HomeIndustry SectorsFinance and PolicyNersa decision means Eskom has to re-engineer itself

Nersa decision means Eskom has to re-engineer itself

Eskom CEO
Brian Dames
By Antonio Ruffini

26 July 2013 – Eskom CEO Brian Dames says the utility will have to re-engineer itself to cope with the 8% average annual tariff increase over the next five years. In its submission for its multiyear price determination three (MYPD3) which is applicable from the 1st of April 2013 to 31st of March 2018, Eskom had applied for an average annual increase of 13% to cover its operating, input and debt servicing costs over this five year period plus 3% a year for payments to independent power producers (IPPs).

Nersa granted Eskom a 8% increase in total, which means of the R1.1 trillion revenue application there is a shortfall of R225 billion over the next five years. The picture is even worse for Eskom, and by default everyone who uses electricity, in that per unit primary energy costs for the 2012/13 financial year (which ended 31st of March 2013) increased by 36.1% from ZA 20.6c/kWh in 2011/12 to ZA 28.1c/kWh. Primary fuels thus account for half the price of electricity produced by Eskom and supplied onwards.

This increase was mainly due to coal usage costs increasing by ZA 3.9c/kWh, and the cost of open cycle gas turbines going up by 1.6c/kWh. In addition, the environmental levy increased by 1c/kWh to 3.5c/kWh from the 1st of July 2012.

As Dames pointed out at a briefing prior to the release of its annual integrated results, it is a problem having a regulated electricity price and the utility having to buy its coal from an unregulated market. Something has to give. One of the assumptions in Eskom’s requested tariff increase was that primary energy costs would increase at a much lower rate of 8.6% a year, with coal costs increasing at 10% a year.

Since even these assumptions upon which a much higher tariff increase request was made than was granted are thus far looking optimistic, Eskom is considering a number of implications. These include relooking at its mandate in terms of ensuring security of supply; the organisation’s financial sustainability and the associated impact on its credit profile; areas of further efficiencies and cost curtailments and reductions as well as re-engineering of the business. However, Dames points out that R225 billion cannot be made up over five years in savings and efficiencies alone – something will have to change.

Eskom will explore alternative funding options. It also plans to discuss its policy and mandate implications with the minister of public enterprises.

Eskom says there is a need to ensure alignment with the shareholder on issues such as coal price regulation, the future role of integrated demand management, further government support and Eskom’s role in developing projects beyond Kusile power station.

An example of the effect of the Nersa decision is that Eskom’s successful integrated demand management programme is already seeing cutbacks, as Dames says the organisation will not undertake initiatives beyond its abilities to finance and support them.