In our previous article, we discussed the implications of a new mining tax in DRC. This week, we turn our attention to South Africa and the impact of the new cabinet on the power sector.
On 29 May 2019, President Ramaphosa announced his new slimmed-down cabinet. Figures in the key economic portfolios represent a strong step in the direction of financial discipline, but also provide continuity at the top. Tito Mboweni and Pravin Gordhan stay on as finance minister and public enterprises minister respectively. Most importantly, the president decided to merge the ministries of mineral resources and energy. Gwede Mantashe takes the charge of the newly-formed portfolio and Jeff Radebe, the former energy minister, is not included in the new cabinet. The president and his team face an uphill task of implementing power sector reforms that can save the sector from a complete collapse and regain investors’ confidence.
The overall make-up of the cabinet is a nod to appeasing certain more radical elements of both the tripartite alliance that supports the ruling ANC’s rule, and factions within the ANC itself, a smart move for a president keen to shore up his support.
A merged energy and mines ministry may stall the pace of reform
The Integrated Resource Plan (IRP) is South Africa’s electricity infrastructure development plan and serves as a guiding instrument for power sector planning in the long run. The current IRP 2010 was promulgated in 2011 and has been under revision since 2016 to align the country’s power procurement strategy with the advancements in renewable energy technologies, among other factors.
Gwede Mantashe is former secretary general of the National Union of Mineworkers (NUM), a powerful lobby group that opposes efforts to reduce overreliance on coal power in the country. He is a mining specialist, and his lack of expertise in the energy portfolio may slow down the transition to renewables. This is in sharp contrast to the previous energy minister, Jeff Radebe. Radebe took lead in signing long-pending renewable energy PPAs in April 2018, fast-tracked the process to finalise the IRP, and didn’t shy away from embracing a pro-renewables stance.
Mantashe’s personal allegiances will be split. His proximity to the mineworkers’ unions will likely influence his position on moving away from coal-dependency and create conflicts of interest. Moreover, Mantashe will likely be preoccupied with fulfilling his promise to introduce new upstream oil and gas legislation. He may therefore have little time to engage more wholly on pushing the draft IRP over the line, which is under progress since 2016 and was expected to be finalised in the first half of 2019 had Radebe retained his portfolio.
Beleaguered Ramaphosa ally remains in
Pravin Gordhan has been under investigation by the nation’s anti-graft ombudsman over spurious claims he violated the Constitution when head of the customs service. The far-left EFF party strongly oppose his tenure, criticising his desire for privatisation of generating functions at Eskom and how assiduously he has been weeding out corruption from bloated state-owned enterprises.
His continued presence leading the portfolio is a positive sign for possible reform of the sector. But his ongoing battle with the EFF does not bode well, since the party will influence unions to use strike action to resist Eskom reform and the progression of the IRP. Alongside a beefed-up EFF presence in parliament, personal attacks on Gordhan may impede the passage of reforms.
Mantashe’s appointment favours the coal industry, only if Eskom could prove financial stability
As mines minister, Mantashe called for coal miners to lead a ‘good PR’ campaign to dissuade the public of its dirty image and to invest in clean-coal technology. Moreover, President Ramaphosa’s reform plan faces resistance from the NUM, which sees it as an attempt to privatise Eskom and put their jobs at risk. The president addressed these concerns before the May election with an assurance that no jobs will be lost, implying that Eskom’s unbundling will not impact its coal power fleet. These developments may have appeased the country’s coal industry whose concerns are compounding with a deteriorating business case for coal power generation in the country.
12GW of Eskom’s coal power capacity is scheduled for decommissioning through 2030. This schedule is contingent upon Eskom’s ability to comply with the minimum emissions standards set under the Air Quality Act of 2004. Additionally, a total of 18GW of coal capacity requires extensive retrofits to ensure compliance with the law in early 2020s, which will be difficult due to the utility’s financial limitations. This may lead to early retirement of coal power plants potentially more than the scheduled 12GW of coal power capacity through 2030. It will become increasingly difficult for Mantashe and President Ramaphosa to continue bailing out Eskom to keep its coal power fleet afloat.
Rudderless Eskom is sinking faster than expected, reinforcing the need for reforms
Eskom appears to be operating much closer to the brink than was initially expected. In March 2019, regulators granted a 13.87% average price increase for Eskom direct customers and a 15.63% average price increase for municipalities, to take effect on 1 July 2019. However, it was denied the 15% annual increase over each of the next three years it had requested. These rises are far short of what Eskom needs to be financially stable. Its debt has reportedly passed the USD35 billion mark (ZAR500 billion). The utility has a very poor debt-service cover of 0.52 as of March 2019, meaning that its operating income is not enough to meet its debt obligations. Its solvency is seriously imperiled.
The energy availability factor (EAF) of Eskom’s coal power fleet has been in decline since 2010. The EAF average of 85% regressed to below 70% in 2018, leading to electricity shortages in November and December 2018. As plant failures and boiler tube leakages became more frequent due to deteriorating coal plants and low water levels at hydropower plants, the country plunged into darkness in February and March 2019. The shed load in these two months (769GWh) is more than half in full year 2015 (1,325GWh).
The embattled utility’s woes threaten South Africa’s macroeconomic fundamentals. The country is barely clinging on to its last investment grade rating, which Moody’s is due to review in November. Its debt-to-GDP ratio may well hit 70% this year, and the central bank has warned defaults are growing for both consumer and corporate debt. To help Eskom achieve financial stability, the government announced a USD5 billion bailout package for three years and linked it to its unbundling and achieving certain performance criteria. There remains no choice for the Ramaphosa administration but to press ahead with formulating and enacting a reforms package.
Mboweni will bring fiscal discipline in the power sector
Tito Mboweni remaining as finance minister is a positive development for power sector reforms. Mboweni is more than aware of the drain on public resources and the effect Eskom’s performance is having on South Africa’s economy. He is keen to fast-track its unbundling in a bid to reduce the state’s exposure to Eskom’s debt through the introduction of IPPs. And Mboweni has publicly announced his intention to review the system under which Eskom sells its electricity to municipalities in the new administration in a bid to recoup arrears owed to Eskom.
But Mboweni is very unpopular with the two elements that support the African National Congress’ rule, the trade union Cosatu and the South African Communist Party (SACP). He will struggle to work with his new finance deputy, David Masondo who is a former SACP youth leader with strong ties to Cosatu. It remains to be seen how Mboweni manages his ministerial portfolio along with obvious political challenges. Nonetheless, his clear priorities indicate that efforts to delay Eskom’s unbundling will face resistance from his ministry whose nod is necessary for any bailout package request for the utility. Moreover, his pro-IPP stance favours renewables which have become most competitive sources of power generation in the country with added benefits of regional development.
The pace of power sector reform is set for a battle over the next year. Public enterprises and finance represent positive continuity, but Mantashe as energy lead could probably stall attempts to speed up Eskom’s much-needed restructuring. Or perhaps the president brought in a coal industry insider to make the reforms process smooth, which is due to face fierce opposition from a much stronger EFF inside and outside parliament. It may take a few months to ascertain Mantashe’s priorities; however, there is little doubt that power sector reforms top President Ramaphosa’s agenda. Further, it’s clear that without concerted, intensive and immediate government action, Eskom will go under.