Nersa decision on Eskom tariff application leaves many questions
Parastatal now has little choice but to incur debt, while spending on electricity transmission network is likely to suffer, writes Carol Paton
THE decision by Nersa (National Energy Regulator of SA) to grant Eskom an 8% increase rather than the 16% it had requested has been greeted by all — from trade unions to business — with relief, and the assumption that this will be good for the economy. Nersa’s full reasoning, published last Friday, was welcomed particularly as it conveyed the sense of a regulator that had finally clamped down on a utility that was wasteful and, in some regards, trying to pull a fast one on the public.
But there are aspects of Nersa’s decision that should be of concern for the public and business. There is the basic question of whether Eskom can keep the lights on — its primary purpose. Although Nersa claims it has found sufficient savings — R100bn — to cut down Eskom’s revenue needs to what it will be allowed to raise, this is based heavily on savings from depreciation. As analysts have said, this has no bearing on cash flow and it is highly doubtful that the utility will be sustainable and cash positive with an 8% hike.
Other programmes, which have been part of Eskom’s strategy to keep the lights on, have also been disallowed. Among them: Eskom is no longer allowed to pay for power buybacks from revenue, or to offer incentives to companies to become more energy efficient.
The argument of the regulator is a rational one: consumers should not be subsidising business either to switch off (which is what a buy-back is) or to become more energy efficient.
Eskom has used
both methods to cut demand. It has only been by damping demand that the lights have remained on in the past two months.
One response, from independent consultant David Holland — who looked at the Eskom price application in some detail — has been to conclude that this means the government will now have to step up with more debt guarantees for Eskom. Mr Holland estimates that with an 8% tariff increase, Eskom’s debt will need to rise from R350bn, where it is now, to R500bn.
He is probably right — there is no other solution.
The manner in which Eskom had been trying to front-load its new build costs into the tariff was not a burden the economy could take on.
But financial sustainability isn’t the only problem raised by Nersa’s decision. As part of its efforts to find savings, Nersa has cut Eskom’s capital expenditure over the next five years by a third from R336bn to R230bn. As well as new capacity, capital expenditure includes transmission and distribution networks.
In these areas, Nersa tells Eskom to do the same thing — but more cheaply.
This could have negative consequences, says independent expert Anton Eberhard, a member of the National Planning Commission and a professor at the University of Cape Town’s Graduate School of Business.
“The discounting of some of Eskom’s capital expenditure costs is disturbing.
“Eskom could take the view that it is not going to maintain the fleet, which is the last thing you want to happen,” he says.
Eskom’s distribution and transmission networks are already under stress, a problem which now looks set to grow in the future.
There is a third large problem with Nersa’s decision.
Although it is not Eskom’s role to plan for new capacity that has not been commissioned by the department of energy, new capacity is urgently needed.
Eskom’s pricing application took into account the capital expenditure costs for Medupi, Kusile and Ingula as well as the cost of off-take agreements from the three rounds of bids for renewables by independent power producers.
But with Medupi looking unlikely to bring its first units on line by December, there is a growing consensus that additional generation capacity must be found. This would need to be built quickly. Energy experts strongly suggest that natural gas would be the best route to solve this problem.
Recent discoveries of gas in Mozambique have made a gas pipeline a real possibility.
Neither this nor an announcement by Energy Minister Dipuo Peters in December that an additional 8,000MW of baseload capacity would be procured from independent power producers — through a combination of coal, gas and hydropower, which would be sold to Eskom, have been factored into Eskom’s five-year plan.
No matter how pleasing an 8% tariff increase is, under the circumstances Nersa’s decision has left Eskom with many unanswered questions.