S Africa’s junk status problematic for power sector

South Africa’s recent demotion to a junk status credit rating is immediately and directly affecting the country’s power supply.

South Africans should not “bluff themselves” as the country’s new-found status can become a huge problem, says audit, tax and advisory services company KPMG infrastructure deal advisory director De Buys Scott.

“Companies such as State-owned power utility Eskom will feel the impact almost immediately because the price of its financing is going to go up. Interest rates will simply be amended to accommodate high risks and this will have a direct impact on Eskom’s costs, which will ultimately lead to the amendment of electricity tariffs and sourcing subsidies,” he explains.

Scott says Eskom will not be able to pass all extra costs on to consumers as they are also “under cash flow pressure.”

He adds that the status will have “other devastating effects”, such as a rise in unemployment, so solely adjusting tariffs is not a feasible method to accommodate rising costs.

“These consequences will be felt by consumers within the next six months to a year – it never happens immediately for them but, in time, it will happen,” he warns.

He advises that, because tariffs cannot simply be adjusted to accommodate rising costs, it must be subsidised elsewhere and this could lead to a nationwide recession.

“Our new status can lead us into a recession and things can get very difficult.”

Scott advises that the country start preparing for a recession early enough. “[Junk status] will restrain expanding projects as debt will become more expensive. Our investment programmes and, by default, also the launch of new projects must be reconsidered,” he says.

Nuclear Debate

Scott says nuclear power is more expensive than any other form of power and it can take 10 to 15 years for a plant to be operational.

“In that time, you can get other forms of power generation operational and, therefore, generate income. You need a period to fund nuclear power plants in a timeframe where there is little monetary income. It is a very difficult time for our country to implement nuclear power.”

However, he says, from a long-term perspective, nuclear power plants last twice as long as other forms of power and they produce a clean source of energy.

“Fundamentally, it must be a part of our power strategies – as long as it is done within a reasonable budget and done sensibly.”

He points out that transparency is the most important aspect of nuclear projects in terms of expenses, owing to the fact that, as the economy comes under great pressure, growth is challenged, inflation will go up and the effects of the country’s credit rating status “will be felt”.

“We must ask ourselves: Can we afford this new utility project? Do we really need it? Are all our renewable-power sources already paid for not enough at this stage?” Scott asks, noting that, if these types of questions are asked, honest answers will indicate the need for additional utilities and appropriate funding for projects of this magnitude.

KPMG at African Utility Week
Generating value and creating agility in the evolving business landscape of power and utilities, with the firm’s goal to focus on ‘future proofing’ to prepare for both foreseeable and unforeseeable forces that are fundamentally changing the power and utilities industry, KPMG has taken up a diamond sponsorship opportunity at this year’s African Utility Week (AUW).

This is part of the firm’s strategy to execute its mastery from an advisory perspective.

Apart from the wealth of knowledge that the firm has to offer AUW’s attendees, KPMG looks forward to exercising its commitment to helping organisations with robust, sustainable and flexible strategies, in addition to models that can adapt quickly in a dynamically unfolding future.

When KPMG’s experts were asked about the biggest challenges currently engulfing the sector, the first issue that they highlighted was that energy security remains elusive on the African continent.

The International Energy Agency estimates that two out of three people in sub- Saharan Africa do not have access to electricity.

This translates into 620-million people on the continent without electricity.

For those that have, the supply is unreliable and very expensive, compared with world standards.

“There is an emerging trend in the sector. Utility-scale developments are decreasing, while we see a lot more of community-size generation projects. Businesses and communities are also showing interest in becoming less dependent on the national grids. In rural Africa, especially, the economics of expanding the national grids do not make sense; hence, there is a significant trend towards mini grids and other off-grid solutions,” says KPMG chairperson in South Africa and power and utilities head Ahmed Jaffer.

Gravitating towards off-grid and smaller solutions in terms generation projects is a wise solution for the African continent.

These solutions are cost effective as the costs that are invested in the general infrastructure of generation projects are eliminated in smaller-scale solutions.

Power and utilities companies globally face the triple challenge of improving environmental performance, keeping consumers’ costs down and maintaining system reliability.

As a result, KPMG has developed a long-term strategy that seeks to continue investing in innovation, thought leadership and refreshing existing methodologies that have proved to be effective over the years.

“I am eager to see a truly integrated resource plan with a more diverse baseload. It is essential for our audience to know that KPMG is a ‘one-stop shop’ for the power and water industry.

As part of our strategy to perpetually manage unexpected changes, we are able to provide services through all project phases, as well as to offer valuable solutions from a strategic, forensics, tax, internal audit and audit perspective,” concludes Jaffer.