by Stef Terblanche

Electricity tariff hike

Consumers smile, but will Eskom keep the lights on with 8%?

Electricity.jpg

Consumers across the board are smiling after Eskom was granted only an 8% tariff increase instead of the 16% it had requested. But there are plenty reasons to question whether 8% will be enough to allow Eskom to guarantee sufficient and reliable future supply. If not, South Africa may return to the dark days of 2008 – or worse. 

The 8% per annum annual tariff increase for each of the next five years may be good news for suffering consumers – both private and business, and especially for small businesses.

It will also be welcomed by large industrial and mining energy-intensive users if the increase determination is repeated in their case. They contribute heavily to export earnings and take up 44% of the available electricity load.

But it is still not clear what the electricity price increase will be for energy-intensive industries and businesses, as Eskom has been given a week to do its own calculations before responding. It is anticipated the increase for large intensive energy users will be between 8% and 11%.

The lower than requested tariff increase is a boost to the economy, according to Investec chief economist Brian Kantor.

But even at 8% annually, the increases between 2012 and 2017 will amount to about 46%, says Chamber of Mines president Mark Cutifani. He told Business Day that the platinum and gold-mining industries alone will face an additional R860 million in electricity costs in 2013 with an increase of 8%. These sectors are already hard-pressed on many other fronts including market conditions and labour problems.

Meanwhile, municipalities have until now used their electricity tariffs as a hidden form of tax. They, too, will now be able to shift that burden away from consumers, as finance minister Pravin Gordhan introduced the new equitable share formula in the 2013 budget.

This funding mechanism allocates to municipalities a grant of R275 for every household with income of less than R2 300 per month. Kantor says this is estimated to apply to more than 59% of all households.

All these developments imply all-round relief from the anticipated horror scenario of a 16% increase. The question, however, is whether the 8% will be sufficient to allow Eskom to meet its targets and guarantee sufficient and reliable future supply? If not, it could bring repercussions worse than those seen in 2008 when rolling power blackouts brought the country to a standstill.

Eskom may now find itself in the same kind of bind that the mining industry and the Western Cape fruit farming industry, for instance, find themselves in. There is pressure to deliver in line with national planning goals, but the means to do so are being severely eroded or undermined.

The price decision by the National Energy Regulator of SA (Nersa) was based on the global average of securing a 3-4% return on capital employed by utilities. Eskom wanted the increases to be based on a return of 7.9% – double the international standard.

According to media reports Thembani Bukula, chairperson of Nersa’s electricity sub-committee, said the regulator had limited this to an average of about 3%, thereby reducing Eskom’s returns to R137 billion instead of the R185 billion Eskom had wanted. Nersa argues this provided enough to cover the debt- and rebuild costs of Eskom, while reducing retained earnings from the R46 billion it sought to around R10 billion.

With its 8% determination, Nersa had effectively cut Eskom’s anticipated total revenue over the next five years from the R1.1-trillion it had anticipated, to R906 billion.

Kantor points out that in its 16% calculation, Eskom had estimated that about R350 billion of debt would have to be issued by 2018. This, Kantor indicated, would rise to R500 billion in the 8% tariff increase scenario.

Nersa believes Eskom should control its costs better and cut them by about R30 billion. It added that Eskom should improve efficiencies and tackle maintenance backlogs.

Nersa further said Eskom had inflated the value of its assets unnecessarily and reduced depreciation costs. It did not agree with Eskom on its calculations regarding coal costs, energy saving, power buy-backs, staff costs, and savings.

Bukula reportedly said 8% was, in Nersa’s view, exactly what Eskom needed to ensure it still provided power, but in an efficient way.

To comply with Nersa’s view, Eskom will have to dramatically improve its management of costs, an area in which it has a poor track record, and which triggered rumours that Eskom chief executive Brian Dames’ head would soon be on the block.

Media reports late in February said he faced an uncertain future over the utility’s rising costs and delays in building new power stations as part of its R350-billion capital development plan to increase and stabilise power supply.

A key component of the expansion programme is the 4 800-megawatt coal-fired Medupi Power Station under construction at Lephalale, which has been hit by significant budget and time overruns. In 2007 Dames announced the power station would cost R70 billion, with a starting date of September 2011. The cost has since escalated to R130 billion, with a starting date of December 2013 – and more delays are anticipated among large energy users.

Given the combination of its ageing facilities, its overburdened grid and low capacity, its track record and its problematic management performance, Eskom’s day-to-day ability to provide stable power supply to the country, its ability to timeously complete its capacity upgrades and its expansion programme, may be put under severe pressure by the 8% tariff increase.

For now, supply remains extremely tight, teetering on the brink of disaster when major components – such as one of Koeberg nuclear power station’s two reactors – shut down.

Last week Eskom said it had capacity of 32 474MW available to meet peak demand of 31 813MW, leaving a reserve margin of just 2% while internationally the appropriate minimum reserve is considered to be at least 10%.

While Eskom has yet to respond in detail to Nersa’s announcement, its fears were adequately summed up by the cautious response by its spokesperson Hillary Joffe, who said: “We have noted the decision and it will present a challenge for Eskom”.  She added that Eskom would “endeavour to keep the lights on."

 

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