The decision by credit ratings agency Moody’s to downgrade Eskom is a blow to the South African utility’s plans to expand power generating capacity in the face of rapidly rising electricity demand.
The downgrade reflects Eskom’s financial and operational position as well as its strategic importance to the South African economy, says Moody’s. The decision will make Eskom’s plans to raise financing in the global capital markets more expensive, and has prompted the government to offer a full guarantee to all of Eskom’s creditors.
Eskom is planning to spend almost R350 billion over the next five years to develop new power plants and return mothballed units to service. The government has already pledged a R60 billion loan, and Eskom says it will need to borrow around R150 billion.
Eskom recently announced that it has started construction of the Kusile power plant in Mpumalanga Province. Development of the 4800 MW coal-fired plant was brought forward after electricity demand growth forecasts were revised in 2006, and the plant is now scheduled to come on-line in 2013. Construction of the 4788 MW Medupi power station in Limpopo started in April.
Eskom is planning to double its installed capacity to 80 000 MW by 2026. In January, the country suffered widespread power outages as a result of years of underinvestment, fuel supply problems and robust economic growth.
Moody’s downgrade – by four notches to Baa2 from A1 – take into account the regulator’s decision to increase electricity prices by 27.5 per cent on average rather than the 53 per cent sought by Eskom as well as the utility’s strong reliance on the government. Moody’s has also noted the challenge that Eskom faces in increasing installed capacity while simultaneously managing a maintenance programme with a thin reserve margin.
