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Jun 05, 2009

Eskom plans to use economic downturn to reduce capital costs

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Changes in market conditions present a significant opportunity for Eskom to reduce the capital costs of its new build programme, acting MD of the enterprises division Braam Conradie told delegates at the South African National Energy Association (Sanea) Action for Energy conference on Friday.

Eskom was spending R385-billion on its capital expansion projects over a five-year period, with Conradie noting that this formed an integral part of government’s response to the global economic crisis.

The power utility was planning to make good use of the economic downturn, he noted, saying that it was expecting to get better prices from suppliers and that it would also try to renegotiate certain contracts.

Eskom would look for savings everywhere, including its capital expenditure and its operating expenditure, with Conradie noting that “everything is up for debate”. He admitted that there would be some offsetting factors, such as the price of equity.

This meant that there could be some decreases in some costs and some increases in others, but he emphasised that the utility was obligated to look at every opportunity.

Conradie said that Eskom was still experiencing a funding problem and that a number of variables could impact on whether it delays any further projects.

Eskom had already delayed some of its projects, including a wind energy project, the Majuba rail project, the Tubatse pumped-storage project and its Nuclear 1 project, owing to the economic environment.

He explained that Eskom obtained its funding from three sources, namely debt, equity and tariffs. The extent to which it would be able to close its funding gap with the contribution from these three sources would be a key consideration in deciding if any other projects had to be delayed.

Everything was a trade off between what it could afford and what it could not afford, he noted.

The average wholesale price of electricity was 16c/kWh in the previous financial year, while the cost of producing electricity at its new Medupi and Kusile power stations would be at least three times that amount.

The utility would have to fund these higher costs somehow.

Conradie asserted that ultimately all these costs would have to be funded through tariffs, saying that debt and equity would only provide additional time for tariffs to be increased.

Eskom has made an application with the National Energy Regulator of South Africa (Nersa) for an interim tariff increase of 34%.

Public hearings on the matter would be held on Monday and Tuesday.

Edited by: Mariaan Webb
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