Eskom MYPD4
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Eskom continues to share the rationale for its average annual electricity increase application of 15% for the fourth Multi-Year Price Determination (MYPD4) and Regulatory Clearing Account (RCA) balance application for 2018 made to the National Energy Regulator of South Africa (NERSA).

This time, it was in Rustenburg for stakeholders attending the North West leg of the public hearings undertaken by the regulator that have been held across the country over the past two weeks and which will be concluded next week. Read more: Eskom application takes into account its regulatory asset base of R1.3tn

The Eskom’s team’s presentation looked at how Eskom’s actual and projected electricity price from 2010 to 2024 compared to external references. On analysis, it became evident that similar to NERSA’s future price path, the various MYPD price paths Eskom requested would plateau once prices reached levels reflective of prudent and efficient costs – which Eskom calculated to be midway between NERSA’s previous upper- and lower price boundaries.

“The main cause of the required price increase is the phasing-out of the current price subsidy, which does not preclude the subsidisation of specific targeted customer categories in future,” said Deon Joubert, Eskom’s Corporate Specialist for Finance. Thus, Eskom’s balance sheet has being providing a subsidy to consumers over many years. This has reached a breaking point – which is not a sustainable anymore. 

“Some stakeholders often express opinions that consumers and the industry cannot tolerate anything higher than Eskom’s current average price of 89.4c/kWh / $ 6.4c/kWh – if that was true, it would make the Integrated Resource Plan or IRP (which reflects even higher price levels) totally academic,” he added. 

“Thus the IRP reflects a similar price to that applied for by Eskom at the end of MYPD4, as the price required to cover efficient and prudent costs and to enable the industry’s financial sustainability, and thus by implication also to support investment in the industry. This price level is further confirmed by numerous credible external sources, including the 2016 World Bank report of electricity utilities in 39 countries in sub-Saharan Africa, (which included an assessment of their opex and capex),” Joubert explained.

“Looking closely at unit costs, the World Bank analysis concluded that Eskom’s unit costs are very low relative to other sub-Saharan Africa utilities (Eskom was the 3rd lowest). Similarly, Eskom’s average price is very low relative to other sub-Saharan Africa utilities – but they are all pricing their electricity at unsustainably low levels and are thus in (or heading to) significant financial difficulties. The report calculated that 81% of the gap between Eskom’s current price and its prudent and efficient costs is due to under-pricing. 

“Eskom is cognisant of the potential impact of the increase in various sectors; but it finds itself in a very difficult financial position. Eskom has repeatedly acknowledged that, as with any other large and complex business, there will always be opportunities for further incremental efficiency gains regarding fuel cost, operational cost, capital expenditure or technical performance, which it continues to pursue and implement – however an objective analysis indicates that its debt situation is mainly or more than 80% a function of having had to take responsibility for the build programme, without the electricity price responding as was required,” Joubert continued.

Eskom showed a calculation that over the last seven years the revenue lost due to under-pricing amounted to R340bn. It resulted in Eskom having had to raise additional borrowings, which is the main reason for Eskom’s current level of debt.

“The effect of Eskom accumulating the under-pricing on its balance sheet as debt is unsustainable and has reached its limit. It is crucial for the sake of Eskom and South Africa that this be rectified urgently – it cannot be delayed beyond MYPD4,” Joubert added.

Regarding electricity sales, approximately 80% of Eskom sales volumes are mainly to municipalities, industrial and mining customers. Consequently, electricity sales changes in any of these three segments requires application of an individual bottom-up approach so as to incorporate specific electricity usage drivers including customers’ business plans and commodity prices.

Eskom illustrated from its own analysis that there cannot be a direct link between the change in price alone and the resultant change in sales. Eskom customers have provided feedback that there are many other considerations when making decisions on continuing their electricity consumption and when making further capital investments. The reliability of electricity is important for industrial consumers.

Eskom Senior Treasury Consultant Kabelo Masike explained further that: “It is an undeniable reality that the growth in sales is slow and in some cases stagnant. The situation is further exacerbated by the fact that the South African economic growth is also slow. However, it is incorrect to attribute the slow growth to electricity price increases. Other contributing factors include: the global recession; downward pressures on the commodity market; declining GDP growth; demand side management by customers; socio-political events; and policy uncertainties.

“It is thus clear that the price of electricity alone is unlikely to reverse the deterioration in the economy; it would require a holistic approach. South Africa needs to continue towards efficient cost reflective prices – with protection to specifically identified vulnerable sectors. Clearly – given the current economic situation – further support is required for vulnerable sectors and key is the establishment of a country platform with the involvement of all key role players to sustain local industrial, mining and manufacturing operations as well as ensuring the survival of other vulnerable sectors,” Masike added.

While higher tariffs are bound to dampen demand, a reluctance to raise prices towards cost-reflectiveness will deny Eskom the ability to fund investments and maintenance required to sustain an adequate security of supply. An inadequate security of supply has more negative repercussions to economic growth and social welfare than a tariff increase. A long-term tariff path is required to facilitate long term investment decisions. This will assist both investors and consumers to adapt as the sector goes through a structural change. The situation will need further integrated Government interventions to boost economic growth.

Deon Conradie, Eskom’s Senior Manager for Electricity Pricing, reminded the audience that the Government has a significant role to play in supporting vulnerable sectors. It is clarified that it is essential that all vulnerable sectors need to be considered.

The average price of electricity should not be confused with the requirements of the vulnerable sectors. He concluded by referring to other countries that have already recognised this support being essential.