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South Africa’s Energy Crisis Costs R$257M a Day

South Africa’s Energy Crisis Costs R$257M a Day

South Africa is facing the peak of an energy crisis that has hit the country since 2008. The main reason is the inability of Eskom, the state-owned company responsible for supplying about 95% of the country’s electricity, to meet the demand of the population. During his annual address on 9 February, South African President Cyril Ramaphosa declared a state of national disaster due to the electricity crisis. According to him, the “most immediate priority is to restore energy security”, which is “an existential threat to the economy and social fabric of our country”.

Eskom introduced in 2008 “load shedding”-a policy of country-planned blackouts based on a rotating schedule. The aim of the measure was to manage demand and encourage energy saving during peak periods to reduce power cuts due to lack of supply. Since then, the population has suffered power cuts that can last up to 12 hours. The company operates in 2023 with 53.6 percent of its power plants, 36.5 percent of which are out of operation for “unplanned reasons”.

According to the Central Bank of South Africa, Eskom’s outages cost the government about 899 million rand a day. It is estimated that the country will have 250 days of power outages in 2023. The country’s economic growth in 2023 is expected to be 0.9 percent due to the energy crisis, down from 2.5 percent in 2022. The power cuts carried out by Eskom directly affect the country’s economy. Businesses, hospitals and water services are constantly damaged by blackouts.

The instability also affects business confidence to invest in the region and the government’s efforts to reduce the country’s unemployment rate. In the last survey by South Africa’s Department of Statistics, the unemployment rate was 32.7% and was the second highest in the world. President Cyril Ramaphosa sought external help to try to alleviate the crisis and to look for other sources of energy. At COP26, held in 2021, South Africa signed the Energy Transition Partnership with the United States, the United Kingdom, the European Union, Germany and France.

The countries offered South Africa $8.5 billion in funding over the next three to five years to help it transition to less polluting energy sources. According to the country’s ministry of Mineral Resources and Energy, 77% of South Africa’s energy comes from natural coal. At the next edition of the conference in 2022, Germany and France will provide another €600 million to the African government to help the country reduce its dependence on coal and make the transition to clean energy sources.

ESKOM

After the 1994 general election, when Nelson Mandela was elected president, the South African government expanded the provision of basic services such as electricity to areas that had previously been neglected by the apartheid regime implemented under the previous administration. As a result, demand increased and the state-owned Eskom was unable to expand its power supply network. Since then, the company has accumulated a history of financial losses, suspicions of mismanagement, corruption and political interference.

Eskom started an electricity production expansion programme in the administration of former South African President Jacob Zuma. Zuma’s administration decided to expand the construction of large-scale coal-fired power plants. The former president stayed in office for 9 years. During his administration, there were spending cuts and precariousness of the structures of the country’s state-owned companies. In October 2022, former Eskom CEO André de Ruyter claimed in an interview with the Financial Times that there was an organised crime scheme within Eskom.

On February 22, de Ruyter announced his resignation and stepped down. In December, he had already warned that he would not stay with the company, but was expected to remain until March 31. Calib Cassim, Eskom’s chief financial officer, has been appointed as interim chairman. Since 2007 the company has had 14 directors. Currently, Eskom says the government does not allow increases in energy prices to cover costs.

CRISIS RELIEF PLAN

The South African government has pledged to absorb US$13.9 billion of Eskom’s debt in an attempt to get around the crisis and get the company back on its feet. The amount corresponds to ⅔ of the total deficit of US$22.3 billion. To do so, the state-owned company must bring in private partners to help supply the energy demand and meet pre-established criteria.

In addition to absorbing a portion of the company’s debt, the government will also give Eskom 184 million rand (about R$52.6 million at current exchange rates), divided into 3 tranches until 2026 as follows:

The government will provide advances to Eskom of 78 billion rand in 2024 (Rs 22.3 billion), 66 billion rand in 2025 (Rs 8.8 billion), 40 billion rand in 2026 (Rs 11.4 billion); .

The advance of Rs 8.8 billion, made available in 2025, will be funded through agreements signed in October 2022 and additional loans of Rs 118 billion (Rs 33.7 billion) will be required;

The state will directly assume 70 billion rand of Eskom’s loan portfolio in 2026, financed through the issuance of short and long-term bonds in the domestic market. The amount passed on by the government can only be used to settle debts and pay prevailing interest.

In addition, Eskom will not be able to make any loans from April 1 until the end of the debt relief agreement period.

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