Revised breakup plan rattles Eskom creditors

South Africa’s decision to modify a plan to break up its state-owned power utility Eskom into three separate entities is encountering opposition from creditors and foreign government funders.

The “revised unbundling strategy” approved by Electricity Minister Kgosientsho Ramokgopa will split Eskom Holdings SOC Ltd into distribution, generation, renewable energy and transmission subsidiaries, but under a single holding company, according to a statement posted on the utility’s website this month.

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That contrasts with expectations that the company would be separated into three stand-alone units, as proposed by President Cyril Ramaphosa in 2019.

The move could threaten the further implementation of the $8.3 billion Just Transition Partnership, a program backed by European countries to help South Africa reduce its reliance on coal-fired electricity.

It may also hamper Eskom’s ability to finance the construction of as much as 14 000 kilometers of new transmission lines, according to analysts including Anton Eberhard, an emeritus professor from the University of Cape Town’s Graduate School of Business.

Eskom’s revised strategy risks creating potential conflicts as the subsidiaries “all report to the same board,” said Olga Constantatos, head of credit at Futuregrowth Asset Management.

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Futuregrowth, which owns Eskom bonds, had expected the National Transmission Co of South Africa to be independent of the utility — as is the international norm.

Eskom denied the plan to retain the NTCSA within the holding company is new, and said the envisaged structure is in line with the Electricity Regulation Amendment Act.

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More than 100 countries have gone through a similar breakup exercise — including the UK, Russia and India — and have established independent entities. Eskom’s former CEO Andre De Ruyter floated the prospect of listing the transmission entity in order to finance its growth, and described the unbundling as “absolutely critical for the electricity industry in South Africa to move forward”.

The new transmission lines, which are expected to cost R440 billion rand, are required to accommodate South Africa’s move away from concentrated coal-fired power generation to a more geographically disparate mix of energy sources.

“The question is whether this achieves the full open and transparent market,” Constantatos said, adding that the changes may meet with resistance from Eskom’s existing lenders.

“They would be structurally subordinated to any new debt that may be raised at the NTCSA level.”

The revised strategy isn’t what was envisaged when the Energy Regulation Amendment Act was drafted, Eberhard said.

“The conflict of interest is not resolved, and it creates the opportunity for Eskom to frustrate the entry of private generators, especially renewable energy, through inadequate transmission infrastructure being made available,” he said.

The new structure will be an obstacle for JETP funding, diplomats with knowledge of the matter said, asking not to be identified because they aren’t authorised to speak to the media. For the JETP to succeed South Africa has to create a competitive wholesale energy market, they said.

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“The end state of the NTCSA asset ownership was never defined before and the ERAA does not make mention of this,” Eskom spokeswoman Daphne Mokwena said in an emailed response to questions. “As such, the reference to revised does not apply to NTCSA asset ownership.”

Conflicts of interest between Eskom as the dominant generator and as the owner of the transmission assets would be managed by an independent Transmission System Operator that’s expected to be constituted by 2030, Mokwena added.

“If Eskom entities retain ownership, any independent entity outside Eskom dealing with them will be stillborn,” said Roderick Crompton, an adjunct professor at the University of Witwatersrand’s business school and a former Eskom board member.

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