Eskom reports strong profit recovery despite another fall in yearly sales

5th July 2016

By: Terence Creamer

Creamer Media Editor

  

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Despite another, albeit modest, fall in electricity sales, State-owned electricity producer Eskom reported a strong recovery in its financial performance for 2016, with net profit rising to R4.6-billion from R200-million in 2015.

At the interim stage, however, net profit stood at R11.3-billion, with Eskom traditionally making its profits in the high-demand, high-tariff winter months, which coincide with the first half of its financial year, which runs from April 1 to March 31 the following year.

Sales volumes fell 0.8%, with consumption from industrial and rail customer segments falling 6.2% and 7.9% respectively, while mining recovered by 2.1%. However, Eskom reported a significant 12.2% rise in electricity exports, made possible, CEO Brian Molefe said, by “surplus capacity”.

The utility sold 201 022 GWh domestically and 13 465 GWh into the Southern Africa and expects to sell even more into the Southern African Power Pool during the 2017 financial year, when domestic sales are expected to fall again, owing to the weak commodity environment. In 2015, Eskom sold 216 274 GWh – the lowest level since 2011.

The production surplus was attributed partly to the lower demand and partly to an improved operational performance, with Eskom reporting an energy availability factor (EAF) of 71.07% for the year as a whole, having recovered in the fourth quarter to 73.5%.

Molefe said the EAF during the first quarter of 2016/17 had increased further to 78% and reported that it had breached the 80% level during June. He was, therefore, optimistic that Eskom could reach its target of a sustainable EAF of 80% well ahead of 2021.

There had also been a recent decline in the use of the diesel-fuelled open-cycle gas turbines (OCGTs), which had been operated intensively during the load-shedding periods, materially increasing Eskom’s primary-energy costs.

In fact, diesel over-expenditure was the second-largest item in Eskom’s recent Regulatory Clearing Account (RCA) application to recoup R22.8-billion in cost and revenue variances for only the first year of the five-year third multiyear price determination (MYPD3). The MYPD3 determined that Eskom should spend R2.5-billion on diesel during the 2013/14 financial year. Instead, the utility spent R10.5-billion and produced 3 621 GWh of electricity from the Ankerlig and Gourikwa plants.

During the 2016 financial year, Eskom still produced 3 936 GWh from the OCGT plants and spent nearly R8.7-billion on diesel, which was way ahead of what is allowed for under the MYPD3. However, group executive for generation Matshela Koko said that its current spend on diesel was R19-million a month, down form around R730-million a month last year.

The improved operational performance came amid an almost 11-month absence of growth-sapping load-shedding and gave cause for chairperson Dr Baldwin Ngubane to assert that Eskom would no longer be a constraint to South Africa’s economic growth.

Eskom reported that revenue rose 10.6% to R163-billion, with the utility benefiting from regulated tariff increases. On April 1, 2016, Eskom increased tariffs by 9.4%, marginally above the five 8% a year increases sanctioned under MYPD3. However, it was above the 3.5% increase that would have actually been instituted, owing to the MYPD2 RCA adjustment, implemented in 2015/16, which resulted in a tariff increase for the year of 12.69%, and changed Eskom's revenue base for the subsequent years of the MYPD3.

Earnings before interest, taxes, depreciation and amortisation, meanwhile, rose 37.4% to R32-billion.

“Eskom is well placed to deliver on our journey towards excess capacity,” Molefe argued, adding that South Africa could never have too much capacity, however, given the demand for power across Southern Africa.

MEDUPI, KUSILE COST REVISIONS

However, Eskom also updated its cost-to-completion estimates for Medupi and Kusile, the two much-delayed coal-fired power stations being built in Limpopo and Mpumalanga respectively. It reported that Medupi is now expected to cost R145-billion, rather than R105-billion, while Kusile was expected to cost R161-billion, not R118-billion. Neither estimate includes interest during construction.

Only one Medupi unit, Unit 6, is currently in commercial operation, with Unit 5 expected to enter commercial operation only in the first half of 2018. The entire six-unit project is expected to be completed only in 2020. Kusile, meanwhile, is expected to be in full production in 2022, with the first unit, Unit 1, expected to begin producing only in the second half of 2018.

QUESTIONING IPPS

Molefe also highlighted the "fact" that, while South Africa’s independent power producers (IPPs) were supplying 4% of national production, they accounted for 18% of the group’s primary energy costs.

He said he was “uncomfortable” with the costs associated with the IPPs. “The IPPs are the most expensive, at the moment, in our generation fleet,” Molefe asserted, noting that the Koeberg nuclear power station was the cheapest source.

Koko went so far as to question government’s coal baseload and gas-to-power programmes, indicating that Eskom had sufficient capacity to meet demand.

The utility had no intention, he added, of drawing on the Dedisa and Avon IPP peaking plants beyond the 2% capacity factor for which it was contracted to pay.

“It will be interesting [to see], given the type of performance we are doing, what’s going to happen to the baseload coal and the baseload gas that are coming, because we don’t need it,” Koko averred.

Edited by Creamer Media Reporter

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