Eskom tar­iff hikes will deepen pain

The in­creases it wants will drive down sales and there is scep­ti­cism that the paras­tatal will be able to counter this

Mail & Guardian - - Business - Lyn­ley Don­nelly

Eskom’s lat­est re­quest for a 15% tar­iff hike each year for the next three years, on top of rev­enue claw­backs, means ris­ing elec­tric­ity prices are likely to ex­ac­er­bate its de­clin­ing sales, en­ergy ex­perts say.

The trea­sury also ex­pects eco­nomic growth to de­cline if the steep in­creases are granted and has warned that house­holds and com­pa­nies will go off-grid to get around them.

Eskom, in its lat­est multi-year price de­ter­mi­na­tion ap­pli­ca­tion (MYPD4), re­cently ap­plied to the Na­tional En­ergy Reg­u­la­tor of South Africa (Nersa) for the 15% in­creases. At the same time, it has made an­other reg­u­la­tory clear­ing ac­count (RCA) ap­pli­ca­tion for the fifth year of the MYPD3 of R21-bil­lion.

The RCA is part of the MYPD method­ol­ogy and al­lows Eskom to ad­just for the over- or un­der-re­cov­ery of rev­enue in any year of a tar­iff de­ci­sion.

In its lat­est RCA ap­pli­ca­tion, most of the money Eskom is seek­ing to re­cover was lost be­cause of de­clin­ing elec­tric­ity sales.

Both the MYPD4 and the new RCA ap­pli­ca­tion fol­low a re­cent de­ci­sion by Nersa to let Eskom claw back R32.69-bil­lion for pre­vi­ous MYPD3 years. This will be re­cov­ered from tar­iffs and trans­lates into a 4.4% in­crease in the com­ing four years.

Ac­cord­ing to Eskom, in the MYPD4, it has opted to smooth the im­ple­men­ta­tion of the tar­iff in­creases at a rate of 15% each year, even though this means that its rev­enues will not cover its en­tire debt com­mit­ment costs, re­sult­ing in a cash short­fall for the first two years (2019-2020 and 20202021) of the MYPD4 pe­riod. It will use the money from the pre­vi­ous MYPD3 RCA de­ci­sions to mit­i­gate its debt ser­vic­ing short­falls.

This “sig­nif­i­cant sac­ri­fice”, said the util­ity, was in “the in­ter­est of al­low­ing the econ­omy to ad­just” to more costre­flec­tive power prices.

But Eskom’s re­quest has been ques­tioned.

“Eskom can say what it likes about what [in­creases] it thinks it should have but … if it gets 15% as well as the RCA award, it will drive South Africa to the very brink,” said Chris Yelland, EE Pub­lish­ers man­ag­ing di­rec­tor.

Given the al­ready weak econ­omy, more price hikes would con­tinue to drive con­sumers to use less elec­tric­ity from Eskom.

“If you were to put up the price … it would make grid sup­ple­men­ta­tion a no-brainer,” said Yelland.

“It would be­come ab­so­lutely in­evitable that ev­ery sin­gle busi­ness and a lot of con­sumers would opt to put in grid sup­ple­men­ta­tion sys­tems, which would re­duce Eskom sales dra­mat­i­cally.”

Grid sup­ple­men­ta­tion would mean run­ning a re­new­able en­ergy sys­tem par­al­lel to the grid, al­low­ing con­sumers to take “as lit­tle as pos­si­ble” from Eskom, Yelland said. Con­sumers can also opt to go off-grid en­tirely.

“It [Eskom] sim­ply can’t do this any more. It’s not go­ing to help putting up prices … they will dam­age their own busi­ness.”

Eskom’s sales vol­ume ex­pec­ta­tions, a key de­ter­mi­nant of the tar­iffs it has ap­plied for, are un­der­pinned by im­por­tant as­sump­tions on mat­ters such as eco­nomic growth.

The util­ity vastly over­es­ti­mated eco­nomic growth in the pre­vi­ous round of tar­iff ap­pli­ca­tions and, as a re­sult, the ef­fect it would have on elec­tric­ity de­mand. But it says it will avoid this by pro­vid­ing Nersa with an up­dated fore­cast dur­ing pub­lic hear­ings.

The trea­sury, in its re­sponse to the tar­iff ap­pli­ca­tion, has queried Eskom’s sales fore­casts and has out­lined what the ef­fect of the price in­crease could have on the coun­try. It has es­ti­mated a 0.1 per­cent­age point de­cline in eco­nomic growth, with par­tic­u­larly harsh ef­fects felt in min­ing, as well as in the elec­tric­ity sec­tor it­self be­cause of the de­cline in de­mand.

House­hold and firms’ mit­i­ga­tion strate­gies would ad­versely af­fect elec­tric­ity sales, with se­ri­ous consequences for both Eskom and mu­nic­i­pal­i­ties, the trea­sury said. Based on “rel­a­tively con­ser­va­tive as­sump­tions” of a 10% in­crease in the next five years, the trea­sury es­ti­mated that 26% of to­tal res­i­den­tial elec­tric­ity sales could go off-grid by 2030.

On an anal­y­sis of 21 listed com­pa­nies, it es­ti­mated that 34% of Eskom elec­tric­ity sales to min­ing firms and 8% of sales to in­dus­trial firms could go off-grid by 2040.

Eskom said that the process used to cal­cu­late sales vol­ume as­sump­tions was “a very rig­or­ous one and a huge amount of ef­fort is put into the process to en­sure the com­pi­la­tion of an ac­cu­rate fore­cast”. This in­cluded test­ing its as­sump­tions with some of its key in­dus­trial cus­tomers.

Nev­er­the­less, it noted the trea­sury’s sug­ges­tion that the price elas­tic­ity ef­fect of such a high in­crease “could be more than what was an­tic­i­pated in the sub­mis­sion”. But the sales vari­ance could be ad­dressed by con­sid­er­ing more re­cent sales fore­casts at the time of the Nersa de­ci­sion, it said.

Eskom had also put an ini­tia­tive in place to grow sales over and above what was ex­pected to tran­spire from the market, it said.

It also said in the MYPD4 ap­pli­ca­tion that it is work­ing to avoid the death spiral in sev­eral ways, in­clud­ing by con­sid­er­ing new gen­er­a­tion in­vest­ments care­fully to avoid stranded as­sets and to ex­plore smaller in­cre­men­tal re­sponses.

In ad­di­tion, it wanted to pri­ori­tise growth in “dis­rup­tive tech­nolo­gies”, such as re­new­ables, stor­age and smart tech­nolo­gies, in­clud­ing po­si­tion­ing it­self for de­vel­op­ments such as e-mo­bil­ity.

But Yelland ques­tioned how well Eskom could com­pete in an arena in which the pri­vate sec­tor has made big strides.

Pri­vate in­de­pen­dent power pro­duc­ers, through the gov­ern­ment’s re­new­able en­ergy pro­cure­ment pro­gramme, have in re­cent years de­vel­oped and in­stalled al­most 5 000 megawatts of green en­ergy. In the same pe­riod, Eskom has only built the 100MW Sere wind farm near Vre­den­dal in the Western Cape.

“Eskom has got no spe­cific core com­pe­ten­cies that will make it com­pet­i­tively bet­ter than in­de­pen­dent power pro­duc­ers,” Yelland said.

Eskom also did not have the ca­pac­ity to cope with the com­plex­ity of im­ple­ment­ing a myr­iad smaller projects si­mul­ta­ne­ously, he added.

MYPD blues: The trea­sury es­ti­mates that 26% of to­tal res­i­den­tial elec­tric­ity sales could go off-grid by 2030

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