Eskom Tariff Hikes: Should they be Higher? Frost and Sullivan 15 November 2012.

“In the light of the recent (postponed) financial close of the window one renewable energy projects, the question has been raised again as to South Africa’s future energy security issues. Fortunately, South Africa has local access to large coal deposits, providing the backbone for coal fired power stations on which the majority of industry has been built. However, with the recent 16% tariff hike announcements (over 5 years) to help strengthen Eskom’s financial position, and the level of push-back from stakeholders, alarm bells are ringing.

The question is seldom asked as to whether these 16% increases are not maybe too low. Eskom is currently in the position where the last coal fired power station was built more than 20 years ago, which, by international standards, makes a large majority of Eskom’s power stations due for decommissioning. Despite two new power stations being built (adding 4,800 MW each) there will, at some point in the not too distant future, be a scenario where we are minus roughly 10,000 – 11,000 MW with the decommissioning of older power plants where continuous refurbishment may be too costly…

(Editor’s note: IRP_2010_2030 As gazetted 6 May 2011 did take into account decommissioning up to 2030 which amounts to about 11 000 MW and the MYPD3 submission hopefully does take this into account. However, the argument to keep electricity tariffs cost-reflective with a bit of smoothing, does make sense to me.)

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4 thoughts on “Eskom Tariff Hikes: Should they be Higher?

  1. According to Eskom’s CFO, during a recent presentation to Parliament, the 16% increase over the next 5 years; 20% increase over the following 5 years and 9% over the 3rd 5 year period should achieve cost-reflectivity, and should thereafter only increase at the inflation rate.

    However, he admitted that this did not include further Capex and Opex, such as additional generation capacity beyond the completion of the Kusile coal-fired power plant and the impact of carbon taxes, respectively.

    Investors would need to consider not simply whether to invest in SA or elsewhere, but where in SA.

    Municipal tariffs are quite distinct in percentage terms from that for domestic, commercial and industrial end-users who buy directly from Eskom.

    However, although many munipalities do, in part, absorb these increases, the trend line is not much less steep. The quantum value – the real Rands & Cents issue – varies from municipality to municipality.

    Nevertheless, commerce and industry, manufacturers in particular, are faced with the challenge of increasing Opex, whilst commercial & industrial property owners and managers face more than the generally accepted 20% of net operating income ascribed to electricity costs.

    The solution lies in the potential for a greater uptake of energy efficiency technologies and demand-side management measures.

    Yet, as pointed out by Eskom, if its revenue drops by a mere 1.9% over the long-term, it could face a further decline in its credit ratings.

    The same tariff pricing principles would apply to most municipalities although most, contrary to conventional wisdom, have become less dependent on cross-subsidising their budgets by leveraging electricity revenue streams. This was done in preparation for the potential introduction of Regional Electricity Distributors by the now defunct EDI Holdings SOC, but may need to increase again if other municipal revenues decline.

    As the IRP2 is due for review, many of these energy planning, regulation, financing, operations and maintenance issues will require new thinking, decisiveness and efficient implementation within and between the national, provincial and local spheres of governance.

    Judging by the prudent approach to the Renewable Energy IPP Procurement Programme, the ongoing transformation of our electricity supply and distribution industries will benefit from the lessons learnt, especially where it would allow for repeatability and scalability.

    The regulatory reforms still under development or pending implementatio hold great promis – the most important of which would probably be:
    1. the institutional and financial arrangements of the envisaged Independent System and Marketing Operator and
    2. The use of the Ministerial powers to determine the procurer and buyer for future procurement programmes.

    But perhaps I am just too much of a believer of looking at “what’s right in the world”.

  2. Dear Craig, good to read your comments. I have been out of touch for some time but like to know whether any of the IPPs have actually signed power uptake and payment agrements to supply power to ESKOM ?
    Keep well, Herbert

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