As stated by its chairman, South Africa should postpone the transfer of assets from Eskom to a standalone transmission company until the government addresses concerns surrounding the state power utility’s financial stability and its creditors.
While Eskom’s board is in favor of forming an independent transmission system operator to oversee the wholesale electricity market and guarantee fair grid access, they suggest that ownership of the transmission infrastructure should only be relinquished after resolving key financial challenges, according to Mteto Nyati. He warned that such a transfer could trigger change-of-control clauses in loan agreements, lead to accounting complications, and disrupt bondholders.
Mteto Nyati.
“We prefer that the ITSO operates independently first; the transfer of assets can come later if necessary,” he said in an interview at Bloomberg’s Johannesburg office on Wednesday, stressing that the right sequence of reforms is vital for successfully transforming the energy market.
As the principal electricity provider in South Africa, Eskom has endured years of mismanagement and financial shortcomings, culminating in rolling blackouts that have stymied economic progress.
Despite advancements in tackling these issues, the government still aims to restructure Eskom into separate units for generation, transmission, and distribution to improve management efficiency and attract private investment in power generation.
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Nyati’s comments underscore the board’s concerns surrounding the restructuring after President Cyril Ramaphosa recently backed the first phase of recommendations from a task team which reinforces the long-term objective of placing the grid under an independent entity’s management.
According to the Presidency, the National Treasury will supervise the resolution of unresolved issues, including asset valuations, lender obligations, and municipal debt.
Eskom is urgently seeking a meeting with the president to voice its concerns, echoing a warning from Moody’s Ratings in May that the restructuring must be managed carefully to prevent undermining the utility’s credit rating or jeopardizing creditor protections while in a precarious debt situation. Although the company has initiated actions to reduce its debt, municipalities owe approximately R119 billion ($7.2 billion) — a debt that will be challenging to recover.
The transmission segment makes up about 40% of Eskom’s revenue, and transferring these assets before addressing the company’s legacy liabilities could severely weaken its balance sheet, Nyati noted.
A valuation commissioned by the board estimated the transmission assets at around R110 billion, notably higher than a projection from the World Bank. This difference will require resolution prior to finalizing any asset transfer plans.
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The board also argues that the process might unintentionally create a conflict of interest, as the grid operator could not only engage in electricity transmission but also decide where new grid capacity should be developed and control network access. This dual role could result in competition with private investors expected to finance a significant amount of grid expansion.
Eskom advocates for a framework where an independent operator serves as a neutral market coordinator, responsible for planning the grid, distributing connection capacity, and managing competitive procurement processes, while ownership of transmission assets remains under the utility’s control temporarily.
Nyati conveyed that Eskom’s perspective was influenced by the consulting firm Kearney, engaged to assess global models for electricity market reform. The board subsequently introduced a “TSO without assets” model to Electricity Minister Kgosientsho Ramokgopa, who later endorsed it as part of the government’s reformed unbundling strategy unveiled in December.
Thus, the board was surprised when Ramaphosa declared during his February state-of-the-nation address that Eskom’s transmission assets would be transferred to the independent operator. An emergency board meeting convened following his speech concluded that there was “no new information” warranting a change in its recommendations.
The Presidency indicated that conversations with Eskom will continue as work proceeds on the second phase of its restructuring.
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