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May 17, 2013

Monopoly on power must end

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For economic activity to be supported, more power generation in South Africa is needed; hence, we need more clarity from the Department of Energy on the role of independent power producers (IPPs) in power generation, given the constrained power system operated by State-owned power utility Eskom, says research and consulting firm Frost & Sullivan energy and power leader Cornelis van der Waal.

Since the National Energy Regulator of South Africa (Nersa) decided to grant Eskom an 8% increase, instead of the requested 16% average increase a year over five years, new project development will prove to be one of the biggest challenges in Eskom’s long-term planning, he says.

Eskom admits on its website that the introduction of private-sector generation has multiple benefits. “It will contribute greatly to the diversification of the supply and nature of energy production, assist in introducing new skills and capital to the industry and enable the benchmarking of performance and pricing,” states the utility.

Eskom further states on its website that its application for revenue over five years translated into an average price increase of 13% for its needs and 3% to support the introduction of IPPs into the country’s energy mix, amounting to 16%. “This is a nominal price increase of 67c/kWh from the current average of 61c/kWh in 2012/13, to an average price level of 128c/kWh in 2017/18,” says Eskom.

The approved 8% tariff increase, which was implemented by the utility on April 1, implies that there will be an increase on the homelight 20A customers consuming up to 350 kWh/m, which will be equivalent to an inflation of 5.6%.

The average price increase for all other residential customers with homelight 60A and homepower will be 8%. Nersa points out in a report, released on February 28, that this will be in line with the third multiyear price determination (MYPD3) Eskom control period, which runs from 2013-2017.

All tariff cross-subsidies, both received and paid, must be shown transparently. These subsidies pertain to affordability subsidies, low-voltage subsidies and historic electrification and network subsidies in large power customer urban tariffs.

Nersa also notes in the report that the use-of-system charges must be based on the cost-per-voltage level for all large power customers. Where there are low-voltage subsidies, these must be transparently shown as a low-voltage subsidy charge.

The report explains that the reliability and service charge covering the cost of providing ancillary services, embedded in the energy charge, must be unbundled for large power tariffs. “The environmental levy charge must be included in the energy-charge component of the tariff and not shown separately. Eskom must ensure that alternative tariff options, other than time-of-use tariffs, are available to municipalities that have a predominantly residential load mix,” the report further states.

The overall costs have increased by 178.60% from the last year of the MYPD2 (2012/13) to the first year of the MYPD3 (2013/14). Some of the reasons provided for the tariff hike are the funding of electrification, new connections and an increase in customer-service costs to improve revenue collection in Soweto.

In the absence of proper justification for the increases and project list, Nersa said it limited the increases to inflation-related increases and expected capacity expansion for the MYPD3 control period, resulting in an adjustment of more than R47-billion.

MYPD3 Control Period
“In keeping with the Electricity Regulation Act of 2006, the revenue being requested in this application will cover R1-trillion over five years, of which two-thirds come from primary energy and operating costs, while the remaining one-third is related to assets, namely depreciation and return on assets,” states Eskom.

The cost of basic natural resources used to produce electricity, including coal, water, biomass and sorbent, which excludes the IPPs, will increase at an average of 8.6% a year for Eskom requirements and by 10% a year once IPPs are incorporated, highlights Nersa.

“Eskom’s operating costs increase by an average of just more than 8% a year. These costs include the maintenance of existing plant and employee costs. Eskom currently has more than 44 000 people on its payroll and this will increase to 45 500 over the MYPD3 period. Most of Eskom’s power stations are in their midlife and require substantial spending on mainte- nance and refurbishment if their performance is to be sustained and improved,” outlines Nersa.

“This means that maintenance costs will continue to increase at a higher rate than that of inflation. Depreciation is set to rise at a yearly average of 10% over the MYPD3 period as we phase in the depreciated replacement valuation method as per government’s Electricity Pricing Policy,” Nersa explains.

Eskom points out that it is crucial that the private sector plays a role in dealing with the future electricity needs of the country. This will reduce the funding burden on government; relieve the borrowing requirements of Eskom; and introduce generation technologies that Eskom may not consider as part of its core function, which may play an important role in the future electricity supply options, particularly off-grid, dis- tributed generation, cogeneration and small-scale renewable projects.

“Given Nersa’s decision, Eskom would still like to remain the baseload supplier in the country. Therefore, it is important for Eskom to maintain its plans for projects such as those for capacity expansions. However, Eskom must find and secure ways to fund these projects, as a lack of funding is limiting its progress,” Van der Waal concludes.

Edited by: Tracy Hancock
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