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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Break up Eskom, for all our sakes

Mail and Guardian 30 November 2012.

(Editor’s note: This is a MUST read!)

The underlying foundation of the country’s economy is that electricity has been cheap, readily available and abundant, writes Dirk de Vos.

Our economy and its industrial base is power intensive and South Africa has one of the highest power consumption-to-unit of gross domestic product ratios anywhere.

Cheap and abundant energy has, for a long time, represented our comparative advantages and shaped our economy. It has allowed South Africa to avoid addressing things such as low labour productivity. Other disadvantages, such as deep and low-grade mineral-bearing mines and the distance from our main export markets, have been offset by the price and ready availability of energy…

More …

Insufficient oversight gives Eskom a free ride

Business Report 23 November 2012.

There is little doubt that state-owned enterprises can be successful. Theoretically they can provide services at a reasonable price and spread those services.

If Parliament – as defender of the interests of the shareholder, the state – is of sufficient standard as an oversight mechanism, the interests of the voter and taxpayer can also be part of the mix.

Eskom, interrogated by the trade and industry committee this week after releasing its interim results, is reasonably sound on paper. It turned a hefty profit of R12.6 billion in the six months to September.

Yet there are many clues that all is not right at Megawatt Park. Less electricity was sold, but revenue rose from R64bn to R73bn in the six months compared with last year. Warnings by various parties that driving up the cost of electricity will bleed the nation, cut jobs and de-industrialise the country have fallen on deaf ears.

Even ANC MPs on the trade and industry committee have pointed out that this is already happening. The drop in sales to the industrial sector is also evidence of this. Eskom chief executive Brian Dames reported that Eskom’s electricity sales for the period, 110 766 gigawatt-hours (GWh), were down from 114 043GWh. But electricity revenue was R72bn (2011: R63bn). Industrial consumers used 23 percent, or 26 220GWh, of the total. This is nearly 26 percent less than the same period last year…

More …

Eskom’s pursuit of ‘strong balance sheet’ poses threat to SA economy — DA

Business Day Live 21 November 2012.

SOUTH Africa’s economy was being sacrificed on the alter of Eskom’s balance sheet, said Democratic Alliance (DA) MP Geordin Hill-Lewis, who also accused the power utility of using unorthodox methods in calculating its depreciation of assets.

On Wednesday, Eskom CEO Brian Dames and chief financial officer Paul O’Flaherty appeared for the second time this month before Parliament’s trade and industry committee to explain the rationale for the power utility’s requested tariff increases and the possible effect it could have on business.

Eskom has applied to the National Energy Regulator of South Africa (Nersa) for a 16% increase annually in its tariffs for five years starting in 2013…

More …

Electricity price hikes render Gauteng uncompetitive, says MEC

Engineering News 15 November 2012.

Power utility Eskom’s push to increase tariffs was tainting Gauteng’s image as an investment destination, said Gauteng Economic Development MEC Nkosiphendule Kolisile on Wednesday.

“We must do something about this. I understand Eskom’s obsession with tariff increases . . . but it simply chases away investors,” he said at the groundbreaking ceremony of the new Gauteng Automotive Training Academy in Rosslyn…

(Editor’s note: Well Mr Kolisile, you know who controls Eskom, speak to them.)

More …

Electricity prices set to keep on soaring

Business Report 31 October 2012.

Donwald Pressly

ESKOM chief financial officer Paul O’Flaherty told MPs yesterday that it seemed likely that inflation-linked tariff increases for electricity were a long way off, possibly only likely at the end of the 2020s.

Until then increases would be in double digits, well beyond the 3 percent to 6 percent inflation target band, he said.

O’Flaherty appeared before the National Assembly energy portfolio committee during hearings on the multi-year price determination. He noted that the 16 percent sought by the state-owned corporation applied for the next five years…

… This would mean 10 years of higher-than-inflation rises to 2023. After that, O’Flaherty said, “a further five years of 9 percent” increases a year were envisaged. That would take the higher-than-inflation increases to 2028. Only thereafter were inflation-linked increases forecast…

More…

Electricity users to pay for switch to private sector power

Business Day Live 24 October 2012.

ONE of the many unpleasant messages in Eskom’s tariff application to the National Energy Regulator of South Africa (Nersa) is that electricity users will have to bear the brunt of the switch to private sector power.

The new multiyear price determination (MYPD) differs from the previous one in many ways. For instance, in the five years covered by the determination, South Africa will, for the first time, introduce thousands of kilowatt hours of electricity capacity from private sector producers. This will be bought at levels higher than Eskom prices…

(Editor’s note: Electricity users to pay for their electricity? That makes sense, who else should pay for it? The general tax payers? Far better for the users of a service to pay for the service. A better question I think is whether it is right to spend money on renewable energy rather than coal or nuclear plants, and would coal or nuclear be cheaper? This is where things get more complicated and more emotional. We have to answer questions such as: how do we put a value on harmful emissions, on environmental damage and on climate change. Will a global tax on carbon come into being and how much will this be?What is the price of coal going to do in the future? Are nuclear power plants safe and if not what cost do we put on the risk? In the end I think it comes down to doing what is right and continuing to mess up our planet to satisfy our energy needs is patently wrong, regardless of the economics. In any event, it looks like the economics are swinging in favour of renewable energy. It would be interesting to see the levelised costs of electricity from renewable sources compared to the levelised costs of Medupi and Kusile. )

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