South Africa's Energy Intensive User Group (EIUG) has questioned whether there would be any investor appetite for a 30% interest in the "expensive" Kusile power station and indicated that it might be more beneficial to open up other Eskom assets for sale to private investors.

Speaking during the Gauteng leg of the National Energy Regulator of South Africa's (Nersa's) public hearings into Eskom's tariff application, the EIUG's Ian Langridge said that, through no fault of its own, Eskom had procured the plant at the peak of the power equipment market, making it "too expensive and too late".

He added that a private investor would have limited scope to use its expertise to lower the financial and construction risks of the project. Therefore, it might be more appropriate for Eskom to open up some of its other assets to private investors in order to help it fund its R400-billion capital programme.

There were many better opportunities elsewhere, including "good Eskom power stations", which would be more appealing to a private investor.

Langridge also said that the EIUG, which comprises South Africa's 37 largest electricity consumers accounting for some 40% of all sales, also opposed Eskom's application for tariff increases of 35% a year between 2010 and 2013.

He said other funding models and plans should be interrogated and also questioned Eskom's basis for calculating its return on assets, which has emerged as a key area of contention during the hearing. Eskom was basing its evaluation on replacement costs while many commentators were of the view that the historic cost index should be used.

Several Nersa panellists have questioned the fivefold increase in Eskom's valuation model, and have asked whether it was really necessary for the funding programme.

But Eskom's new finance director, Paul O'Flaherty, said that its return was based on a weight average cost of capital of 10,3%, which had been benchmarked.

Further, in its application, Eskom was not anticipating securing that level of return. He said it would be -1,9% in 2010/11, 1,7% in 2011/12, and 4,7% in 2012/13.

Nevertheless, Langridge argued for an urgent revision of the funding model used in the application, from the return methodology used, through to its operational and capital costs.

The EIUG was convinced that there were many savings to be gained, particularly in the sphere of primary energy.

Some of the funding pressure could also be relieved by transforming the current "hostile" environment for independent power producers into an attractive one.

However, the current Department of Energy integrated resource plan excluded a material contribution from independent power producers. This policy should be urgently reversed, Langridge averred.

LARGE USERS MUST PAY?
Questioned by the chairperson of the hearings, Thembani Bukula, as to why a solution to the immediate tariff hike could not be partly remedied by a disproportionately large increase in the low tariff charged to EIUG members, Langridge warned that there would be economic and employment consequences.

Some of the plants within the EIUG members' production mix were already marginal, Langridge said, and would be forced to close even at an increase of 25%.

But the Congress of South African Trade Unions and Earthlife Africa believe that it would be better for the structure of electricity pricing to be reversed so that households, and particularly poor households, receive the "subsidy" rather than industrial users.

In his presentation on Thursday, Earthlife Africa's Tristen Taylor also argued that industrial tariffs should rise significantly in order for energy efficiency measures to become economically attractive.

"Eskom should abolish its current practice of selling below the average cost of production," Taylor argued, adding that the regulator should use Eskom's average cost of production as the minimum tariff for all customers, excluding that which would be set aside for free basic electricity.

A minimum of 200kWh/m of electricity should be provided free, he added.

The nongovernmental organisation also argued that funding for Kusile should be excluded from the tariff-determination period, arguing that "cheaper" forms of renewable energy should replace the programme.

It also argued that private equity in the public electricity sector should not be considered a source of funding as it is contrary to the public good of supplying electricity at the most affordable levels.