Why Eskom needs a 38% electricity price hike

Eskom is in deep financial trouble, with its interest expense far exceeding its operating profit, which shows that it can no longer service its debt.

Over the last decade, Eskom was plagued by mismanagement, corruption, rising employee expenses, and huge cost overruns on Medupi and Kusile.

These factors contributed to Eskom racking up huge debt that has reached levels that put the country’s finances under pressure.

Since 2011, Eskom’s debt has increased at a rapid pace. The power utility’s total liabilities and interest-bearing debt peaked in 2020 at R637 billion and R532 billion, respectively.

Eskom currently has R566 billion in liabilities, of which R402 billion is interest-bearing debt.

The debt levels are so unmanageable that Eskom finance head Calib Cassim wants the government to take over R200 billion in debt.

The graph below shows Eskom’s total liabilities and debt since 2006.

Rising debt does not necessarily signal a financial problem. Many companies increase their debt by expanding their profitable operations.

However, a problem occurs once an organisation’s debt increases while its ability to service its debt deteriorates.

A company’s ability to service its debt can be determined by comparing its operating profit to the interest expense on its debt.

In Eskom’s case, its interest expense far exceeded its operating profit over the last four years. It indicates that it can no longer service its debt.

Eskom’s latest financial report shows that it can only cover 13% of its interest expense with its entire operating profit.

When an organisation can no longer cover its interest expense, its debt will continuously increase in what is known as a debt trap. It often means companies take out loans to pay off loans.

The graph below, which shows Eskom’s operating profit and interest expense since 1990, clearly illustrates its dismal financial situation.

In August, Eskom applied to the National Energy Regulator of South Africa (Nersa), asking for a 32.66% electricity tariff increase from April 2023.

Eskom updated several assumptions in its revenue application during September, slightly reducing its ask to 32.02%.

The power utility said its total revenue as applied for in June 2021 — R335 billion for the 2024 financial year and R365 billion for the 2025 financial year — remained roughly the same.

Nersa has interpreted Eskom’s price increase differently, restating the overall price increase requested as 38.1% when factoring in its Regulatory Clearing Account (RCA).

Eskom’s RCA is a reconciliation of qualifying Nersa-approved revenues that didn’t materialise and actual expenditure that was higher than projected.

Eskom has previously said the revenue impact of load-shedding is not included in the RCA balance.

This article was first published by Daily Investor and is republished with permission.

Now read: Eskom blew R680 billion on power plants — now it generates less electricity

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Why Eskom needs a 38% electricity price hike