Nersa pins Eskom’s bloated salary bill to the wall

THE NATIONAL Energy Regulator of South Africa’s (Nersa) decision to grant Eskom only a 5.2 percent increase for the 2018/2019 financial year has pinned the power utility against the wall.

Hours before Nersa announced its decision on Eskom’s application for a tariff increase, Eskom interim chief executive Sean Maritz alluded to the tariff decision’s impact on funding.

Eskom has confirmed that its finances were constrained.

Against the backdrop of recent downgrades by S&P Global Ratings and Moody’s Investor Services, the lowerthan-expected tariff increase would affect the availability and cost of funding.

Repayments As at March 31, Eskom had to repay interest of R213 billion over the next five years, with debt repayments of R200bn.

The decision presents Eskom with the dilemma of ensuring financial sustainability in the face of moderate electricity price increases.

Eskom is grappling with more immediate financial problems, with reports of declining liquidity. Interim chairperson Zethembe Khoza said on Friday the organisation would be able to pay January salaries.

Khoza said Eskom would release the delayed interim financial results before the end of this month.

The interim financials are expected to reveal the true state of Eskom’s financial health.

The constrained balance sheet, as well as electricity overcapacity, are the main reasons for Eskom’s controversial reluctance to sign power purchase agreements with 27 renewable energy independent power producers (IPPs).

The power utility has said it would sign power deals up to bid window 4.5 of the Renewable Energy Independent Power Producer Procurement Programme, provided these cost 77c/kW/h or lower.

With the electricity surplus expected to reach 3 000MW by 2020/21, Eskom has said there was limited opportunity to connect new IPPs to the grid unless they were economical.

In the year ended March 31, Eskom’s expenditure on IPPs was R19.8bn.

Eskom has, however, found little sympathy with Nersa.

Speaking at the announcement of the regulator’s tariff decision, Nersa chairperson Jacob Modise was critical of the power utility’s failure to keep its costs down.

He said Nersa had made

recommendations to Eskom on how to reduce costs, but it was up to Eskom to implement those.

“If Eskom cuts costs as we recommended, it will be able to get its cash flow back on track,” Modise said.

Grové Steyn, an economist at Meridian Economics, said yesterday it appeared that Nersa had sent Eskom a strong message that it should take drastic measures to cut costs.

“Eskom has a hugely bloated salary bill, its coal costs are too high, it maintains a suite of older coal-fired power stations that are redundant, and the costs for its power station programme – the primary reason for its large tariff increases – are simply out of control.

“Given that this tariff approval is only for one year, it is unclear whether Eskom will be able to sufficiently cut costs during this period, or whether it will just continue to borrow to pay its bloated operating costs, including its salary bill.

“In the absence of drastic cost-cutting measures, it is therefore likely that Eskom’s financial position will continue to worsen during this period.”

Steyn said the Nersa decision sent an important message that Eskom’s next application for a new multi-year tariff determination, expected next year, should demonstrate drastic cost-cutting measures to obtain Nersa support.

“However, I doubt whether Eskom will be able to take these difficult but necessary decisions under its current leadership,” he said.