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It did not work this timeDid Eskom, with its earlier application for an electricity tariff increase of 45% for thee years in a row, try to pull a fast one with one of the oldest tricks in the book before it has to face competition in the not too distant future? This is the question posed by certain observers after it lowered its application to a still-staggering 35% per year, which will take electricity in the country to the league of the highest in the world.
It would not have been the first time in South Africa’s history that the initial threat of a massive hike in cost would have been used to make an eventual increase seem very reasonable. In the early years of the introduction of sales tax in the country – which later became value-added tax – the government at the time once “leaked” the possibility of an increase from 4% to 11%.
As was the case with Eskom this time around, the reaction was one of disbelief and even outrage. When the eventual announcement came and it “only” went up to 7%, the general reaction was one of relief.
If this was the aim of Eskom this time around, it did not work. Coming on the back of other massive increases over recent years, economists and business leaders were quick to point out that it still implied an increase of 146% over the period of three years and a massive 633% over the period since 2005.
The South African Chamber of Commerce and Industry pointed out that while business confidence rose last month, Eskom’s 35% proposed increase could stunt prospects for economic recovery. The chamber’s chief executive officer Neren Rau warned that the proposed increase would “definitely cause some businesses to close their doors".
Well-known economist Mike Schüssler, Speaking during a Solidarity conference on the power crisis, pointed out that South Africa’s electricity cost is already among the highest of developing countries. He was also extremely critical of the lack of transparency in the special lower tariffs in terms of secret contracts between the utility and some of its largest industrial customers.
Eskom’s financing model for expansion also came under fire at the same occasion from energy consultant Andrew Kenny, who said that by trying to fund its build programme through higher tariffs, Eskom is attempting to take an easy option.
“It is hoping to pay off the power stations quickly and then make big profits… It is trying to avoid debt. It is pretending it is a high-risk business with high costs of capital and it needs a high internal rate of return, all of which is nonsense. Eskom must realise that its job is to make electricity, not to make money,” he said.
Schüssler also argued that the utility’s most important running costs have got out of hand. Staff costs have risen by 33.6% during a single year, primary energy costs by 38.4%, and other running costs by 30.8%.
He further pointed out that a restrictive regulatory environment, which has seen private payers shun the South African market, was behind the relatively higher electricity prices. “It has been a fact for a while that South Africa does not have the cheapest electricity in the world,” he said.
Business Unity South Africa called for an urgent review of Eskom’s funding model, combined with bold measures to unlock private capital, particularly in the form of independent power producers.
The prospects of independent power suppliers entering the South African electricity market in the meantime improved last week with the announcement of the government’s National Integrated Resource Plan."
Minister of Energy Dipuo Peters said that in terms of this plan, South Africa must have the electricity infrastructure in place by 2013 to ensure electricity security. Her department is also creating an independent systems operator (ISO), which would be situated outside Eskom.
The ISO will be responsible for matters such as electricity procurement from independent power suppliers and would make it possible to properly utilise the potential of such independent suppliers.
The new entity could be up and running within as little as three months and end the situation whereby Eskom is both lawyer and referee in the domestic electricity sector, she said.
