On Monday 22 October Eskom Holdings Ltd., the state-owned supplier of about 95% of South Africa’s power, announced the details of its application to the National Energy Regulator of South Africa (Nersa) for a tariff determination to cover the next five years from April 2013. Eskom is seeking a 16% increase in average electricity prices to avoid a repeat of the numerous electricity blackouts across the country in the first quarter of 2008, as Eskom rotated the limited power available.
The utility has to apply to Nersa for permission to raise tariffs and wants annual increases of that size from 2013 up until 2018, according to a statement. An annual 16% increase – which includes 3% to support independent power producers (IPPs) – would raise prices from 61 cents per kilowatt per hour to 128 cents by 2017. This means that South Africans will on average be paying just over double the current electricity price by 2018.
A third of the increase will be required to pay for higher coal costs, Eskom said, and another quarter will go to increased operating costs. The rest is made up mostly of making provision for replacing ageing infrastructure and paying current and future debt raised to do so.
The current Multi-Year Price Determination (MYPD2) ends on 31 March 2013. Nersa will announce its final decision in February 2013, following an extended period of consultation and public hearings.
Investing in the future
“It’s very important that we invest in the future,” Eskom’s chief executive officer, Brian Dames, told reporters at a recent briefing Johannesburg, where the company is based. He said outdated capacity will be decommissioned at a time when the utility added 155 000 customers last year.
The tariff application will see Eskom’s return on assets improve from 0,9% to 7,8% over the MYPD3 period, with the return going mainly to support the debt raised to finance the utility’s capital investment programme. According to a press release by the utility, Eskom will be spending about R337-billion over the five years on its new building programmes, as well as upgrading and refurbishing its existing assets.
Supporting renewable energy
The tariff increases account for 13% a year until 2018 for Eskom’s returns and depreciation of capacity expansion until the Kusile power plant is completed. It also includes 3% to support the introduction of IPP producers. The IPPs, which will supply the first large-scale introduction of renewable energy into the South African market, include all three phases of the Department of Energy’s (DoE’s) renewable energy procurement programme (3 725 MW), in line with a determination by the Minister of Energy, as well as the DoE’s peaking projects (1 020 MW). Should the independent producers not develop as the government plans, Eskom said, it will require 20% year-on-year increases.
The coal conundrum
“Coal is the big issue with price pressures driving costs up to R250-billion for the next five years while the company strives to keep manpower costs below inflation,” Dames said. “Eskom is very concerned about mining projects due to supply the company after 2018,” he added.
Coal is Eskom’s single largest cost, and coal costs are seen increasing by 10% per year over the five years, with Eskom’s primary energy costs increasing by 8,6% on average within the five years. Eskom has called for a pact to contain coal cost increases, which averaged approximately 18% over the MYPD2 period. Other operating costs increase by an average of 8% a year within the five years, with manpower costs rising in line with inflation.
The building programme has significant benefits for the economy, providing the necessary infrastructure to grow the economy, creating jobs and skills and stimulating the development of local supplier industries. There are currently more than 35 000 people on site at Eskom’s big building projects and more than R75-billion of contracts have been placed with South African suppliers.
Eskom’s application covers only its committed new building programme up to the end of the Kusile power station project, which is expected to be completed by 2018/19.
“An investment grade rating is vital to ensure that we can access funding, at cost-effective rates, for our building programme. The application will enable Eskom to move to a stand-alone investment grade rating by the end of the MYPD3 period,” said Eskom’s finance director, Paul O’Flaherty.
As part of the application, Eskom modelled scenarios showing the pricing implications of new building projects beyond Kusile, in terms of the government’s Integrated Resource Plan 2010, which indicated average increases of 20% over the MYPD3 period. However, the additional capacity was not included in the tariff requested from Nersa.
The 16% increase is based on Eskom’s revenue – what users of electricity end up paying will depend on how they buy power and how much they use. From March 2013, Eskom proposes, municipalities and high-consumption home users will pay 13% and 14% more respectively, while industrial and commercial users will pay 21% more. Home users with very small consumption, on the other hand, will pay either slightly less or only around 5% more, after a new tariff system is introduced.
Municipalities have in recent years increased their electricity prices well above the increases levied by Eskom, using the difference to subsidise other services.
Special pricing agreements
The one exception to the general increase is the mining company BHP Billiton, which buys power for its smelters at a sweetheart rate under secret contract. That contract will now be submitted to Nersa for review, Eskom said, although it stopped short of saying negotiations with the company have failed.
Eskom also announced that it would soon be submitting an application to Nersa to look into the special pricing agreements which Eskom has with BHP Billiton relating to the aluminium smelters in KwaZulu-Natal. The special pricing agreements link the price that the smelters pay for electricity to the dollar price of aluminium and were entered into in the 1990s, when Eskom had surplus generating capacity, which is no longer the case.
The increase that Eskom requested did not make provision for the introduction of a carbon tax, and assumed independent power producers would start contributing significantly to power generation over the next five years – even though the process of allowing such outside players into the industry has seen long and consistent delays.
Revenue requirements for MYPD3
General primary energy: 33%
Operating costs: 25%
• Higher prices: Higher prices boosted Eskom’s net income by 57% to R13,2-billion in the year ending on 31 March, while volumes sold were little changed from a year earlier.
• Lower credit rating: Standard & Poor’s recently downgraded Eskom’s credit rating to match a lower sovereign rating, which is a concern, the utility said.
• Residential restructuring: “Residential tariffs should be restructured to simplify understanding and optimise the protection of the poor, while high-usage residential customers pay more cost-reflective prices,” states Eskom’s tariff determination summary.
• Largest customers: Eskom increased its tariffs by an average of 25% for the last six years. BHP Billiton Ltd. (BHP), Xstrata Plc (XTA) and Anglo American Plc (AAL)’s aluminium, ferro-chrome and platinum smelters are among its largest customers, according to www.bloomberg.com.
• Industrial action backlash: According to www.bloomberg.com, protests that have spread through South Africa’s mining and trucking industries also happened at the site where Eskom is building the 4 764-megawatt Medupi power plant, due to start generating power next year. Civil engineering contractors, whose grievances were unclear, damaged equipment and vehicles at the construction area in northern South Africa, Eskom said in a statement on 6 September. “We cannot afford any more industrial action,” Paul O’Flaherty, the utility’s finance director, said at the presentation. “The last interruption at Medupi lasted for three weeks,” he said.
• Power shortages: Eskom expects power shortages to last until the end of 2013, when the first unit of the Medupi coal power plant in the north of the country starts generating power.
Full acknowledgement and thanks are given to www.bloomberg.com for the information given to write this article.