Eskom crisis casts new doubt on South African PPAs


February 2, 2018

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In July 2016, the then-chairman of South African state utility Eskom, Ben Ngubane, wrote to the country’s energy minister saying that the firm would not sign any more power purchase agreements to support the country’s renewables growth.

Eighteen months later and the situation has not improved. In fact, it has worsened. Eskom is yet to sign 26 PPAs to buy electricity from wind and solar schemes totalling 2.2GW, which represent investment of ZAR58bn (€3.9bn). These PPAs were due to be finalised by the end of 2015.

Eskom delayed signing the deals because it said renewables cost far more than coal and that the PPAs would have set it back $4bn over the next 20 years. In the last two years, the South African government has kept asking Eskom to comply with the law and sign the PPAs, but several deadlines have not been met.

The latest of these deadlines, imposed by South Africa’s energy department, was at the end of December 2017. Its new deadline is the end of March. We cross our fingers in hope, not expectation.

After all, Eskom has been delaying and obfuscating because the outstanding PPAs are not its only issue at the moment.

It is reportedly close to default with over ZAR350bn (€24bn) of debt, mainly due to its strategy of pursuing investment in coal. Eskom owns 15 coal-fired power plants and, in 2016, unveiled plans to invest ZAR324bn (€22bn) building two new ones.

However, a combination of stagnant power demand, rising maintenance costs for its existing power plants and a huge investment programme have left it with a liquidity crisis. It could reportedly run out of cash by the end of February.

The situation is so bad that the government has intervened, by issuing R350bn (€24bn) in guarantees to Eskom – of which R275bn (€18bn) have already been used – and recently named a new board in an attempt to reassure lenders. Bloomberg has reported Eskom is now set to ask banks for funding commitments to return its liquidity buffer to the required R20bn (€1.3bn).

This still leaves the question of what will happen to the PPAs.

The South African Wind Energy Association has said it now expects the finalisation of the 26 outstanding deals by the end of March. SAWEA told us that the only step left is for the minister of public enterprises to grant her approval in terms of section 54(2) of the Public Finance Management Act, to be addressed to the chairperson of Eskom, in response to Eskom’s application for the minister’s approval in terms of section 54(2) of the PFMA to enter into PPAs. Simple, right? We still remain cautious.

The key point is that the development of renewables, including wind, in South Africa is deeply linked to Eskom. Investors have been attracted to the country because its Renewable Energy Independent Power Producers Procurement Programme has offered PPAs with Eskom to developers. The utility has so far signed 64 PPAs for a total of 4GW of renewables capacity.

But it is also a captive market and so, if the state-owned business does not resolve its financial issues, the whole sector is at risk. To be honest, the whole South African economy is too.

Finance Minister Malusi Gigaba warned last month that if Eskom’s problems are not fixed urgently, the South African economy could collapse. He said “there would be no currency and no economy for the country if Eskom went belly-up”.

This is because the government has guaranteed Eskom’s debt. If the utility failed to meet its debt obligations, the government would be liable. However, South Africa’s public finances couldn’t repay Eskom’s debt without issuing more government debt itself, putting further pressure on the country’s economy.

That could be the silver lining for developers waiting for Eskom to sign on the dotted line. Either Eskom is too big to fail, and so will be able to sign the deals itself, or the government will take over and sign them. That is the positive take.

But it is also tough to imagine that wind PPAs would be a priority in the case of a full collapse. Either way, the end game is in sight.

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