Eskom's restructuring might prove detrimental to its future prospects

In response to protracted financial troubles at the state-owned entity, South African President Cyril Ramaphosa has announced plans to restructure operations at Eskom. Frost & Sullivan is ambivalent about the effectiveness of the measures for Eskom itself, but has faith in their benefit for South Africa’s larger energy market.

The restructuring involves the division of the entity’s operations into three distinct verticals, namely generation, transmission and distribution, with the objective of distributing the burden, costs and the responsibility across all three. The move comes after a period of prolonged financial struggle at the power distribution entity.

Eskom’s financial trouble has stemmed primarily from a high level of debt, which currently stands just short of R420 billion when last reported in September last year. Not only have the financial woes led to a stagnation of operations at the entity, but they have also prevented it from exploring more renewable forms of energy generation.

The split comes despite considerable opposition from trade unions in South Africa, primarily due to the fact that restructuring on such a large scale usually translates into substantial job cuts. The President has assured the unions that he will consult trade unions at every stage of the restructuring process.

As the entity has struggled, a number of consulting firms have offered their perspectives on what the best course of action would be going forward. Senior analysts at FTI Consulting last year indicated that expanding the state-owned entity’s market to neighbouring regions in Southern Africa would be the best way to regenerate revenues.

According to Frost & Sullivan, the President’s restructuring plan might benefit Eskom, but might not have the capacity to rescue its operations altogether. Nevertheless, the incentives for renewable energy will encourage other firms across the country to increase their investment in more renewable forms of energy.

“Opening the market through power being procured from various power sources would also invite companies to South Africa to look at distributed generation and electric mobility, which is already being looked at in many other countries,” said Neeraj Sanjay Mense, Analyst at Frost & Sullivan.

“South Africa could also see companies moving into the country to manufacture batteries, as we have the needed natural resources and energy storage is an essential element in the wind and solar grid,” he added.

Mense also explained how the policy could be detrimental to Eskom, stating that, “ With all the different sources of power which are coming into play, such as wind and solar, and the cost of alternate energy generation reduced below that of coal, buying from private players such as the IPPs [independent power producers] within the Renewable Energy Independent Power Producer Procurement program could potentially result in a shutdown of some of Eskom’s existing plants.”