Why Eskom-run nuclear power will ruin SA
If you want to understand why the nuclear deal strikes terror into the hearts of economists, look no further than Eskom’s current operations. Already its overinvestment in the face of declining electricity sales is leading to exorbitant tariff increases, hidden government subsidies and efforts to restrict renewables. A core concern is that the nuclear project will bankrupt the country. If utilities overinvest, consumers and businesses end up paying for unused capacity.
Since 2007, Eskom’s plant expanded in constant rand from R140bn to R580bn, climbing from 1.5% of SA’s total fixed assets to above 5%. Even without nuclear Eskom plans to keep investing more than R70bn a year. In return we get a 7% decline in the volume of electricity sales coupled with a tariff increase at 150% above inflation. And now Eskom wants 20% more for 2018-19.
Thanks to escalating tariffs, Eskom’s sales revenue soared almost 150% in real terms despite slumping sales. But its profit has declined steadily.
In 2007, its return on capital was 4%. In the past three years, this ranged from 1.8% profit to losses at 0.9%. The decline partially reflected the erosion of cost controls, but it also resulted because payments for investment financing kicked in.
Eskom argues it needs higher tariffs to cover fixed costs, which persist even when sales decline. Imagine any other business trying that. You own a restaurant and your sales plummet. So you add more rooms, keep your staff on and cut the amount of milk you buy. Then you double your prices to cover your “fixed” costs.
No costs are immutable. In fact, Eskom’s tariff increase for 2018-19 is linked to R77bn in new investments. Meanwhile, although Eskom concedes its older plants cost twice as much as new capacity, it is phasing in downsizing over three years. Surely it can accelerate that timetable so as to reduce costs?
Meanwhile, Eskom wants to keep out other producers, even if they are cheaper and cleaner. It has sought to kill renewable energy projects, which have a lower unit cost than its own older plants. It has urged the government to clamp down on producers who generate electricity for their own use.
Eskom is also trying to get taxpayers to pay more for its investment spree. In its latest application for a tariff hike, it includes money to pay its creditors but no returns to the government, which has invested billions in Eskom.
Finally, it is asking the government to subsidise new energy-intensive producers, mostly smelting and refining metals, even as it raises costs for other businesses. In the past, when SA had some of the lowest electricity prices in the world, it could attract new investors by holding down its own prices. Then, from 2008 to 2012, although its tariffs increased rapidly, high metal prices made SA reasonably attractive. Since then metal prices have crashed and electricity costs are more or less equal to Europe.
As Eskom admits, SA cannot hope to bring in new refineries without huge subsidies. If its strategy succeeds, society as a whole will end up paying extra to open new refineries that use coal-fuelled energy on a huge scale. That will impose hidden health and economic costs but generate few jobs because they are highly capital intensive and effectively divert resources from more advanced industries.
Even without nuclear, Eskom has got us all into a helix of vicious cycles: it keeps raising investment in the face of falling sales — and then hiking its tariffs further to cover its capital costs. The result is a continual fall in demand, necessitating more tariff hikes to sustain Eskom’s high investment levels.
The fall in energy intensity may be excellent for the environment, but paying more for electricity is not so great for taxpayers and consumers.