ACCOUNTING FOR DARKNESS

Some of South Africa’s leading CFOs reveal the very real impact the country’s power crisis is having on people, business, and the economy.

CFOs around the country are concerned about ongoing rolling blackouts that, according to Eskom’s now former CEO Andre de Ruyter, will likely be around for at least the next 18 months. The grid’s failure is badly affecting productivity, especially at heavy industries, and resulting in the need for massive investments, which are eating into cash flow reserves.

During his State of the Nation address on 9 February, president Cyril Ramaphosa declared the power issue a national state of disaster and shortly thereafter appointed Kgosientsho Ramokgopa as Minister of Energy. Ramokgopa has since said that South Africans should be patient with the power crisis plaguing the country. Measures to right the situation are urgently required, as the economy is losing as much as R900 million every day when stage 6 is in effect, according to the South African Reserve Bank. Loadshedding is taking its toll in terms of lost productivity and are adding additional costs to the balance sheet, many CFOs point out.

Nedbank CFO Mike Davis says that Ramaphosa’s State of the Nation Address was right to focus on the energy crisis as the challenges in electricity supply remain a binding constraint to growth and job creation. “However, this has been the case for several years and, like far too many of the critical structural reforms, we have plans in place but many of them remain on the to-do list and implementation and delivery is poor. The State of Disaster may provide some additional impetus for implementation and delivery but needs to be well-managed and monitored to prevent wasteful expenditure.”

Mike says the green bank welcomes any intervention that has the potential of stabilising our electrical supply. “Importantly though, the mandate and tasks of the Minister of Electricity will need to be clearly defined and well-coordinated in order to stabilise Eskom’s financial position and energy supply, whilst the country’s need to simultaneously transition to alternative cleaner energy supply. Simultaneously, the country needs to transition to alternative, cleaner energy generation."

In the retail sector alone, companies like Woolworths are losing as much as R30 billion a quarter, while Pick n Pay is gearing up for permanent loadshedding; installing technology such as solar panels and inverters in their stores. At the same time, customer demand is dampened because customers are concerned that frozen foods may have spoiled from inconsistent power.

Sheldon Friedericksen, Fedgroup general manager of group benefits, says that continuous loadshedding is a disastrous situation in South Africa. “The continual nature and disruption takes its toll.”

He explains that there is a direct impact on business, with many being unable to operate unless backup facilities are available at an affordable cost. “Business over the years has had to adapt to these challenges, and it remains the most important aspect of running a business to be prepared for various risks to your operating model.”

Yusuf Bodiat, CFO of The Federated Employers Mutual Assurance Company, which specialises in workmen’s compensation insurance, points out that customers will be hard hit as there will be a trickle down effect. This, he explains, is because small businesses may not be able to obtain alternate power sources, which means they will battle to operate. “For those who are able to procure alternate power sources, whether in the form of generators or solar, the impact is still negative as they would have both cash flow and financial difficulties in ‘keeping the lights on’.

“If we unpack this part a bit further, the challenge with generators is that it requires a continuous supply of fuel (whether petrol or diesel), a resource that is relatively expensive due to its low supply and high demand. As reference, the fuel price has almost doubled in the last 10 years, priced at R12.69 in March 2013, and has increased to R22.65 by March 2023 – an increase of 78 percent, as a result of fluctuations in the price of brent crude oil, the ZAR/US$ rate and fuel taxes, to name a few. With respect to solar, as much as it may be the better longerterm solution, the initial capital outlay is too expensive for many small businesses currently.”

There’s a secondary impact, says Yusuf, in that those small companies that can’t afford to find alternative power sources to fuel their operations, will need to cut costs to keep the doors open. “For some, unfortunately, the reduction in costs may not be enough and these businesses are likely to shut-down. For those who are able to cut costs effectively, it may, likely, result in a reduction in staff and/or staff salaries.”

In terms of productivity, Implats is finding the load curtailment agreement with Eskom, “disrupts our production rhythm as we must shut down equipment where necessary, and stop certain production activities” according to CFO Meroonisha Kerber.

Yusuf adds that prices will have to go up so businesses can manage the operating costs of the current period of a lack of power. This may, consequently, result in lower sales or consumers having to spend more for goods and services.

South Africa Flight Centre Travel Group CFO Averen Deonanan agrees with Yusuf, saying that spending power for consumers, too, is under pressure. Energy is a large driver of inflation, accounting for 8.7 percent of inflation, according to Statistics South Africa.

A more serious issue is that stability of essential items such as vegetables and maize meal cannot be guaranteed, says Andri Geel, CFO of agricultural company GWK. She adds that the problem also affects prices. “As a business, we’ve done detailed work in terms of the impact, and manage these daily.”

In addition, loadshedding is also changing the world of work, with people having to go into the office where there is backup power, costing them fuel to drive to work. Companies that have implemented backup measures are seeing their operational expenditure climb, says Yusuf.

“Ultimately, individuals and households will feel the pinch as they will be receiving lower incomes as their employers/ companies are cutting costs (on the one hand), and household expenses are increasing as prices of goods and services are increasing (on the other hand),” says Yusuf.

Retailers are also set to be hit by lower spending power, with sales during the Black Friday frenzy this year expected to be R5.4 billion lower than it would have been if South Africa was not experiencing so many days of load shedding, which has been at high levels throughout 2022, according to new research conducted by the Bureau of Market Research (BMR) on behalf of Capital Connect.

The research also finds that the motor trade is forecast to generate additional sales value of R5.9 billion over the busy promotional period, which is R2.9 billion lower than would be expected in a year with less load shedding.

Says Professor Carel van Aardt, Research Director at the BMR: “With a stagnating economy, rampant unemployment and rising inflation, the Black Friday period this year is about shopping for survival. With bleak economic prospects, we can expect to see consumers stock up on necessities rather than splashing out on luxuries for themselves or buying early Christmas presents for their loved ones.

“The hot sellers this year – apart from groceries in bulk – are likely to include gadgets and equipment to help consumers navigate the load shedding crisis. In an environment of poor consumer confidence and weak discretionary income, we can also expect to see consumers trade down from expensive brands and products to white label brands and more affordable substitutes.”

Capital Connect says that the current situation of low economic growth and high unemployment will likely lead to a relatively weak Black Friday, with growth that battles to keep pace with inflation. However, there is a demand for alternative power solutions. Year-over-year, consumer interest in inverters has increased by 56 percent, generators by 29 percent, uninterruptible power supplies by 29 percent and solar systems by 34 percent.

The retail sub-sectors that will gain the most additional revenue over the Black Friday period will be general dealers (R7.7 billion); clothing, textile, footwear and leather retailers (R5.5 billion); and furniture, appliance and equipment retailers (R1.6 billion). These amounts could have been substantially higher without loadshedding, with general dealers alone losing out on R577 million, says Capital Connect.

In motor trade, the bigger winners include accessories (R1.2 billion), fuel (R2.3 billion), used vehicles (R1.5 billion) and new vehicles (R516 million). New and used car sales are forecast to R1.2 billion less than they could have been in the absence of load shedding, while fuel retailers will be missing out on more than R870 million in potential revenues, it adds.

Apart from the cost to the economy, there is an indirect cost, says Sheldon, in that people’s ability to cook a nutritious meal “removes the level of optimism required for growth, and the will to try something new. South Africans are also unable to relax because the lights are out, and spend too much time in traffic.

Yusuf adds that the longer term impact of loadshedding for everyone is mental wellness difficulties due to the issues everyone faces.

Meroonisha believes that several actions must be taken concurrently:

1. Fix current Eskom plant to improve availability, this is critical to ensure baseload supply to SA's mines (could reduce load shedding in the short term)

2. Expedite programmes to add new supply capacity onto the grid (to provide headroom for economic growth, especially through low carbon alternatives)

3. Update the Integrated Resource Plan (IRP), which was promulgated in 2018, to allow cost effective and matured technologies onto our long-term national energy plan (to give us a long-term view of how the energy challenge is to be tackled)

Sheldon states that its Impact Investing unit welcomes many of the changes that have been made to the regulatory landscape, especially the electricity provision aspects. “A regulatory landscape, and utility provider, which encourages those with capital to invest in energy provider and efficiency initiatives that can be used for the improvement of the whole ecosystem can only lead to the reduction of loadshedding to at least a once in a while occurrence.”

Funding projects within the renewable sector means that banks have to come to the party. More and more, they are funding projects that meet Environmental, Social, and Governance (ESG) targets as stakeholders push for companies to be more responsible when using power. Such funding deals have become part of financial institutions’ targets as they move towards no longer funding fossil fuel projects.

One such example is when Nedbank became the first local bank to launch a renewable energy bond on the green segment of the JSE, in 2019. It has subsequently funded deals such as ones for Imperial and Old Mutual, and recently announced that it aimed to about double funding for such projects to R50 billion.

And then there is an agreement between Standard Bank and British International Investment to provide solar company Scatec with R18 billion in debt to fund a battery energy storage and photovoltaic solar project in South Africa.

The project will provide total solar power capacity of 540 MW photovoltaics and 11.1 GWh of battery energy storage – delivering reliable clean power into South Africa’s grid. “This is not only about ensuring a reliable supply of power to citizens and a growing economy, but also ensuring that we meet our obligations as a nation to reduce carbon emissions by bringing more clean energy onto the grid,” says the bank.

Investec issued its first green bond in 2022, raising R1 billion under its DMTN bond programme. The issue, which was 3.8 times oversubscribed, highlighted a healthy appetite among institutional investors looking to make a positive impact in terms of their ESG commitments.

Absa, too, is providing input for green projects, having recently acted as bond advisors for a R1 billion investment in a green bond issued by Growthpoint Properties transaction and helped Growthpoint with the private placement of the bond on the JSE.

Businesses will be paying more for power if Eskom successfully wins court cases that seek to stop the implementation of 18.65 percent for the 2022/23 financial year and 12.74 percent for the next being granted. Former Optimi CFO Rajan Padayachy, currently a consultant to the CEO, says the recent tariff hikes would not necessarily be an issue if it improved the stability of the power feed. “If the price goes up and the amount of hours of load shedding reduces, the net impact may well be a cost saving as currently the cost of alternative power sources does, in the short-term, exceed the higher tariff.”

Eskom, according to an affidavit filed by its CEO (then CFO), Calib Cassim, which was summed up by Moneyweb, has basically said that tariff increases are vital when it comes to keeping the lights on.

However, should this not be the case, businesses will be affected by higher costs, which means the money to keep the lights on must be taken from R&D and growth initiatives, says Rajan.

Meroonisha sees recent tariff hikes as adding significant inflationary pressure to its input cost base, making electricity one of the fast-rising unit-cost elements. “Our cost base has already experienced significant pressure from currency depreciation and the welldocumented global inflationary pressures due to constrained supply chains and rising input pricing. Over the past two years, these factors have led to material increases in our total cost base and negatively impacted the overall profitability of our operations.”

Sheldon, however, is optimistic, pointing out the hikes are expected and will continue and can be incorporated into most business models. However, the knock-on impact of these is a cycle of further inflation pressure, interest rate and exchange rate management, which will continue to put pressure on the consumer. He adds that tariff hikes will encourage investment in off-grid projects.

To get around the rolling blackout obstacle, companies are turning to wind and sun to provide power. This also fits in with the United Nations’ Net-Zero goal that aims to see the use of fossil fuels eliminated by 2050.

Sasol is one company shifting from dirty sources of energy, having signed three wind-power purchase deals with Enel Green Power, an Enel Group subsidiary. This deal will see Sasol incorporating 220 MW of renewable energy, which will provide 800 MW a year, at its Secunda site, where Air Liquide operates the world’s largest oxygen production facility. In total, Sasol is aiming for 900 MW of clean energy.

Hanré Rossouw, Sasol CFO, explains that the company is shifting away from fossil fuels, embracing new forms of energy, and, in August 2020, committed to reduce its absolute greenhouse gas (GHG) emissions from the South African operations by at least 10 percent by 2030, off a 2017 baseline. As part of the company’s energy strategy, Sasol has an ambition to lead the energy transition in South Africa. The energy transition is focussed on decarbonisation, preservation and growing new value pools.

“Our decarbonisation agenda is positioning us to deliver sustainable value into the future. We are undertaking renewables at scale while growing new value pools such as green hydrogen, ensuring competitive and sustainable returns,” he says.

In mining, too, there is a shift. Meroonisha says the platinum mining company has concluded studies for behind-the-meter solar power plants at its Marula and Rustenburg operations in South Africa. Implats has issued market inquiries for wheeling renewable energy supply to its South African operations and further market inquiries for gas-to-power and heat solutions at its Refineries operations, to displace coal use. “These initiatives are among those aimed at achieving our 2030 goal to reduce our carbon footprint by 30 percent and further progress against our ambition of attaining carbon neutrality in 2050.”Other sectors, too, have embraced alternative power sources.

Averen says the company has been able to overcome some of the challenges with early decisions like installing invertor systems in its stores, remaining flexible in the way it works and procuring an extremely large range of diverse products to meet the needs of its customers.

The Foschini Group has proactively spent R200 million in 2023, says CFO Bongiwe Ntuli. This comes “ahead of severe load shedding”. It also installed Tesla Power walls in its high turnover stores to protect trade (about 1,000 stores out of just over 3,000 stores have the backup power). "Payback has been unbelievable and protects 60 to 70 percent of our South African revenue.”

Dawid Swart, CFO of Wetility, says the cost of installing renewable energy, such as solar and wind, has come down significantly over the past decade. “These two sources are becoming more competitive than traditional sources of energy.”

According to the International Renewable Energy Agency (IRENA), the cost of utility-scale solar PV in South Africa has decreased by 68 percent between 2010 and 2020, while the cost of onshore wind has reduced by 54 percent during the same period.

IT company EOH is looking at covering its roofs with solar, just like Mustek did many years ago. Megan Pydigadu, Group Finance Director, adds that it is talking to its landlords about introducing clean energy at its offices to reduce its dependence on generators and manage the cost of running generators. “We are looking at putting solar on our office roofs and storing a base load through batteries. We run data centres for our customers that need up time 24 hours per day, seven days a week, so it’s critical we have multiple backup options to ensure uninterrupted power supply.”

Omnia is also moving green. CFO Stephan Serfontein says it is on track to achieve its 2027 aims, which include a 12 percent increase in renewable energy consumption, and a 20 percent reduction in greenhouse emissions. However, the cost-effectiveness of renewable energy for companies in South Africa depends on several factors such as the type of renewable energy, the cost of renewable energy technologies, the size and location of the company or a specific project, the prevailing electricity prices as well as government policies, and legislation, Stephan adds. Companies need to look at the cost implication, over the short- and long-term, as it will initially affect capital and cash flow, but lead to lower electricity costs, Dawid adds.

While South Africa chases its target to mitigate the effects of loadshedding while going green, there is a dire need to fill the need for skilled workers who have taken the route of studying the science, engineering, maths, and technology (STEM) fields in South Africa.

The sector urgently requires electrical engineers, operations and maintenance managers and mechanical technicians. Skills in manufacturing, assembly and installation are also needed. Since renewable energy plants are also businesses, they require skills in sales, marketing, finance, and general business operations as well, according to Enel Green Power South Africa (EGP RSA).

EOH has taken up the challenge of helping upskill, says Megan. Its finance team has established a committee called Gear UP that does volunteer work in the community. “We have set a target of 1,000 hours of volunteerism for this financial year. We want to make volunteerism an embedded part of who we are as a finance team. We have adopted a high school and children’s home in Soweto. This year we want to support the learners with science, technology, engineering, and math (STEM) education and help prepare the learners for a better future in this way.”

Students are shying away from STEM subjects because of a belief that they are difficult. Although degrees in these fields are challenging, they can be achieved, and are necessary to follow careers in renewable energy and to take up the many employment opportunities available, says EGP RSA.

A consistent electricity supply will be an issue for the foreseeable future, despite the appointment of an electricity minister, and South Africans will have to do what they do best – pull together and come up with innovative solutions. Until then, the rolling blackouts are going to strain everybody’s purses. l