Eskom’s Multi-Year Price Determination application

PMG.org.za 27 November 2012.

Date of Meeting:

27 Nov 2012

Chairperson:

Ms M Themba (ANC; Mpumalanga)

Summary:
Eskom explained that the Multi-Year Price Determination 3 (MYPD3) was its third application, and that it had been submitted in October 2012.  This was the beginning of a public process in which a decision on electricity tariffs could be made only by the National Energy Regulator of SA (NERSA), which was an independent body.   NERSA’s tariff decision applied only to Eskom customers, and not to all electricity consumers.

Eskom had engaged all stakeholders in preparing its application, which had been made available and explained in various forums, including the media, for scrutiny.  The application had tried to balance the needs of industry with economic growth. It was important to remember that Eskom planned for a South Africa that was growing, and this would require continued investment in the future.  Electricity tariff increases would stop only when the price was relatively where it should be, as currently the price was cheap.

Eskom recognised the impact of tariff increases on the economy and households, especially small businesses and the poor. The company had strived for the right balance in prices and sustainability, and had thus suggested a five-year path. This would lessen the impact by gradually increasing the price, and would provide certainty. Coal and other operating costs had been contained in the application.

The application would for the first time include the introduction of Independent Power Producers (IPPs) in all three phases of the Department of Energy’s (DoE) renewable energy programme, and the DoE peaker plants. Eskom was applying for only 13% to produce and maintain its operations – this was what was needed on average for the next five years. Then there was a further 3% required for the development of IPPs.  Eskom had included a long-term price path to implement new capacity beyond Kusile, but this had not been included in the revenue requirement for the five years.  Cost-reflective tariffs were important to ensure sustainability, while not burdening the taxpayer. It was important to provide confidence to lenders and investors, and to give lenders the assurance, through the tariff path, that Eskom would repay its debt.

If mining companies could produce the right quality of coal at the required volume, Eskom could adjust its application. Coal costs had the biggest impact on electricity prices, but they were unregulated. This was where the challenge was – a regulated industry (electricity) dependent on an unregulated sector (coal) for prices. Eskom had secured 80% of its coal contracts for the next five years, but what would happen beyond 2018 was an issue that the country needed to deal with.

Eskom warned that if NERSA refused the increase, it would then have to stop buying coal and that could have dire consequences, including having to close some power stations, resulting in reduced expenditure and operations, the halting of major projects, and an inability to repay its loans. 

Members sought clarity on whether the input from the public hearings was ever considered when the decision on the tariff was made. Concerns were voiced over how poor people would be protected against the increasing tariffs, particularly as municipalities set their own mark-ups.  Other issues raised included the high levels of electricity theft, the need to regulate IPPs, the future role of nuclear power, and Eskom’s long-term financial sustainability.

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