Business warned earlier this month that South Africa risked entering a “vicious cycle” of ever-increasing yearly electricity hikes, beyond those already approved, owing to the nature of the current tariff-setting formula, which allows Eskom to recover variances in revenue arising when power sales are below the level approved in a given multiyear price determination (MYPD) period.

In its Regulatory Clearing Account (RCA) submission, Eskom is seeking to recoup R11.7-billion in revenue variances for the 2013/14 financial year alone, making it the largest single component of the R22.8-billion claw-back application.

The revenue variance claim arises, Eskom asserts, as a result of R7.3-billion in lower sales to standard tariff customers in the year, which saw Eskom sell 194 778 GWh under its standard tariff instead of the 208 442 GWh outlined in the current determination, or MYPD3. The utility has also made a further R3.8-billion claim, arising from Eskom’s interpretation of how its controversial negotiated pricing agreement with the aluminium smelters should be treated.

Speaking on the final day of National Energy Regulator of South Africa (Nersa) public hearings in Gauteng, Business Unity of South Africa (Busa) standing committee chairperson on economic and trade policy Martin Kingston said it was unlikely that economic growth and electricity demand would recover for the remainder of the MYPD3 period to March 31, 2018. Therefore, Eskom would have further claims to recoup revenue over the duration of the prevailing five-year determination period, which would result in hikes well beyond the 8% already sanctioned.

Should Eskom’s RCA application be approved as is, the Eskom tariff could increase by around 16.6% from April 1.

Such a scenario, Kingston argued, would compromise the viability of Eskom’s customers,which, in turn, would lower demand to the point where the viability of Eskom itself could be imperilled. Demand had already fallen to 2007/8 levels, while tariffs had risen sharply, with Busa estimating a 348% increase over the ten-year period from 2007/8 to 2017/8.

The consequence would be a “vicious cycle, whereby customer unit costs would rise to the point where some domestic enterprises would be forced to either downsize or close.

“I think this is a self-fulfilling prophecy and we need to think very carefully about how we arrest this particular trend before its damage on the economy becomes irreparable,” Kingston argued.

He was not alone in calling for some reflection as to whether the regulatory methodology was “fit for purpose”, with Ted Blom, representing the newly rechristened Organisation Undoing Tax Abuse, better know as Outa, arguing vociferously for a complete overhaul of the methodology.

Business was equally concerned about the uncertainty caused by continual upward adjustments to the tariff in the middle of a determination period, with Eskom having already succeeded in an earlier RCA application, which resulted in the 2015/16 tariff rising by 12.69% instead of 8%.

Sibanye Gold’s Peter Turner said mine planning was affected by “surprise” RCA adjustments within the agreed period and added that the sustainability of, and unlocking value from, South African gold resources required stable and reliable supply and affordable input costs.

The Aluminium Federation of South Africa’s Mark Krieg added that price predictability and certainty were required to encourage investment in a period of very low or no economic growth.

Krieg warned that a further drop in demand and cost increases would lead to further tariff increases – a “vicious circle that needs to broken” to restore confidence, certainty and growth.

Diesel Dilemma The
Nersa panel also homed in on the prudence and efficiency of Eskom having spent an extra R8-billion on diesel to operate the expensive open-cycle gas turbines (OCGTs) during its 2013/14 financial year, with the diesel cost variation the second-largest component of the application.

The MYPD3 determined that Eskom should spend R2.5-billion on diesel during the year. However, the utility ended up spending R10.5-billion and producing 3 621 GWh of electricity from the Ankerlig and Gourikwa plants, as opposed to an assumed output level of 1 056 GWh.

Eskom CFO Anoj Singh argued that its extensive use of the OCGTs was prudent, as it ensured that the utility avoided load-shedding, beyond the 13 hours recorded during the year. He also insisted that all other supply- and demand-side options had been exhausted prior to the deployment of the diesel plants.

Eskom even went so far as to display a chart indicating that, had it restricted the use of OCGTs to the morning and evening peaks, load-shedding would have increased by 2 586 GWh, which would have carried an economic cost of R25-billion.

However, the Nersa regulatory panel questioned both the R25-billion figure – which panellist Jacob Modise suggested included no offsets, such as those that could have arisen from higher electricity imports from Mozambique and lower exports to Botswana – and the efficiency of having used the plants during low-load weekend periods.

Panellist Nomfundo Maseti also probed whether the “overutilisation” of the OCGTs could really be considered prudent, efficient and cost effective, in light of high levels of unplanned outages from Eskom’s coal fleet during the year. Eskom’s unplanned outages rose to 14.4% in 2013/14, against an MYPD3 expectation of 10%. The net result was a fall in the energy availability factor to 75.1% from a planned level of 80%.

Eskom executive for generation Matshela Koko acknowledged that the “biggest driver” of the higher diesel use was the rise in plant unavailability, but argued that the balance for the shortfall “could only be found in the diesel space”.

It could not, executive for transmission Thava Govender added, have been found through a reduction of exports, which took place during periods of low domestic demand, nor through increasing the use of independent power producers, whose available capacity had been fully purchased during the period. Eskom was also unable to increase imports from Cahora Bassa, owing to various problems, such as flooding, collapsed towers and snapped lines on the Mozambique side of the border.

The higher use of OCGT coincided, Koko said, with a change in strategy that prioritised addressing the coal-fleet maintenance backlog. For this reason, the plants were used over low-demand weekend periods to provide space for maintenance and/or to replenish dam levels at the hydro peaking plants.

At the time Eskom had not yet, he said, found a balance that allowed for higher levels of maintenance and lower levels of diesel use, while keeping the lights on. He argued that, with hindsight and incremental changes to the strategy, that balance was currently being found through its maintenance “budget” approach of 11.5 GW of maintenance in the summer and 8.5 GW in the winter.

“We have come to realise that, when we live within that maintenance budget, we have more plant available and we burn less diesel . . . but you can only do that the with benefit of hindsight.”

Singh stressed, though, that the test of prudence was a “test of reasonableness” in the circumstances, without the benefit of hindsight.

In concluding remarks at the close of the hearings, Singh again defended the R22.8-billion claim, arguing that the additional costs had been incurred in the provision of electricity “as efficiently and as effectively as possible within the context [in which] it operated”.

The additional costs were “legitimately claimable, subject to prudence, under the MYPD methodology”, he added.

However, business and civil society presenters expressed serious misgivings about the prudence of both Eskom’s revenue variance claim and its claim for additional costs.

Busa argued that Eskom’s greater used of the diesel-fuelled open-cycle gas turbines was the result of operational inefficiencies and should be disallowed, while many presenters argued that Eskom was itself a major cause of the lower sales outcome and that consumers should not be penalised for its failure to complete key new-build projects and maintain its existing plant.

Hearings chairperson Thembani Bukula closed proceedings in Johannesburg with an announcement that the regulator intended releasing its RCA determination on February 25.