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Oct 22, 2012

Eskom seeks yearly increases of 16% to 2018

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Africa|CoAL|Energy Intensive User Group|Eskom|Industrial|PROJECT|Projects|Africa|South Africa|Electricity|Energy|Energy Regulator|State-owned Electricity Utility|Brian Dames|Power|South Africa
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State-owned electricity utility Eskom has submitted its third multiyear price determination period (MYPD3) application to the energy regulator, in which it is requesting average yearly tariff increases of 16% for the five-year period from April 1, 2013, to March 31, 2018.

The utility indicated on Monday that, if granted, the increases would raise the price of electricity from 61c/kWh currently to a nominal 128c/kWh by 2017/18, or to 96c/kWh real at the conclusion of the tariff period.

CEO Brian Dames said the application translated into average yearly price increases of 13% for the utility's own needs, while the average total increase of 16% a year included an additional 3% to support the introduction of independent power producers (IPPs) – principally the 3 725 MW of renewable capacity currently being procured and a further 1 020 MW from the Department of Energy's open-cycle gas-turbine peaker project.

Through the application, Eskom was seeking allowable cumulative revenue of nearly R1.1-trillion over the five-year period.

The bulk of the revenue requirement related to anticipated primary energy costs of R355-billion, most of which related to the purchase of coal. The balance was attributed to IPPs (R78-billion), operating costs (R270-billion), integrated demand management (R13-billion), depreciation (R185-billion) and a return on assets request of R187-billion.

CFO Paul O'Flaherty said the depreciation charge was based on yearly increases of 10% over the period, while the return on assets was premised on a transition from a return of 0.9% in 2013/14 to 7.8% in 2017/18. He stressed that the return would remain below the 8.16% target set by the regulator, as well as the utility's weighted average cost of capital of 8.31%.

The submission, which would now be canvassed with the public through hearings to be held by National Energy Regulator of South Africa (Nersa), was delayed from the initial deadline of August 31, after government requested that Eskom make certain adjustments to its assumptions.

The adjustments related to a misalignment between the initial MYPD3 submission and the Integrated Resource Plan (IRP), which assumes that Eskom would add 29 000 MW and IPPs 16 000 MW by 2030.

However, Eskom limited its submission to the conclusion of the introduction of the Kusile power station and the addition of the renewables and peaker projects. O'Flaherty indicated that increases of closer to 20% a year over the period would be required to fully align the MYPD3 application with the IRP.

The application had also been informed by an assumption that energy demand would not grow by more than 1.9% a year, which was far below estimates of over 3% a year outlined in the IRP, which was likely to be reviewed in the coming year.

The MYPD3 had also been premised on single-digit increases in primary energy costs and the institution of a mandatory energy conservation scheme.

The return sought, together with the depreciation charge proposed, were likely to feature strongly in the upcoming hearings, particularly whether the depreciation figure should be calculated on a replacement asset basis rather than on historical costs.

O'Flaherty defended the use of the replacement-asset calculation in the interests of avoiding future price spikes, but acknowledged that the revaluation had added R64-billion, or over 2%, to the depreciation charge outlined in the submission.

Dames said the increases would facilitate a transition to cost-reflective tariffs over a period of time and sought to balance the needs of the economy with the imperative of ensuring Eskom became independently sustainable and credit worthy.

The utility has also indicated that a price level of 96c/kWh, in real terms, would be necessary for it to cover its operating costs and move ahead with its R323-billion, five-year capital investment programme.

Nevertheless, the increases being sought were likely to prove controversial and unpopular, as they follow on from several years of above-inflation increases sanctioned by Nersa between 2007 and 2013.

South African power prices have more than doubled over the period, with Eskom’s selling price having climbed from around 20c/kWh to 50.3c/kWh last year and 61c/kWh currently. However, prices paid by municipal consumers are far higher and also less uniform.

The MYPD3 documentation, which runs to around 3 000 pages, also, for the first time, offered visibility of the proposed cross-subsidisation of certain categories of consumer, by other consumers.

Though small customers still paid a higher price per unit, Eskom showed that the cost to supply such consumers was far higher than was the case for large customers. Therefore, large customers subsidised all other categories of consumer – a trend that would be entrenched further should the application be approved.

The submission showed that the future increases were also not uniformly spread, with the submission proposing that industrial customers receive a 21% average yearly hike over the period, from 57.2c/kWh to 69c/kWh, while low-consumption residential consumers receive a 1% decrease to 75.6c/kWh.

In terms of the submission, municipal tariffs were set to rise by an average of 13% a year over the period, from 57.3c/kWh to 64.9c/kWh.

For South Africans, who are struggling with a series of above-inflation administered price rises, affordability has emerged as a key concern.

A particularly vociferous critic is the Energy Intensive User Group (EIUG), whose 31 members consume about 44% of South Africa’s electrical energy and whose operations turn over about R794-billion yearly.

The EIUG has already urged Nersa to scrutinise the cost assumptions used by Eskom and crack down on nonelectricity-related costs. It also argued that the “right” price path for South Africa should also be informed by such issues as affordability, cost reflectivity and improved transparency of costs and tariffs.

Prices, the EIUG argued, were simply rising “too fast and too high” for companies in a range of industries to remain globally competitive.

Nersa confirmed receipt of the application and set a closing date of November 20 for stakeholder comments ahead of public hearing in all nine provinces, which would take place between January 15 and 31. It would make a determination on February 28 and lawmakers would consider the application in March.

The sanctioned increases would be implemented on April 1, 2013, for direct Eskom customers and July 1, 2013, for municipal customers.

Edited by: Creamer Media Reporter
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