Why Eskom-run nu­clear power will ruin SA

Business Day - - FRONT PAGE - NEVA MAKGETLA Makgetla is a se­nior re­searcher with Trade & In­dus­trial Pol­icy Strate­gies.

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.

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