nce again firmly in the National Energy Regulator of South Africa’s (Nersa’s) court after business, civil society and labour put up their usual heavy resistance to Eskom’s latest request for hefty tariff hikes to help it deal with its financial woes.

Indeed, Eskom used the final leg of the nationwide hearings into is fourth multiyear tariff determination (MYPD4) to outline just how dire the situation was at the State-owned company, despite having received a nominal tariff increase of more than 600% over the past 15 years.

CFO Calib Cassim revealed that its loss for 2018/19 would be worse, at R20-billion, than the R15-billion loss it had projected in January and that it would be followed by another R19.7-billion loss in 2019/20 even if it received the hikes it was currently seeking from the regulator.

The deterioration was attributed mainly to the additional costs that had arisen as a result of the underperformance of the utility’s coal fleet, which had already resulted in a sustained period of rotational load-shedding towards the end of 2018.

The fall in the coal fleet’s energy availability factor (EAF) had also led to Eskom becoming increasingly reliant on more expensive generation options, such as the diesel-fuelled open-cycle gas turbines.

Cassim said the 2019/20 loss would arise even if the utility was granted the 21.5% tariff increase it was seeking for implementation from April 1.

Following recent revisions to the sales and production assumptions used in its original MYPD4 submission, Eskom was requesting a 17.1% hike for 2019/20, instead of the 15% originally sought. The increase would be additional to the 4.41% rise already approved for the year as a result of Nersa’s adjudication last year of Eskom’s Regulatory Clearing Account (RCA) applications.

In addition, Eskom was seeking to claw back R21.5-billion through an RCA application for 2017/18 and was proposing that the amount be recovered by means of a 2.8% additional hike in 2020/21, which would be included in the tariff base until 2022/23.

The utility also revised its tariff request for 2020/21 and 2021/22 to 15.4% and 15.5% respectively from 15% previously, after lowering its sales forecast, reducing the coal fleet EAF for the coming three years and updating the schedule for the introduction of new Medupi and Kusile units.

Lower Sales Outlook
Eskom’s revised application is based on a lower sales forecast for the coming three years, as well as material adjustments to its production plan as a result of a decision to shut 24 coal units at the Hendrina, Grootvlei and Komati power stations.

Eskom is now forecasting sales of 210 953 GWh for 2019/20, having previously forecast sales of 215 507 GWh. Likewise, it has reduced the sales outlook for 2020/21 and 2021/22 to 211 012 GWh (216 196 GWh) and 212 007 GWh (218 292 GWh).

Cassim attributed the reduction in the sales outlook partly to a lower export sales forecast, which had been adjusted as a result of lower capacity by some countries in the region to pay for Eskom supply.

Several Nersa panellists questioned whether the weak sales outlook should not, instead, be attributed directly to the strain ongoing electricity price hikes were placing on consumers. Cassim responded that its analysis pointed to demand remaining relatively inelastic, apart from the situation in certain vulnerable sectors, such as gold and platinum mining.

Minerals Council South Africa has warned that the hikes being sought could “render almost all gold operations (95%), representing 96% of gold production, lossmaking or marginal in a short period of three years, threatening a total of 98 509 jobs”.

Manager responsible for generation Brad Ross-Jones told Nersa that, while the initial MYPD4 application assumed that no production would be required from Grootvlei, Hendrina and Komati over the three-year period, Eskom had allocated capital to the plants with the intention of ensuring that 12 units could be returned to service within 12 months.

The revised plan envisaged all three stations shutting down, with the ‘dead-stop dates’ scheduled for all their generating units during the MYPD4 period. No capital expenditure had been budgeted for the plants, which would also be removed from the regulated asset base component of the revenue application.

Nevertheless, the closure decision, together with further delays to the introduction of Medupi and Kusile and a lower EAF, would result in a higher use of the expensive open-cycle gas turbines, including those owned and operated by independent power producers.

The new assumed EAF for the coal fleet was outlined as being 71.5% for 2019/20, 72.5% for 2020/21 and 73.5% for 2021/22, as opposed to 78% assumed in the original MYPD4 application.

Cassim said price increases in line with Eskom’s updated request – which was being strongly contested by business, unions and civil society – were necessary to return Eskom to within reach of a breakeven position and allow it to begin servicing its R420-billion in debt without resorting to additional debt.

Should it be granted its request, Eskom forecasts that it would make a smaller loss of R3.6-billion in the third year of the MYPD4 period and return to profitability thereafter.

Debt Relief?
The earnings estimate did not include any provision for government taking over R100-billion of its debt, which Cassim confirmed had been proposed to government by Eskom. “Obviously, if that decision is favourable, it will improve our income statement to a certain extent.”

In the absence of support from either the consumer or the taxpayer, or both, the utility’s “going-concern status was in jeopardy”.

“If we get to a situation where our accounts are qualified, the implications are significant for Eskom: where the lenders will want to recall their debt, government will have to step in and we will have to present our financials on a liquidation basis. “That’s the seriousness of the situation that’s facing Eskom.”

Eskom also stressed that calls for no increase or an inflation-linked hike were not realistic, owing to the RCA-related tariff approval of 4.41% and the expectation of full cost recovery against current and future independent power producer contracts, which would add a further two percentage points to the 2019/20 increase.

“Therefore, in reality, we are already at the top of the inflation target, without giving Eskom a single increase for its own cost of operations.”