Eskom reaffirmed to the Parliamentary Portfolio Committee on Energy on Friday that it would not, through efficiencies alone, be able to close the R225-billion financial gap arising from the lower-than-requested tariff determination for the coming five years.

Several other responses were, therefore, being pursued, including an initiative to identify whether additional support might be required from the utility’s shareholder, the South African government.

On February 28, the National Energy Regulator of South Africa (Nersa) granted Eskom yearly increases of 8% for the period from 2013/14 to 2017/18, instead of the 16% it had requested. This translated into allowable revenue for the period of R862-billion, rather than the nearly R1.1-trillion sought.

Divisional executive: regulatory and legal Mohamed Adam told committee members that a “systematic, rational approach” would be pursued to deal with the shortfall, including the implementation of a R30-billion savings plan to which it had committed in its third multiyear price determination (MYPD3) application to Nersa.

Eskom was already considering how the business could be “reshaped” in response to the cost reductions required by Nersa, as well as ways to bolster productivity. This initiative was being undertaken under the banner of the integrated delivery programme, which was being driven by CEO Brian Dames and overseen by Kiren Maharaj.

A joint shareholder-intergovernmental workgroup had been established to consider possible constraints to Eskom meeting its mandate in the medium term. The impact of the regulatory “disallowances” had been back-end loaded, meaning that the implications were less pronounced in the first two years than would be the case during the final three.

Therefore, the workgroup would consider whether the utility would require additional shareholder support during the MYPD3 period and would also explore funding alternatives.

Eskom had already benefited from a R60-billion subordinated loan and R350-billion in government guarantees. To date, the utility had utilised R150-billion of those guarantees.

Non-financial support would also be considered, including the progress on a mandatory energy conservation scheme and finalising government policy on shoring up domestic coal resources for domestic electricity production, possibly through a country pact on coal prices.

In his recent Budget Vote address, Public Enterprises Minister Malusi Gigaba said that, the implications of the Nersa decision were being studied. “As the shareholder, we are committed to ensure that Eskom remains sustainable and is able to deliver on its build commitments,” he added.

Adam indicated that Eskom would be looking to implement substantial changes within the next two years to mitigate the shortfall and stabilise the business.

It would also engage with Nersa on its reasons for certain disallowances and the assumptions used to inform the MYPD3 determination, but Eskom was not appealing the Nersa determination.

Through these engagements, Eskom would home in on those regulatory frameworks and rules that could assist it in “addressing the challenge”.

An area of focus could be the use of the regulatory clearing account (RCA) as a mechanism to “claw back” some of the revenue lost through the determination. The RCA is a risk management device used to reconcile differences between actual and approved revenue during the MYPD period.

Priority was also being given to deal with the policy implications of Nersa’s determination, including the future role of Eskom in building capacity beyond the Kusile coal-fired power station and in facilitating integrated demand management (IDM).

The utility applied for R13-billion over the period for IDM projects, but only received R5-billion.

Nersa indicated that, in the longer term, most IDM programmes should be implemented by a suitable agency, rather than Eskom, as the management of IDM funds by Eskom created a conflict of interest, in that Eskom was required to encourage customers not to purchase generated electricity.