Jitters over Eskom money troubles

By Haggai Matsiko

Uganda is only country in region with ties to embattled South African power generation giant

Just days after cash-strapped ESKOM failed to secure a much anticipated tariff hike in South Africa, power sector players in Uganda fear trickle-down effects as the energy giant seeks alternative funding.

Eskom had sought 16% tariff hike a year through March 2018 but the National Energy Regulator of South Africa (NERSA) announced at end of February that it had allowed only an 8% rise.

Sector observers immediately pronounced the development to be “bad news for Eskom’s balance sheet”.

Bloomberg News quoted Peter Attard Montalto, a London-based economist with Nomura International Plc, who said failure to secure increasing tariff revenue raises questions about where Eskom would find the new badly needed money.He was one of many commentators who were asking about where Eskom, which is reeling under a 195 billion rand (Approx. Shs 58 trillion) of debt and interest outstanding, according to data compiled by Bloomberg, will find new money.

“Bloomberg also quoted Hilary Joffe, a spokeswoman for Eskom saying “It will certainly present challenges”.

Eskom announced a 12.6 billion rand profit (Approx. Shs 4 trillion) for the six months through September 2012 mainly as a result of increased tariffs.

The power giant needs more new money to build two new coal-fired plants, two new gas-turbine plants, and a pumped storage plant. It also needs to re-commission three coal-fired plants, upgrade existing plants, and build new transmission lines and two renewable energy plants.

Eskom which aims to increase its power generation to 80,000 MW by 2025 from the current 41, 194 MWs has not paid dividends to its shareholder, the government of South Africa, since 2008.

Analysts have said even with the high tariff hikes, Eskom will not be able to meet its build and financing costs.

Local financing jitters

Formerly Uganda’s biggest power generator, Eskom Uganda holds a 20-year generation concession on two main hydro-electricity power plants; Nalubaale and Kiira on the River Nile at Jinja.

The two dams have a capacity to generate 380 Megawatts (MW) but Eskom has at most generated only 180MW. Still, that is 42% of all electricity generated in Uganda. It is, therefore, easy to see how Eskom’s South African problems could trickle down to Uganda.

Uganda has an installed power generation capacity of 818.5MW from hydro, thermal, biomass, and diesel plants and actual peak demand of 487MW. Its current generation is, however, only 558.5MW. The difference is due to poor performance by Eskom.

Eskom Uganda Managing Director, Nokwanda Mngeni, told The Independent there is no way the Ugandan subsidiary could be affected by troubles back at home in South Africa. She said Eskom Uganda is semi- autonomous.

“There is very little interference from our shareholders apart from reporting to them and seeking technical assistance from them about certain aspects,” she said.

“Compared to Eskom Holdings, our operations are a drop in the ocean,” she added.

According to her, the South African power giant has clung on to the Uganda operation because “it has worked well and is looked at it as a flagship.”

“In future should Eskom consider expanding their operations anywhere, they have the Ugandan example to show,” she said.  Reports elsewhere indicate that the Uganda operation is strategically important for Eskom because it is part of the greater Programme for Infrastructure Development in Africa (PIDA) that aims to create an integrated power grid network for the continent. Uganda lies strategically along PIDA’s proposed North-South transmission link from Egypt-South Africa.

But Nokwanda confirmed that when Eskom Uganda won its concession in 2003, it built its investment operations around a US$6.8 million loan it secured from its parent firm, Eskom Holdings. Although  repayment of that loan was completed in 2007, Nokwanda said Eskom Uganda still has long-term debt obligations.

“We used to declare dividends but for the last two to three years, we have not,” she said, “We have been investing the profits.”

According to a press statement in August 2012, Eskom Uganda plans to inject US$20 million in operating expenses on the two hydropower generation dams it controls; the new Kiira and old Nalubaale dams.

“There are a lot of problems on the old plant,” she noted, “We are already wondering whether we should be spending more money on it.”

She said while the two plants have 15 units, only 13 were in operation. Of these, three units have faulty water ways that require at least Shs 500 million to fix each while another unit at Nalubaale had developed a crack due to concrete movement causing its water control gate to malfunction.  Nokwanda said the old Nalubaale dam could be put out of service by 2023 as it has passed its expiry date.

“Plants are usually designed to last 50 years, which it has made,” she said of the dam which was commission in 1954.

The number of refurbishments required at both plants for 2012/2013 in the Ministry of Energy, Sector Performance Report 2011-2012, comes to over 30 and requires about US$ 10 million.

Nokwanda also told The Independent that because of the stringent transfer pricing regulations, Eskom Uganda is putting together a 10-year Funding Plan in which it is looking at independent borrowing.

High debt financing costs, inadequate power generation, and high operating expenses are at the heart of Eskom Holding’s problems in South Africa.

Based on how Eskom Uganda’s 10-year Funding Plan is financed, it is easy to see how the South African problems could trickle down to Uganda.

Ailing giant

Although South Africa has run a “tight power system” with diminishing reserve capacity since 2007, its low generation crisis has escalated. It applied for the 16% hike in tariffs to raise revenue to finance new generation but the move sparked widespread riots in South Africa among domestic and industrial consumers.

Workers unions and industrialists say Eskom’s high power tariffs will slow the economy and cut jobs.

The high tariff regime also marks a turning point for a company which has for decades prided itself to be the “cheapest power generator in the world”.

As recently as 2008, South Africans paid as low as 19.4 local cents per Kwh. This had jumped to 61local c/Kwh and the 65.1c/Kwh that NERSA allowed on Feb. 28 will come in effect in April. By 2018, according to the NERSA announcement, Eskom could be charging up to 89.13 local cents.  That is a 360% leap in the cost of electricity in just four years.

Eskom which produces up to 45% of electricity in Africa generates, transmits, and distributes about 95% of the country’s electricity. That represents 60 percent of Africa’s total electricity consumption.

Eskom has power system operating concessions in Senegal, Mali, and Mauritania, and a power generating concession in Uganda.

But the company’s main activities are in the SADC region where it controls generation and grid networks in Mozambique, Zimbabwe, and Swaziland.

South Africans have sporadically attacked Eskom, taking to the streets over high tariffs and power outages since the worst power outage riots of 2008.

High salaries

A report by global environmental lobbyist Green Peace, The Eskom factor: Power politics and the electricity sector in South Africa notes that in 2011, mining and industry customers who consumed 60 percent of its power, paid an average of 36.2 local cents per Kwh, while 4.5 million direct residential customers paid on average 66.4 local c/KWh.

The report castigates Eskom for paying its CEO R478 000 per month (plus bonuses) when an ordinary South Africa earns R3162 per month. The CEOs salary is equivalent to the monthly cheque of 151 ordinary South Africans.

The same report also shows how Eskom increased its tariff from 24.7c for every kWh to 40.3c on average in 2011 posting a net profit of R13.2 billion in 2012.

In a much recent salvo, Green Peace accused Eskom of spying on its activities forcing the power utility to suspend its contract with Swartberg Intelligence Support.

White elephants

In Uganda, there is widely held claim that Eskom’s new Kiira dam that purportedly has a capacity of 200MW is a white elephant. Initially designed to use excess water from the reservoir on the River Nile, it has failed to relieve the old Nalubaale dam.

Dickens Kamugisha, the executive director of the NGO African Institute for Energy Governance (AFIEGO) says Eskom produces below capacity because it has not invested in new infrastructure as per agreements.

“Where does the money go, where does it invest?” he asks in a veiled insinuation at profit repatriation.

Kamugisha says that with no stringent laws that determine how much a company should invest in the local economy, the likes of Eskom can end up just repatriating profits, thus undermining Uganda’s most critical sector.

“It [Eskom] has had that concession for the last 10 years,” Kamugisha notes, “it is the biggest power company in Africa, how come it is not being felt?”

Nokwanda, however, blames water restrictions and the ageing of the Nalubaale dam for the poor performance.  Without water restrictions from the Directorate of Water, Nokwanda said, Eskom can generate up 280 MW.

“They are always actively supervising us; they give us more water whenever we need it,” Nokwanda told, “and our PPA is efficiency driven, if we do not generate the power required of us, the penalties are so high.”

An eight-member Adhoc Committee on Energy (ACE) that investigated the electricity sector recommended, in a 2012 report, that Eskom’s contract be terminated.

It disputed Eskom’s reported level of investment and said, world over, big electricity generation is a sovereign responsibility either under direct government control or a public private partnership.

Eskom has faced such accusations elsewhere. In Mozambique, Eskom has for decades been accused of paying exploitatively low power to the Cahora Bassa Hydro-electricity Company (HCB) and ensuring that South Africa enjoys low tariffs. Based on a 1960s agreement, Eskom is supposed to get up to 1500 MW from HCB at only 2 c/kwh. The stand-off forced HCB to cut off supply to Eskom’s grid into Zimbabwe.

Wrong financing model?

Until recently, the Eskom model appears to have been high tariffs abroad and low tariffs. Generation deficits at home appear to be forcing it to shift to a high tariff model at home where its financing model has been criticised.  Under the model, Eskom projects to use revenue from high tariffs to finance the building of new power generation ventures. In this way, it says, future generations will be assured of adequate and cheap electricity.  Eskom’s critics say it is unfair to tax the present generation for the enjoyment of the future generation. Most prefer a model where today’s generation pays for what it consumes.

In its 2010 annual integrated report, Eskom Holdings states that the future involvement of Eskom in markets outside South Africa is limited to those projects that have a direct impact on ensuring security of supply for South Africa.  The projects include generation managerial roles in facilities in Uganda and Mali.

But sources say that even in Mali, Eskom has been considering withdrawal due to problems with its concession. It also got out of Zambia. That would leave only Uganda in the picture.  Such scaling back has led critics to argue that Eskom clings on because Uganda a safe haven with an inefficient government that is incapable of monitoring a giant like Eskom with its wealth of expertise.

“If you have a weak regulator who does not have the capacity to do research and investigate the sector,” Kamugisha asks, “how do you deal with a company like Eskom with the expertise it has? It will just make its money.”

He says that the Power Purchase Agreements (PPAs) usually allow the companies to put government on pressure because they provide that an operator must get a return on investment.

Kamugisha also notes that this would have a direct impact on the tariff paid by the ordinary man. “So if you do not have the capacity to control the expenses of such a giant,” Kamugisha argues, “how will you ensure that the tariff is not hiked?”

To seal his argument, Kamugisha cites the newly inaugurated Bujagali Hydro-power Project, where the proprietors, Sithe Global Power and the Aga Khan Fund for Economic Development, had initially said that a unit would cost six US cents and price skyrocketed to 12 US cents by the time it was completed.

Ugandan tariff going up

As a dominant generator, Eskom directly determines the power tariff in Uganda. Its fixed generation, operation and maintenance costs that are adjusted according to inflation, refurbishment costs and exchange rate variation and sales to the electricity transmitter Uganda Electricity Transmission Company Ltd (UETCL). The resale price to power distributor Umeme and the distributor’s costs and mark-up make up the final tariff.

Under this arrangement, Eskom like all the other institutions in Uganda’s institution-bloated electricity sector submit their budgets to the sector regulator for approval. This year, Eskom requires US$15 million (Shs 39billion) up from Shs 29.7 billion last year. This cost plus the budget of the Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), Uganda Electricity Distribution Company and Umeme will make up the tariff.

For financial year 2013, the budget for UEGCL is Shs 5.1 billion, UEDCL Shs. 3.3 billion, and UETCL Shs 50 billion. Umeme also has a fixed budget under what is called distribution operation and maintenance costs and its other costs— together all this is compiled to arrive at a tariff that Umeme charges.

Umeme had last year applied to automatically adjust tariffs on the basis of currency and inflation variations. However, the Electricity Regulatory Authourity (ERA) rejected Umeme’s request and maintained its quarterly tariff adjustment system. As a result, Umeme, will charge UShs 562.4/kWh from domestic users, UShs 533.0/kWh from commercial users, 462.9/kWh from medium industries, UShs 325.2/kWh from large industries and UShs 545.0/kWh for street lighting.

The question critics are asking is why Ugandans have to keep paying for Eskom and UEGCL yet the output of the two towards Uganda’s electricity sector keeps dwindling.

In their report, the MPs on the Adhoc committee also questioned why the taxpayer continued to bear the brunt of the huge costs for operation and maintenance of the two plants and fund UEGCL at the same time. They noted that UEGCL had the expertise to run the two plants.

Experts say the demand for power is growing at 10% per year and outstripping the rate of generation and the capacity of distribution.

Uganda’s energy deficit is likely to rise after the 100MW from thermal power stations was switched off.  Sector players fear the country might face another round of power outages in the near future because of the ever growing demand. This is why it is important that Eskom delivers more power.