SA can’t afford another Eskom price hike

SA can’t afford another Eskom price hike

The National Energy Regulator of SA (NERSA) will continue its public hearings on Eskom’s application for the evaluation and approval of the regulatory clearing account (RCA) balance for the financial year 2013/2014 of the third multi-year price determination (MYPD3.)

The RCA process reconciles variances between the actual costs that Eskom incurred in 2013/2014 financial year in the production of electricity and the MYPD3 record of decision by NERSA.

Eskom has submitted an RCA application to recover R22.8bn, which it said is driven substantially by revenue under-recoveries, higher expenditure on coal burn, Independent Power Producers (IPPs,) Open Cycle Gas Turbines and other primary energy costs.

“Eskom’s mandate is to provide electricity to support the economy. We are sensitive to the impact the RCA submission has on the wider economy. To this end, we have not claimed R10.5bn of costs incurred by Eskom that are not recoverable under current RCA methodology,” Eskom said on the first day of the public hearings in Cape Town.

On Monday Leslie Rencontre, director of electricity at the City of Cape Town, told NERSA the adjustment would mean all cities in South Africa would face an electricity tariff increase of at least 16% in July.

The bulk of the R22.8bn adjustment Eskom is asking for, is made up of reduced revenues of R11.7bn and increased primary energy costs of R14.4bn.

“Electricity prices are already high for business and residential consumers, including the poor,” Rencontre said.

“Any additional increase approved by NERSA will have a further negative impact on Cape Town’s economy.”

At the hearings the SA Local Government Association (SALGA) told NERSA the big question is whether the South African economy and South Africans are ready for another unaffordable electricity increase at this point.

SALGA said it understands and accepts the RCA process, but it has unintended consequences and defeats the purpose of having a 5-year multi-year price determination.

In SALGA’s view the RCA process, therefore, creates uncertainty and instability, which could end up punishing consumers because of “bad planning and grossly inaccurate projections” on the part of Eskom.

Business is no longer able to absorb further electricity tariff hikes, particularly given the impact on an already weak South African economy, Virgin Active SA told NERSA in its presentation at the hearing.

“A further tariff increase has a massive compounding effect and is baked into the base forever. Compound effects of previous years’ increases should be more than sufficient for Eskom,” the company said.

“Allowing Eskom’s proposed increases has the potential to perpetuate the poor management and planning issues at Eskom. Tariffs are easily used as a convenient ‘release valve’ rather than Eskom being forced to find more innovative ways to address its issues.”

Roger Pitot of the Authority of the SA Automotive Components Industry (NAACAM) told NERSA that granting Eskom the R22.8bn adjustment would in effect mean an increase of more than 25% for tariff based customers during the 2013/14 financial year.

“Based on Eskom’s rationale similar ‘corrections’ can now be expected in future,” cautioned Pitot.

“Does Eskom realise the consequences? Users and particularly business and industry will further reduce their usage of power as encouraged by Eskom and as prices escalate, creating a vicious circle of lower revenue, surplus capacity and Eskom requests for price increases, which is certain to continue.”

In his view this will lead to a further reduction of investment and employment in the industry.

Cape Chamber of Commerce and Industry says a further increase in electricity tariffs will not solve Eskom’s problems and could worsen their financial situation. In a presentation to the National Energy Regulator, Sid Peimer, Executive Director of the Chamber, said tariff increases would make more Eskom customers decide to turn to solar power and this would erode Eskom’s customer base.

“This is not a prediction. It is happening and at an increasing rate because it makes commercial sense. PV panels are getting cheaper and more efficient and will continue to do so.”

He pointed out that in the Western Cape there were already a number of large “own generation” solar projects from Clanwilliam and Citrusdal to office blocks in the city while the Waterfront had already installed solar panels to meet most of its future electricity needs.

He said Eskom’s main problem was that it had got its forecasts of future electricity demand hopelessly wrong and this was the reason for the shortfall in revenue.

“Good managers learn from their mistakes. Clearly, Eskom has not learned and it is still producing unrealistic demand forecasts. There is a dangerous element of wishful thinking in their budgeting. That is bad management at the highest level and business and the South African consumer is now being asked to pay for these mistakes.” the Chamber said.

The second big problem was the over use of the diesel-fuelled open cycle gas turbines which produced the most expensive electricity and which Eskom was forced to sell at a loss.

“The open cycle gas turbines are basically jet engines from the likes of Pratt and Whitney and General Electric. They are designed to run on paraffin. Why does Eskom use the more expensive diesel fuel?” This was one area where Eskom could save money.

“Our message is very simple. First bring your costs under control before you ask business and the pubic for more money to pay for past mistakes.”

If Eskom wanted to regain the trust of public it should be more transparent about its costs, especially procurement and it should justify its use of “middlemen”.

“We believe that greater transparency will lead to greater trust and a welcome improvement in relations between Eskom and its customers.”


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