Electricity prices not high enough – Eskom

Eskom is acutely aware of the impact of high electricity tariffs on consumers, but tariffs still have to increase to a level where it allows for the recovery of efficient cost, said Tsholofelo Molefe, financial director of Eskom.

Molefe reacted to the decision by the National Energy Regulator (Nersa) to increase electricity by an average of 12.69% next year, instead of the 8% increase granted earlier.

The further increase is based on compensating Eskom for under-recovery in the previous tariff period (MYPD2) that stretched from 2010/11 to 2012/13.

Molefe said Eskom is in the process of preparing a further application to Nersa for compensation for amounts under-recovered during the period April 1 2013 – March 31 2014. She would not commit to a timeline for the submission. “Once the appropriate governance processes have been followed, the submission for the RCA application will be made,” she said.

During the Nersa meetings that Moneyweb attended, it was clear that further Eskom applications “of the same magniture” are expected and may lead to additional tariff increases annually, over and above the 8% granted annually for the five years ending March 31 2018.

Molefe said the latest Nersa decision will weigh positively in rating agencys’ credit rating decisions, but that is only one of several factors the agencies take into account.

She said the further tariff increase will contribute towards a more sustainable Eskom, but “this provides a limited reprieve to challenges to Eskom’s financial sustainability. Further interventions would be necessitated to ensure improvement in Eskom’s sustainability.”

Shaun Nel, spokesperson of the Intensive Energy Users’ Group (IEUG) said the group was always of the view that the 8% increase was not enough and with a 10% increase annually over the five-year period (MYPD3) Eskom would be able to achieve a stand-alone credit rating in seven years, if not sooner.

The need for an extra adjustment is therefore not a surprise to the IEUG.

He said the group supports the drive towards cost-reflective tariffs, but does not agree with the level of return on equity Eskom wants to be included.

Naren Rau, CEO of the South African Chamber of Commerce & Industry (Sacci), said the further increase does not come at a good time for business. The business sector is highly constrained and GDP growth is slow.

He said the business sector does not have the capacity to absorb higher electricity tariffs and they will either have to pass it on to customers or business activity will be inhibited.

Rau said Sacci is engaging with the Department of Cooperative Governance and Traditional Affairs (Cogta), on behalf of especially small businesses that are battling extremely high electricity bills from municipal suppliers. Traditionally, municipalities have used electricity revenue to subsidise other services and business tariffs were further increased to subsidise residential customers. Rau said Sacci is looking at alternatives for the municipal funding model.

He said South Africa is only at the 99th position out of 140 countries on the World Economic Forum’s competitively report, regarding electricity provision. The uncertainty relating to the cost and quality of electricity supply is not good for business, he said.

Rau said electricity supply in South Africa is in crisis and policy constraints should be removed urgently in order to look for solutions beyond Eskom.

Source: Moneyweb

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Electricity prices not high enough – Eskom