23 November 2007 – Eskom warned that its expansion plans for the next five years may double in cost to US$43 billion. Tariffs would have to rise “at least” 20% per year for five years in order to help cover the bill.

Bongani-Nqwababa

Bongani Nqwababa,
Eskom’s finance director

Said Bongani Nqwababa, Eskom’s finance director "Preliminary estimates show our estimated capital expenditure is going to double to R300bn for the five years starting in (financial) 2008-09."

He put this rise in expenditure down to cost of power equipment and rapid capacity expansion needed to meet the demand.

In order for Eskom’s balance sheet to remain uncompromised, Eskom would only be able to borrow half of the capital amount needed, meaning much of this finance would have to be provided by tariff hikes.

The utility also has limits to what it could hope to receive from the South African government, its shareholder.

Speaking at a National Energy Regulator of South Africa (NERSA) public hearing this week on Eskom’s’ requested 18% tariff increase for 2008 and 17% increase for 2009, Nqwababa said that if the tariffs weren’t approved, Eskom would have to borrow more and tariff would rise even further.

"In the event that we get less (than requested) the reality is that increases will be higher in future — the sooner the tariffs are at economic levels the better.

"It’s not a one- to five-year programme; it’s a 20-year programme. In the next 20 years we will need to spend R1,3-trillion on upgrading both general transmission and distribution."

Thembani Bukula, NERSA’s electricity regulator, said it was unlikely Eskom’s increase would be higher than 14.2% for 2008.

South Africa currently has the lowest electricity rates in the world, and Eskom’s request has sparked concerns over inflationary effects on the South African economy.

Reserve Bank Governor, Tito Mboweni, was critical of the tariff increases, calling them “irresponsible.”

The Chamber of Mines of South Africa has requested the tariff increase be granted to Eskom, saying the increase was needed to meet a sharp increase in the price of coal. Eskom says coal prices have risen 30% over the last year.

The Chamber of Mines also expressed concerns about the threats to miners caused by the frequent blackouts.

"Disruptions in the supply of electricity pose a very real threat to the health and safety of personnel in underground mining operations," it said. "It is therefore critical that Eskom is able to operate effectively".

Eskom’s balance sheet has been described by the treasury as “healthy”, and it believes Eskom can fund the expansion on its own, through borrowing and income.

However, Nqwababa has warned this picture will look “significantly different” in five years, saying Eskom could probably borrow a maximum of US$21.5 billion. Financial help from the government may restore Eskom’s balance sheet, but it would not help its income statement.

"We would be operating at a loss and no one would lend us any money," he said.