foot before it gets on with the major operational problems at hand.

Among those anxiously observing the drama are managers in the mining sector, who calculate that a 45%-per-year tariff hike will compound to 200% over three years and add up to 25% to mining costs in South Africa. A 31% tariff increase already became effective in April this year, and now the gold miners are feeling their operating margins squeezed so tightly by the stronger Rand currency that some underground mines could be faced with closure, as seen when a power crisis halted mines across the country previously.

Mark Cutifani, CEO of AngloGold Ashanti, has said that the entire economy would collapse if the full tariff increase was granted by Nersa. Graham Briggs, CEO of Harmony Gold, described the possible increases as a "spectre" looming large over the industry. The pressure on Eskom power supplies and the costs to mining, smelting and metals industries eased when the global downturn caused production pullbacks. Now they are in danger of missing the recovery and are working on fundraising options for Eskom to put before Nersa and the government when a formal reviewing and consultation procedure starts.

The general feeling is that someone has to give ground, and that someone should be Eskom.

Needing $12 billion to pursue the new power plant build program, Eskom has been pushing for a realistic electrical power tariff after the country enjoyed decades of government-subsidized power. Potential independent power producers (IPPs) with state backing have been holding project plans for some time and would also welcome clarity on commercially viable tariffs.

But by looking to raise revenue faster than costs and obtain funding for the power build, Eskom could lay waste to the margins on which its industrial customers operate. Painful pressure would be put on domestic users, with the already hard-pressed poor feeling the brunt of a tariff assault harder than any other group. Members of the government already have said that three annual 45% increases are just not feasible for the economy.

The feeling in industry and the market is that capital funding will have to come from a number of sources and should be accompanied by operating and cost control measures from Eskom. The possibility of delaying the Kusile project, which is the second of two new 4,000-MW coal-fired power stations amid a clean coal debate nationally, for 18 months has been mooted to help cash flow; that power gap has been filled by contracting for supplies from new power stations in Botswana and Mozambique.

The government also will have to find more funding support, especially after stepping back from new nuclear plans in recent deliberations, and development bonds have been given an airing without too much enthusiasm being shown. Perhaps more than anything, Eskom management must accept the need for assistance from various sources and admit that launching annual 45% tariff increases will compound problems and perhaps fatally complicate both the supply and demand sides of South Africa's power equation.