Organised business lamented the fact that South Africa's energy regulator was being asked to adjudicate potentially devastating tariff increases in the absence of policy certainty regarding the future structure of the country's power supply industry.

In a presentation made on Thursday during the Gauteng leg of the National Energy Regulator of South Africa's (Nersa's) public hearings into Eskom's tariff application, Business Unity South Africa (Busa) argued that South Africa's electricity policy should be overhauled so that it takes a longer-term perspective than the three years under consideration.

Such a policy should accelerate competition, by: opening the sector urgently to independent power producers (IPPs), cogenerators, and imports; ensuring government, as Eskom's shareholder, scaled-up its injections and guarantees; and raising Eskom's gearing to between 100% and 200%.

Busa calculated that additional government guarantees of R27-billion would unlock an additional R10-billion in yearly borrowings and should be explored.

A five-year tariff path framework would also support price smoothing, with Busa CEO Jerry Vilakazi proposing increases of 25% in 2010/11; 25% in 2011/12; 22,5% in 2012/13; 12,5% in 2013/14 and 10% in 2015/16.

Such a price path would result in the price nearly doubling over five years rather than rising to 82c/kWh from around 30c/kWh over three years.

Vilakazi said that a greater reliance on equity injections (public and private), increased guarantees and increased borrowings would be a more appropriate funding model than the current heavy reliance on tariff increases.

The current model would have serious negative economic and social consequences.

Busa calculates that growth would be curtailed by between 0,5% and 1%, inflation would rise by 1,2%, and up to 200 000 jobs could be lost.

The organisation also calculated that the proposed increases of 35% a year between 2010 and 2013 would have an economic cost of R80-billion, for a rise in Eskom revenue in year one of R18,2-billion.

Vilakazi called for urgent policy resolution, particularly of the integrated resource plan (IRP) - the first version, which has been described as an interim plan, was published at the end of December.

This so-called IRP1 set the framework for power generation projects to be added to the generation mix up until March 31, 2013, and a second version, which would have a 20-year horizon, would only be developed and consulted during the first half of 2010.

Busa did not openly call for a halt to the Nersa process until such a policy resolution was obtained. Vilakazi indicated, though, that it had already had high-level engagements with the South African government where its concerns were canvassed.

CIC Energy's Greg Kinross, whose company intends building a 1 320-MWcoal-fired power station at Mmamabula, in Botswana, and sell part of the output into South African grid, was somewhat more forthright.

He argued that Nersa would need to work with Department of Energy (DoE) to overcome the conflicts between the IRP and Eskom's second multiyear price determination (MYDP2) application, "potentially even prior to the tariff determination".

CIC was particularly unhappy with the fact that the IRP did not provide for new capacity required on or after April 1, 2013, which would undermine planning, owing to the fact that between five and six years were required to plan for additional capacity.

"Since it is our view that unless IPPs are used to solve this problem, Eskom may incur further unbudgeted costs during the MYPD2 period," Kinross said, adding that the National Treasury should also be urgently consulted, owing to the fact that it could well be called in to support Eskom.

IRP MISALIGNMENT

Nersa also raised questions about the misalignment between aspects of Eskom's application, and the recently published IRP1, which determined power generation investment choices for the same period.

Nersa regulatory member Dr Rod Crompton said that differences between the application and the IRP posed a problem as Nersa had to base its decisions on the letter of the law and policy.

Eskom senior GM for regulatory affairs Mohammed Adam acknowledged the discrepancies, which he said had arisen owing to the fact that the documents had been designed in parallel rather than in series.

He said Eskom had given an indication in its application of the impact on the tariff, should the IRP1 stipulations of not delaying the Kusile power station, the 100-MW Sere wind farm, and the Department of Energy's (DoE's) independent power producer, be sustained.

But he believes the gazetted IRP was flexible and could still be altered to accommodate the changes introduced by Eskom in a bid to 'smooth' the tariff trajectory. In an earlier application, Eskom submitted a request for three yearly increases of 45%.

But if it became clear that the DoE would not realign the IRP, then Nersa would indeed be obligated to follow the IRP rather than the Eskom application.

Kinross calculated that should IRP1, rather than MYPD2, be used to determine the timing of the capacity roll-out, Eskom's funding shortfall would increase significantly, possibly to as high as R80-billion.

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