Eskom races to tap cheaper funding

Plan for a just transition is needed in time for COP26 to grab a chunk of concessional financing

SA has less than 100 days to get a “just energy transition” plan in place if it is to access the window of opportunity presented by concessional climate financing or lose out to other countries, says Eskom CEO André de Ruyter.

A just energy transition refers to the movement away from carbon-intensive energy generation towards clean technologies such as solar PV and wind, but done in such a way that communities and workers in the coal economy are not left behind to face misery in ghost towns.

As the world seeks to limit global warming to 1.5°C and achieve net zero emissions by 2050, governments and funders are looking for ways to reduce global emissions. As the world’s 12th-biggest emitter, SA offers an attractive opportunity to do this.

But although the idea of accessing concessional finance for Eskom has been around for more than two years, there has been no movement on it by the government. An expert presidential task team formulated proposals in March 2019 for President Cyril Ramaphosa.

De Ruyter, who set out the beginnings of Eskom’s vision for an energy transition at a meeting of the Presidential Climate Commission on Friday, said SA needed to get a plan in place by the time COP26, the UN climate summit, meets in November.

Eskom hopes to raise R150bn to fund the transition from multilateral lenders, including the World Bank, German and French government development finance institutions and the New Development Bank, which have all expressed interest in Eskom’s proposals.

Concessional climate financing will be linked to a faster retirement of Eskom’s coal fleet than envisaged at present and the expansion of the national grid to enable the connection of

Eskom and private sector renewable energy projects.

“This is an exciting offer by these lender governments and we are very optimistic that there is very substantial money being put forward.

“The opportunity is SA’s to lose, before other countries take advantage,” said De Ruyter at the commission meeting.

The proposal under discussion involves a “multi-tranche, multi-year facility by a multilender syndicate” that will provide funding on a “pay for performance” basis.

“It is important that we accelerate the drive to conclude this by COP26. We have 97 days to put such a transaction together. Government will be required to ensure all processes are expedited,” he said.

However, the Treasury, which would have to be integrally involved in the transaction, has over the past two years been lukewarm on concessional climate financing. In reply to questions on Sunday, the Treasury said it supported the spirit of the Eskom proposal.

“The Treasury supports the transition of the electricity sector and a shift to alternate clean energy combined with appropriate investments in upgrading the grid infrastructure and adequate support measures for vulnerable workers and communities.”

However, “the pace and scale of the transition will be important and will have to be carefully managed taking into account the overall financial viability of Eskom”, it said.

De Ruyter’s just transition transaction is a more modest version of the one proposed to Ramaphosa and the Treasury by the expert task team two years ago. In that version, part of the intention was to reduce Eskom’s debt burden by shifting this into a special purpose vehicle and exchanging expensive finance for cheaper concessional options.

Eskom’s financial position is extremely precarious and it is dependent on annual cash bailouts from the Treasury to service its R400bn debt burden.

The Treasury has shied away from a big Eskom debt solution – such as taking a large chunk of debt onto the sovereign balance sheet – and has opted instead for annual transfers. The February budget allocated R31.7bn of support to Eskom.

Deputy finance minister David Masondo set the cat among the pigeons in the commission meeting when he offered his personal views rather than those of the Treasury, which included a proposal in which Eskom debt holders agreed to a haircut in exchange for faster decarbonisation. The Treasury said on Sunday that it had noted Masondo’s “personal views” and was still committed to pursuing the path it was on.

“The Eskom debt matter is being dealt with as part of the unbundling process. It is anticipated that some debt relief will be required to enable Eskom and its subsidiaries to be financially sustainable, the nature and scale of such relief will be based on Eskom’s improved operational and financial performance. It must be noted that the build-up of debt reflects underlying operational and regulatory challenges and a debt takeover won’t solve these issues,” it said.

The resolution of Eskom’s financial position must tackle several fundamental concerns, which included: tariff increases that earned a reasonable return; cost savings; the unbundling of Eskom into three separate entities; and the restructuring and/or reduction of debt to manageable levels, it said.

DE RUYTER’S JUST TRANSITION TRANSACTION IS A MORE MODEST VERSION OF THE ONE PROPOSED TWO YEARS AGO