The tariff implications of the National Energy Regulator of South Africa’s (Nersa’s) decision to allow Eskom to operate its diesel-fuelled open-cycle gas turbines (OCGTs) for up to 450 GWh a month have not yet been determined. But the State-owned utility has confirmed that it has already prepared a regulatory clearing account (RCA) application for the first year of the current third multiyear price determination (MYPD3) period and that it will finalise a further RCA for the second year at the conclusion of its financial year, which ends on March 31, 2015.

The MYPD3 covers a five-year period, from April 1, 2013, to March 31, 2018.

Both RCA applications will seek to claw-back “variances” between the revenue assumptions made in the MYPD3 and actual costs incurred by Eskom, which have, to date, far exceeded the assumptions.

With the OCGTs operating at 450 GWh a month over a full year, Eskom has indicated that its total costs could rise by 6% at the current diesel prices. Once other variations incorporated into the RCA mechanism are included, the overall cost variation could be as high as 10% of annual revenue.

Nersa full-time regulatory member for electricity Thembani Bukula tells Engineering News Online that the regulator is yet to receive MYPD3-related RCA applications, which he stresses will be subjected to a prudency and efficiency review once delivered.

Bukula confirms that Nersa has given Eskom permission to use the OCGT plants in the Western Cape more intensively than had been assumed for the second year of the MYPD3 and that it has requested the utility to submit a revised OCGT usage plan for the remainder of the five-year determination period.

Eskom has indicated that its 2014/15 diesel budget will again exceed the MYPD3 allocation, having spent a massive R10.5-billion on diesel fuel in 2013/14, which was R8.1-billion above the R2.5-billion set aside in the determination for the year. Eskom expects to spend a similar amount in 2014/15, against an approved OCGT cost allocation of only R2.7-billion.

Through the RCA mechanism Eskom will seek to “retrospectively reconcile” cost variances and, should it be found that these costs were prudently incurred, it will be able to recover these through a future tariff adjustment. However, there will be a lag of two to three years between the costs being incurred and recovered, implying that Eskom will need to fund and carry the initial expense in the interim.

In light of more severe financial constraints for year two, the utility has not been in a position to raise the additional funding for diesel and is, therefore, seeking R3-billion in bridging finance from government to close the gap until the end of the current financial year.

In order to prepare the way for a recovery of those additional costs, on January 5 Eskom requested of Nersa an upfront prudency assessment on its additional OCGT usage requirements. With such “regulatory certainty” in hand, the RCA application will reflect the additional OCGT usage.

The impending RCA applications for the first two years of the MYPD3, follow on from the Nersa’s recent review of Eskom’s RCA application for the MYPD2 period.

During the MYPD2 review, the regulator agreed that Eskom had under recovered R7.82-billion between 2010 and 2013 and announced that 2015/16 power tariffs would increase by 12.7% on April 1, instead of the 8% originally sanctioned in MYPD3.

Given the lag between RCA applications and adjustments to the tariffs, the implications of Eskom’s MYPD3-related applications are likely only to be felt from April 1, 2016, with the adjustments for the second year expected only from April 1, 2017.

Eskom says that, owing to the ‘base effect’ of Nersa’s decision to increase the 2015/16 tariff by 12.7%, “it is unlikely that the RCA mechanism could result in price increases for 2016/17 and 2017/18 of above the 13% [received] for 2015/16”.

However Nersa also has the option of spreading the recovery of such increased cost over a longer period, particularly where it considers these costs to be extraordinary and non-permanent.

On the other hand, if Eskom believes the delay in recovering the variances will place too high a financial strain on the business, it could consider re-opening the MYPD3, which would trigger another series of public hearings into the power tariff as has been the case in the past.

Eskom reports that, at this stage, with the support from government, internal cost-cutting measures and other initiatives, it is expecting to be able to tolerate the inherent cost-recovery delay of the RCA mechanism.