Eskom’s Worsening Load Shedding Eating Into Municipal Revenue – Moody’s

Over the past few years, the contribution of electricity sales to revenues of South African metros has declined, as users opt for off-grid solutions due to load shedding, according to a report from Moody’s.

The ratings agency on Monday issued a report indicating that electricity supply shortages would be credit negative for municipalities.

“Over the past two years, worsening load shedding by national power producer Eskom – in response to power shortages – has resulted in lower revenues and surpluses for rated metros, a credit negative.

“Load shedding by Eskom is credit negative for municipalities as it reduces the operating surpluses generated by electricity sales,” Moody’s said.

“We expect gross electricity surpluses to gradually fall further as load shedding continues and encourages additional large power users (LPUs) to go off-grid,” the report read.

Consumers and LPUs are increasingly opting for alternative energy sources, Moody’s emphasised.

“The impact of this has been greater for metros than for local municipalities, given that they generate more of their electricity revenues and surpluses from LPUs.

“In anticipation of LPUs using alternative power sources or completely going off grid, metropolitan municipalities are already budgeting for lower electricity revenues,” Moody’s said.

The City of Tshwane, Ekurhuleni and Johannesburg have the highest reliance on LPUs for their electricity revenue.

Independent Power Producers

Independent Power Producers (IPPs) are another spanner in the works for municipalities – Energy Minister Gwede Mantashe has said government will issue more licences to IPPs to generate electricity.

“We expect this to accelerate the decline in municipal revenues over the medium term, as more LPUs will go off-grid,” the report read.

So far, the City of Johannesburg has recorded a 25% decline in revenue from LPU’s between 2017 and 2018.

“We forecast a 25% decline in revenue from LPUs for all rated metros over the next three years. Based on this assumption, we expect a 7% decline on average in budgeted gross operating balances for all rated metros over the same period,” the report read. This means the gross operating balance of R2.8bn would be reduced to R2.6bn in three years.

Tshwane and Ekurhuleni, both have the highest exposure to LPUs and will be the most impacted. Their budgeted gross operating balances are expected to decline by 10% and 8%, respectively.

No room to move

As per current regulations, municipalities can only purchase electricity from Eskom. This limits their flexibility to counteract the impact of load shedding on their revenues, according to Moody’s.

The City of Cape Town has taken legal action to allow the metro to procure up to 400MW of renewable energy from IPPs.

“Although municipalities are permitted to have their own generation plants, they only provide a small proportion of energy relative to demand, leaving Eskom as the main supplier of electricity to municipalities and thereby limiting their ability to offset supply challenges from the provider,” the report read.

Additionally, the National Energy Regulator of South Africa has ruled on electricity tariff limits – which means without the regulator’s approval municipalities cannot increase the price of electricity to counteract declining revenues.

“They (municipalities) also lack flexibility with regard to other major sources of revenue, including property rates, government grants and water rates,” Moody’s noted.

Municipalities often use the surplus from electricity revenue to cross-subsidise other basic services and cover part of capital expenditure. Declining electricity revenue surplus means municipalities are more likely to be reliant on capital grants and borrowing to fund their capital expenditure budget, Moody’s pointed out.

“This will likely limit the ability of municipalities to efficiently provide basic services to the public,” Moody’s warned.